UK AGRICULTURE SITS ON AN EQUITY GOLDMINE

Banks are “falling over themselves” to lend to farmers because of the growing value of agricultural land and the sector’s excellent credit record.
The result is that farmers can afford to be bold in their investment decisions because lenders are less concerned about what purpose borrowed funds are used for. In turn this is providing a wide variety of enterprise opportunities.
The report and the confident outlook comes from Simon Dixon Smith of Land Partners (LLP), the new advice team for farmers in the eastern region.
“Banks will offer funds on a five year fixed term at around 4.5%,” he says, “so investments that offer a margin over this look attractive.
“Over the last five years the value of agricultural land in the UK has increased by around £104bn. In the East of England alone it rose in value by over £12bn.
“During the same period borrowings by the nation’s farming, forestry and fishing businesses have increased by only £2.4bn. This represents an increase in equity in farmland of a thumping 90%, a net rise that has outperformed that of the entire UK housing stock. This buoyant situation looks set to continue.”
In contrast, since 2006 (7), there has been the tail end of a bull run and then a collapse in other UK property sectors. So though the value of UK housing stock increased by £246bn, that was only by 6% while an equivalent increase in mortgage borrowing of £167bn leaves an equity increase of £79bn. Progressive equity withdrawal from UK housing stock exacerbated falls in underlying asset values.
“The major difference with UK agriculture is that equity grows fast with rising land values as it has an average loan-to-value ratio of under 5% compared to the 29% of the UK house market.
“Farmers have always been ‘conservative’ in their approach, but a holistic look at the asset base could radically increase return on capital and provide a hedge against volatile commodity prices. Many assets can offer a good return going forward, depending on attitude to risk.
“If equity is king, then agriculture will rule for some time,” concludes Dixon Smith.
He anticipates that homes in the East of England should increase in value by 14% *while current rental yields, averaging around 5%, are expected to increase by over 20%, thereby covering interest on the debt.