UK rural estates as a property asset class are proving resilient

Rural estates remain resilient to economic pressure, survey claims

Rural estates in the UK remain resilient to the recent economic pressures and according to Savills 2012 Estate Benchmarking Survey results, the average gross income has increased by 1.7% to £200 per acre.

The property firm says that this is a continuation of the upward trend which started in 2001 although over the past two years the rate has weakened.

The agricultural and residential sectors performed best during this survey year with increases in total income of 6.9% and 5.5% respectively. It was the reverse for the commercial and leisure sectors, which were hard hit by the uncertain macro economic conditions leading to a fall in incomes of 7.1% and 9.3%.

Cost saving measures proved effective with a fall in total expenditure of -1.2% to £80 per acre. This led to a 4% increase in average net incomes before depreciation, finance, drawings and tax to £114 per acre.

‘Where estate owners and managers have adopted a dynamic and proactive management approach towards assets and tax planning, it is clear the rural estate is continuing to prosper. The better performing estates are seeing significantly improved results,’ said Mike Pennington head of the Estate Benchmarking Group.

From an investment perspective rural assets continue to outperform most alternative assets with a healthy investment performance recorded by our survey. In the year to 05April 2012 the average total return for all estates was 9.4%. However, like most property assets, the total return was primarily made up of capital growth at 7.9% and just 1.5% of income return.

At a regional level the survey shows that location is a key contributing factor to the opportunities presented to individual estates.

Agriculture is the main income stream in the eastern regions of England whereas income from non-agricultural assets squeezed the agricultural contribution in the southern regions to less than a quarter of gross income.

On average in the South East estates derive 47% of their income from residential property and a further 20% from commercial assets. While in the South West the proportion of gross income from leisure was higher than in any other region at 7%.

Overall the growth in average residential rents per dwelling was small, average annual rental income of Assured Shorthold Tenancies (AST) increased slightly by 0.4% during 2012 to £8,355 per dwelling.

Savills says that it is clear a degree of restructuring activity took place with reversions to ASTs from agricultural tenancies and other housing stock, which is likely to have had a knock-on effect on rents during the reversionary year, but will add value in the future.

For the second year average income from commercial enterprises came under pressure representing 13% for gross income compared with 16% in 2011. Average office rents decreased by 6% to £9.20 per square foot although the average rent for retail units increased by 27% to £15.65 per square foot.

When it comes to leisure, woodland and sporting income, Savills says that the weak economic climate has clearly affected this sector with a fall in the average income of 9.3% recorded. Unsurprisingly, as mentioned above location is the key to this sector. In 2009 in the South West income was over £23 per acre whereas for the 2012 survey year this figure reduced to £15 per acre.

Savills added that estate woodland is still under utilised with the survey showing that this sector again made no real contribution to gross income. Considering that 11% of the average estate is woodland it would appear that this is a resource which is worth more exploration.

Sporting income increased by 25% and Savills believes that this in part is reflected by the fact that some inefficiently run shoots have either been disbanded or let so taking them out of the survey sample.

‘From our survey it is clear that rural estates, through a range of property assets, are already managing the risk of income volatility. Restructuring of farm and housing stock tenancies is clearly having a positive effect on incomes. This will remain essential in order to counteract the ever greater peaks and troughs of commodity prices and the wider economic uncertainty,’ said Ian Bailey head of rural research at Savills.

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