Why was the Model Estate created?
In using the analogy of a mixed rural estate, similar in structure to many under the management of Carter Jonas, we can gain an interesting and helpful insight into the performance of a rural estate and the dynamics that are at play. This enables us to make strategic recommendations for the coming months.
The Model Estate is also used to compare the short- and long-term capital value performance of agricultural land and assets against a basket of alternative asset classes: residential and commercial property, equities, gold, fine wine and classic cars.
Please note that all findings in this report are based on valuations undertaken on 31 December 2022.
Components
The Model Estate was valued at £50.12m in December 2022, representing an annual increase of 6.9% against a value of £46.88m in 2021. Capital values have increased steadily over the last 10 years, with 10-year annualised growth at a healthy 5.1%, or 64.2% cumulatively.
A significant uplift in the farmland market, reflected in both in-hand and let farmland, has bolstered the total capital value of the Estate. Combined, these assets account for 56.7% of the total value of the Estate. The ‘other’ assets on the Estate, namely the solar farm and quarry, also saw impressive growth. This sub-section also includes a telecoms mast, syndicate shoot and fishing rights. The value of the residential assets increased too, although to a lesser extent. However, the value of the manor house has remained the same and the commercial element saw a moderate decline in value.
Total value: £50.12m
Annual change: 6.9%
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Component
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Description
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Let farms
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1,499 acres of arable land and 371 acres of pasture land
Six farms, four let on FBTs and two let on AHAs
Three farmhouses, one let on an FBT and two let on AHAs
Four cottages, one let on an Ag Protected tenancy and three let on ASTs
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In-hand farms
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1,073 acres of arable land, 71 acres of pasture land, 60 acres of woodland and 21 acres of tracks
One four-bedroom farmhouse
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Manor house
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A Grade II listed Manor House and 23 acres of amenity woodland.
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Let residential
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Seven houses, five let on ASTs, one let on an Ag Protected tenancy and one vacant.
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Let commercial
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13 properties, all let on L&T tenancies.
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Other
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A telecoms mast, syndicate shoot, solar farm, fishing rights and a quarry.
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Key:
FBT Farm Business Tenancy; AHA Agricultural Holdings Act 1986 tenancy;
Ag Protected Rent (Agricultural) Act 1976 tenancy; AST Assured Shorthold Tenancy;
Rent Act Rent Act 1977 tenancy; L&T Landlord and Tenant Act 1954 tenancy
Figure 1 – Components of the Model Estate (by capital value)
Component performance
In a year defined by rocketing inflation, faltering economic growth and political turmoil, rural estate owners have been presented with numerous headwinds. Although the UK narrowly avoided a technical recession in 2022, some property markets have been more adversely affected than others, reflected in the varying performance of the different elements of the Estate. Despite this, the overall value of the Estate increased.
Figure 2 - Model Estate Performance, 31 December 2022
historical trends of the performance of agricultural land show that it outperforms inflation in the medium- to long-term, offering wealth preservation benefits
The in-hand agricultural land element increased by 7.1% over the last year, with the arable land valued at £9,900/acre and pasture at £8,500/acre. This represents an uplift of 7.6% and 9.7% respectively. Meanwhile, woodland values have been stagnant, ranging from £5,250/acre to £5,500/acre.
Change in land values varies depending on local market dynamics, the type of land and the quality. Yet, across the board, sustained high demand from an increasing diverse selection of buyers continues to outstrip supply and has served to maintain upward pressure on values. Values reported on the Estate are ahead of averages across England and Wales, but reflect the regional picture where some notable large farm sales have achieved in excess of £10,000/acre.
Threats to the agricultural industry were plentiful in 2022 and had the potential to derail farmland values. The Russian invasion of Ukraine, coupled with the complexities of Brexit, has resulted in unstable supply chains and rocketing inflation. Agricultural output prices have not kept pace with spiralling input prices, putting sustained pressure on profit margins. However, increases slowed considerably in the final quarter of the year. Most significantly, fertiliser prices (ammonium nitrate, imported) fell by 19.5% in the three months to December, averaging £700/tonne. Still, the longer-term price trends show a substantial shift, driving sustained cost inflation for farmers. Compared to the same period two years ago, fertiliser prices have seen 222.2% growth.
Structural changes in the market have also created uncertainties. Dwindling direct payments and the vagueness of the incoming environmental schemes has forced many to question their confidence in the industry.
However, historical trends of the performance of agricultural land show that it outperforms inflation in the medium- to long-term, offering wealth preservation benefits. Particularly, the market is still sustained by rollover funds and so capital values are likely to be less exposed to the increasingly expensive debt market in the way that many other property markets are.
Considering Natural Capital
In parallel with other landowners, the Estate has continued discussions on whether land should be taken out of food production for ‘green’ initiatives, whether that is for government Environmental Land Management (ELM) schemes or Countryside Stewardship agreements or private market opportunities, such as the creation of biodiversity units.
Engagement with ELM is not mandatory, neither will it be suitable for all businesses. Specialist commodity producers may find the onus associated with removing land from production in aid of environmental management to be comparatively uneconomical. However, where marginal land is farmed, ELM may unlock greater economic return with regular cash injections independent of crop yields.
The creation or enhancement of habitats (and subsequent management) for biodiversity can also offer consistent, long-term income opportunities. The market is in its infancy but, with Biodiversity Net Gain (BNG) becoming mandatory in November 2023, the market picture will become increasingly clear and the Estate will be able to get a better idea of what value biodiversity units will have. In the meantime, the Estate is weighing up the flexibility of the different schemes, the ease and cost of the different standards or enhancements they can implement and what the longer-term implications may be on the value of the land.
The let farmland has seen little change over the last year, with most tenant farmers sitting tight whilst the effects of dwindling direct government support payments on the rental market unfold. Concurrently, and like the in-hand farms, tenant farmers are assessing the opportunities arising through the emerging ELM schemes. Local rent reviews have resulted in unchanged rents.
In the longer-term, the decline in 1986 Act tenancies can be expected to accelerate as the second-generation successions expire. As this takes hold, we can expect more movement in let farms. However, some third successions could run to the end of the century and company tenancies can endure indefinitely.
Regionally, in southern England, Carter Jonas data shows that openly marketed farm business tenancy (FBT) rents usually exceed national averages, with a five-year rolling average holding firm at £140/acre across both equipped and land-only holdings. Average FBT tenancies have reduced to 4.67 years from 2021 (Central Association of Agricultural Valuers (CAAV) in their Land Occupancy Surveys 2021).
There has been a moderate increase in the capital value of the Estate’s residential portfolio. The one in-hand residential dwelling increased in value by 2.8% during the year and the let assets rose by 3.8% year-on-year, reflecting a buoyant private rental market.
While the residential element of the Estate was an undeniable winner in the previous year, 2022 looked very different. A record number of house moves occurred following the pandemic and up to early 2022, resulting in immense house price growth. However, against a backdrop of falling real incomes and a near tripling of mortgage rates, demand eased later in the year. The total number of mortgage approvals in 2022 was 19.2% lower than 2021, with the greatest falls occurring in the last couple of months (Bank of England). According to Nationwide, annual house price growth peaked at 14.3% in March 2022, before slowing to 2.8% by December. Meanwhile, Halifax reported a peak of 12.5% annual growth in June, falling to 2.1% in December.
Growth in private rental prices, in contrast, accelerated throughout the year, reflecting buoyant demand and dwindling supply with some private landlords now exiting the market. In the 12 months to December 2022, rental prices for the UK (excluding London) increased by 4.3% (ONS). Royal Institution of Chartered Surveyors (RICS) reports that demand continues to rise, while new supply coming to the market is dwindling, forcing prices upwards. The two rent reviews that took place on the Estate resulted in an uplift of 10% to move rents in line with local comparables.
Solar Farm
The Estate’s solar farm has seen the greatest increase in value of all assets on the Estate, with a significant year-on-year uplift of 29.7%.
The Estate’s solar farm has seen the greatest increase in value of all assets on the Estate, with a significant year-on-year uplift of 29.7%. This is predominantly a result of the sharp fall in global fossil fuel supply following the Russian invasion of Ukraine and, subsequently, Russia being almost wholly removed from the supply chain. The ensuing energy crisis caused a spike in demand for domestic, commercially produced renewable energy. It also impacted the availability of some materials needed in solar farm construction (particularly steel), resulting in an increase in the value of operational sites. Coupled with the acceleration of environmental and sustainability targets set by corporates, there is mounting pressure on the renewables market to future-proof the energy sector, pushing prices up accordingly.
Quarry
Activity levels at the quarry have remained consistent throughout 2022 and annual sales have risen to 300,000 tonnes of saleable sand and gravel. Quarry Co.’s modest increase in production is attributed to the closure of a competing quarry site and success in securing a share of the latent market demand for the sales volumes previously controlled by that competitor. Consistently elevated sales are putting pressure on permitted mineral reserves at the quarry, and so Quarry Co. is now considering a further planning application supporting a lateral extension to permitted working arrangements.
Planning Permission was secured during 2022 for a revision to permitted restoration arrangements at the quarry that will serve to utilise imported inert waste materials to partially infill the quarry void and deliver a mixed-use restoration comprising leisure and amenity usage and land dedicated to the creation of habitats for biodiversity. Inert waste tipping will commence within the next 24 months (dependant on being granted the required Environmental Permit). Once such operations commence, additional royalty revenues will be due to the Estate under the terms of Quarry Co.’s lease.
The combination of an increase in minerals sales during the year and an index-linked rent review due at the outset have served to support a notable increase in revenue payable to the Estate. A year-on-year increase in income of 29.5% was recorded.
Sporting rights
The sporting rights on the Estate are let to a local syndicate at a rent equivalent to £6.73/acre across almost 2,000 acres. The tenancy expires in 2023, and early discussions with the syndicate suggest they will be seeking to reduce the rent due to sharp rises in the costs of running a shoot. Avian Influenza led to movement bans on poultry products and a subsequent lack of availability which, coupled with spiralling input costs (namely energy and feed) and staff shortages, has driven up prices exponentially. Data from the 2022 Game Shooting Census (GunsOnPegs) shows that, over the year, the average cost of pheasant on a game card has risen by 31%, and partridge by 19%.
Telecoms mast and fishing rights
The values of the telecoms mast and fishing rights have held firm over the last year.
Over the year, the value of the manor house stood firm at £7.5m. The country house market has settled down from the frenetic activity seen in 2020 and 2021, where rocketing demand for prime country houses in a typically stagnant market rebased prices in most regions to a new level. Like the wider residential market, this growth was sustained through much of 2022. Most significantly, the increasing cost of finance has introduced more caution to the market. Coupled with inflated seller expectations, transactions have slowed.
Reflecting challenges in the commercial sector, the value of the Estate’s commercial assets fell by 0.8% year-on-year. High-quality city centre offices have led the post-pandemic office market recovery, while out-of-town and secondary stock (such as on the Estate) has underperformed. A harsh economic backdrop together with the ongoing long-term structural shifts in demand accelerated by the pandemic has generated uncertainties in future levels of occupation and constrained growth in asset values.
The industrial rental market, which saw remarkable performance in 2021, has eased over the last year. Rising operating costs, labour shortages and supply-chain concerns have impacted the rental market, and annual rent growth has decelerated from record highs. Further, activity in the investment market has fallen away sharply and capital values have plummeted. However, a shortage of development and growing lack of stock will continue to act as a constraint on take-up and support yields in the near-term.
Rent reviews on the Estate in 2022 have resulted in unchanged rents for the office units, all of which remain occupied. Tenants cited ample parking and access to open spaces as valuable features which have had a positive influence on employee sentiment. Conversely, the industrial spaces have been more problematic with two tenants leaving and one unit remaining vacant. The other unit (8,073 sqft) has been relet at a reduced rate of £3.90/sqft, representing a decrease of 8.2% from the previous tenancy.
Alternative asset classes
The only asset class to see stronger growth than the Estate was classic cars.
Figure 3 - Long-term alternative asset class performance
When ranked against a range of alternative investments for growth in value in 2022, the Model Estate outperformed almost all assets and ranked second (see figure 3). The bank of assets includes fine wine, gold, classic cars, equities, residential property and commercial property.
The only asset class to see stronger growth than the Estate was classic cars, where the HAGI Top Index reported a 18.0% annual increase, the fastest rate in nine years. Although many challenges existed for the classic cars market in 2022, such as rocketing fuel prices and disrupted supply chains for parts, there were still record sales and significant, high-ticket transactions.
The fine wine market was also bullish in 2022. The Liv-ex Fine Wine 100 index increased by 6.8% year-on-year after reaching a record high in September, just below the Model Estate’s 6.9%. The market’s strong performance from late 2020 onwards has brought an influx of new players, typically high-net-worth individuals, who have been looking to fine wine to diversify their investment portfolios. Over the longer term, both classic cars and fine wine have witnessed impressive growth, with 10-year annualised growth rates of 11.0% and 4.9% respectively.
In the face of political and economic headwinds, many assets had a volatile year and saw an overall decrease in value. Despite falling steeply throughout most of the year, the gold market rebounded in Q4 and ended the year down just -0.2%. An increase in demand from central banks and institutions is a key reason for this bounce back. The equities market, measured using the FTSE All-Share index, also had a turbulent year and decreased in value overall by 3.2%. Prices plummeted by 15.1% from its peak in February to its low in October, then jumped 11.5% in the last quarter.
2022 represented a year of price corrections for the commercial and housing markets, reflected in the MSCI Quarterly Index for residential and all (mainly commercial) property. While MSCI reports capital values for the residential investment sector to have dropped by 4.9% over the year, the all property index decreased by a substantial 12.8%. Industrial assets saw the greatest fall in value (-17.4%), and no property sub-group (retail, office, industrial, residential, hotel and ‘other’) recorded an annual increase.
