Farmland: Fields of gold

Farming - plus the land and homes that go with it - is on a roll. It's the only part of the market where boom, not gloom, is the current watchword. Clive Aslet reports

You won't need telling that 2008 has not been a particularly jolly year for property. According to Henry Pryor, of online property portal, the price of an average house is falling by £1,000 a week. But one part of the market is bucking the trend: farmland (with, of course, farmhouse). You'd be forgiven for having forgotten it; throughout all those years when the City was booming, banks were shovelling money into mortgages and property in the south of England went stratospheric, agriculture was in the doldrums, and the price of farmland refused to budge. Now, just when the rest of the market has gone to a darkened room feeling queasy, the farmland market is galloping away, ruddy-cheeked and jumping five-bar gates.

Farm favourite: the asking price of more than £10 million for the 1,130-acre Morval estate, at Looe, on the south coast of Cornwall, reflects the boisterous good health of the agriculture industry and the performance of farmland in the property market

Everywhere you go, farmers have eye-popping tales of fields in their county that have sold for three times what they would have fetched a few years ago. Figures from Savills estate agency show that prime arable land increased in value by 26 per cent in the first quarter of 2008.

James Laing, of Strutt & Parker, who sells more farmland than any other agent in Britain, thinks it has further to go. "Land has gone from £3,000 an acre to £7,000 an acre in three years,'' he says. "I believe it will reach £9,000 an acre. At £9,000, there is still an acceptable level of profitability in terms of yields.

He has just put Grange Farm, South Kyme - 800 acres of flat, potato-growing south Lincolnshire, with a Victorian farmhouse - on the market at £6.5million; it would have been £3million three years ago. As for the credit crunch, no worries. When the land agents Smiths Gore surveyed lenders last month, they found the banks just as happy to lend on farmland, still regarded as a prime asset with a low record of bad debt, as they had been before Northern Rock upset the apple cart for residential buyers.

It was in 2005 that prices started to move. There were three stimuli. First, Celtic hordes swooped on the west coast, via the ferry port of Stranraer. Irish farmers, having sold land either for development or because the price of farmland in Ireland had gone into orbit (£20,000 an acre in some cases), were traditionally distrustful of banks, had too much to stuff under the mattress and so put their bundle straight back into farmland in Britain.

Second, Danish farmers, highly efficient but unable to expand in their own country, followed the route of their Viking ancestors, and devoured the pickings to be had in East Anglia (even at today's prices, land in the UK is still cheaper than in Denmark).

Third, hedge fund managers began putting their own funds, so to speak, into hedges: they liked the lifestyle, had spotted a rising market and, although generally too young to think about inheritance planning, may be influenced by the tax advantages of owning farms (because land that is not let to tenants incurs no inheritance tax, and tenanted land enjoys a 50 per cent rebate, it is a handy way of passing money to the next generation).

Not long ago, half the farmland on the market was being snaffled by City buyers. A good house, attractive countryside and shooting were essential parts of the package. Despite the sub-prime crisis, some very large piggy banks are still waiting to be emptied.

Knight Frank would like to empty some of them into Broome Farm, Shropshire (£2.25 million) and Eaton Hall Farm, Derbyshire (£3.75 million), both of which are said to have "stunning large family homes in excellent condition'' - just the thing for lifestyle purchasers.

But now there is another driver, quite unlooked for in the days when Defra was encouraging farmers to do anything except farm. Agriculture is starting to take off. As an Ayrshire farmer tells me, as we look at one of his new barns, a third of it filled with a hillock of dun-coloured grain: "Once it gets in here, wheat ceases to be something I've grown in a particular part of the country. It's a global commodity.'' What traders call "soft'' commodities, and the rest of us call food, have been rising.

While the UK economy grew by 2.2 per cent in 2007, that of India soared by nearly 8 per cent, that of China by more than 10 per cent. As they get richer, the Indians and Chinese want to eat more than the staple of rice. Demand is going up just as productivity is going down. Australia, which used to export grain, is suffering one of the worst droughts in its history. American farmers, encouraged by a government that hates being in thrall to oil states in fractious parts of the world, are growing fuel crops rather than food.

There being a global market for grain, as for everything else, the price is soaring like a helium balloon when someone has just let go of the string. It is now heading towards £200 a ton - up 360 per cent from 2002. Believe it or not, global forces also determine the prices of seemingly perishable food such as meat, eggs and milk (eggs and milk travelling in powdered form); as we know from the supermarket checkout, these have also started to climb.

Oil prices have gone up, too. Because it takes a lot of oil to make fertiliser, drive farm machinery and transport grain from one part of the world to another, costs have eaten up part of the barley baron's profit.

But only, claims Crispin Holborrow of Savills, quite a small part. In fact, the price of farmland has mirrored the price of wheat. Both have performed better than gold.

Riding this wave, farmers themselves want to buy land. With a tractor costing more than a top-end Mercedes, they need to increase the size of their farms to achieve efficiencies of scale. But they are not the only ones to have seen the new path on which agriculture is set. Investors who see land as likely to outperform the stock market have been hurrying down the farm track. The asset management company Schroders was at the head of those forming funds to buy farmland, raising £3billion for its Alternative Solutions Agriculture Fund in just 18 months. "The demand for let land is enormous,'' Justin Marking, of the buyers' agency Prime Purchase, says.

This is a turn-up for the books. Tenancies that predate the Agricultural Tenancies Act of 1995 gave the tenant security of tenure not just for his own lifetime, but that of two subsequent generations. But as profits from farming rise, so do the rents that can be asked from tenants. And some of the well-publicised woes of farming excite mercenary investment hopes.

Farming has been so miserable for so long that the average age of British farmers is now nearly 60 and fewer of the children want to follow them on to the farm. Investors see that they have a chance of buying out tenants who are reaching retirement age, or providing them with other land and buildings, in order to maximise the value of an estate. Traditionally, tenanted land was sold at a discount of 50 per cent. But, as Mr Marking reveals: "People who buy tenanted farms are now prepared to pay 70 per cent or 80 per cent of the value it would have if it were untenanted.''

A perfect example of an investment estate is being offered by Savills (020 7409 8882) on the south coast of Cornwall. The Morval estate, outside Looe, runs to 1,130 lush acres, its banks speckled with bluebells and sappy with uncoiling fern fronds in spring. Dove-grey buildings, constructed of narrow courses of granite, snuggle into a bosomy landscape of rounded hills. The three tenanted farms and few dozen cottages bring in an income of £148,000 -not perhaps an astonishing return when you consider than offers of more than £10million are being asked. But the capital value will grow if farmland continues to rise; besides, there are all sorts of things that can be done, on an estate of this size, to create "uplift''.

In the present market, the estate, which has become detached from its mansion house, would be worth far more if it included a residence for the owner; perhaps, in time, the mansion house could be bought back. Or permission for a new one might be squeezed out of the planners under the "Gummer clause", which allows exceptions to be made for works of truly outstanding architecture. Or the right offer might persuade one of the tenants to leave his farmhouse.

A deep cleft of a valley, well-wooded but under-keepered at present, has the makings of a spectacular pheasant shoot: "The birds would come out so high you'd be lucky to see them,'' says one local.

Rocketing pheasants are an appropriate metaphor for farmland prices, just at the moment - with the difference that nobody expects any bang, bang from a shotgun to bring them down.

Marcos Marcou has just bought 290-acre Sherbourne Farm in Warwickshire from Knight Frank, at the asking price of £1.2 million. Cyprus-born Mr Marcous has, for the past 20 years, visited the countryside from his home in north London, often for shooting. His prime object in buying the farm, which has no house with it, is to develop the shoot.

''But I also see it as an investment,'' he says. ''Commercial and residential property are finished, but food prices are going up internationally, and so is the price of farmland.'' The farm combines pasture, arable and woodland, with some ancient grassland forming a Site of Special Scientific Interest.

'Buying up neighbouring farms is a sure-fire way of making even more money from land: Atty Beor-Roberts, of Knight Frank, calls it "marriage value". With additional acres, farm buildings and houses, an investment farmer can generate more rent, produce and subsidies without the need to acquire the additional machinery or workforce necessary for a separate farm. Of course, it is a rare occurrence that neighbouring farmers decide to sell up at the same time, which is why the recent launch of two adjoining Cotswolds farms to the market is likely to spark global interest.

Little Barrow, near Moreton-in-Marsh, is a 495-acre estate with an elegant house, staff accommodation and landscaped gardens. If it were joined to the smaller, yet functional, Frogmore Farm, the other side of a hedge, with 116 acres, a four-bedroom house and farm buildings, 600 acres of prime Gloucestershire farmland would produce about £50,000 each year in subsidies alone.

"I haven't know this much land come on the market in the Cotswolds for several years," says Mr Beor-Roberts. "Little Barrow could be the main house and the farming operation could be at Frogmore, with a farm manager's house. Little Barrow's farm buildings could then be used for facilities such as stables and garages." Offers of more than £5 million are being sought for Little Barrow, while Frogmore Farm is on the market for £1.7 million, both with Knight Frank., 17.05.2008

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