Posted 15 June 2017 By Mike Shawyer, Partner
In Rural and Landed Estates
Land, of any sort, is difficult to value. As accountants we are often required to value assets of one sort or another, and various tools have been developed to do so. Quoted shares, of course, are valued by the markets, using models based on earnings, dividend yield, quality of the business, future expectations and the value of alternative investments. Unquoted shares are valued on a more subjective basis, taking account of all those factors, but also applying discounts to reflect the marketability of the shares and the size of the holding.
None of these tools is particularly helpful when we look at agricultural land. Rental yield, when one takes out some management costs, is miniscule: if one valued a rented farm by reference to income alone, and using the multiples which would apply to a quoted property company (say 3.5% dividend stream), it would come out at about £3000 per acre. However, when we apply the risk factors in the market today, we would need to look at Brexit, currency movements, age of the farming population, transaction costs, lack of liquidity and volatility of the food output which sits in a manufacturing process for a year or more with no certainty as to the volume or value of the end product. If we valued any other business asset with those uncertainties we would be looking at very substantial discounts which would push the price down towards £1-2000 per acre.
So why is the market value, even in a highly uncertain era, six or seven times what it would be for any other business asset? The obvious answer, and one which a valuer would have given at the outset, is because that is what someone will pay for it. That simply begs the question, why would someone buy an illiquid asset which yields a highly uncertain 1% return when they could buy highly tradeable quoted shares to earn almost 4 times as much?
The real answer to the question is threefold. Firstly farmland is an attractive asset. Unlike company shares, where one often doesn’t even have a share certificate to admire, farmland is there to look at. An owner can walk over it, shoot over it, use it to enhance the setting of his house and sometimes even develop part of it for higher return. How often do clients say "it won’t be built on in my lifetime, but it might come in for the children or grandchildren"?
That leads on to a second reason: it is a long term asset. The very lack of liquidity in the market which would be a discounting factor for shares is what keeps the market in a tight cycle of supply and demand. It would probably be true to say that, on average, farmland remains within a family for at least three generations so by extension only 1 or 2% comes onto the market in any year. This then means that when land does come up for sale, conventional pricing models simply don’t apply for the neighbouring farmers. The purchase is regarded as a once in a lifetime chance to extend the farm so the pricing equation is often simply "how can I raise the money?" rather than "is this the best investment for that money"
Finally, and possibly of lower importance than the other two factors (although sometimes used as an excuse) there are the tax advantages. Inheritance tax relief alone is valuable but combined with CGT rollover possibilities, agricultural property is an attractive proposition for someone retiring from another industry who can eliminate a CGT liability, limit IHT exposure and acquire an attractive asset which has (hitherto, at least) a good record of capital growth. Although the number of such investors is small, the market is very illiquid so external investors coming head to head with acquisitive neighbours will drive a piece of land to a price for beyond the economic value of the income stream.
Perhaps the most telling answer to the opening question is a comment sometimes heard from clients: even those clients who will consult with their accountant on almost every business decision will sometimes say at the yearend "Oh yes, and we bought another 50 acres – I didn’t ask you at the time because I knew you would tell me not to"!
For any queries regarding this article or any other issues please contact Mike Shawyer on 01793 818300, or send him an email.