November 2009

LEGAL EASE: on the farm

Agricultural property in the UK can provide a secure long-term investment. It has a track record of stability, now combined with the increasing importance of food security While the current difficulties in the UK property market have been well reported, with levels of investment falling substantially, the agricultural property sector has remained resilient.  Although agricultural land prices have fallen, the decline has been much less dramatic than in other areas of the property market and prices are now beginning to rise again, with land agents Savills reporting an increase of almost 2% in the second quarter of 2009.  Historically the UK agricultural property market has tended to be counter-cyclical in economic terms and this lack of volatility has always made it an attractive long-term investment.  Prices are now bolstered further by an increased political awareness of the need for food security, given that demand for food is rising and the amount of farmland is finite.  
As regards the rest of Europe, farmland in Eastern Europe provides an attractive opportunity for investment where entry values are low or agricultural performance could be improved.  However, political uncertainty and lack of infrastructure may deter some investors. Compared to equivalent UK property, agricultural land in other Western European countries appears to be significantly overvalued. In addition, under existing European legal systems it can be more difficult to buy large blocks of farmland than it is in the UK, which can impact on the ability to maximise returns.  
English law, by contrast, benefits from a wide range of flexible legal structures for land ownership and management which can be used to suit investors’ requirements. In terms of ownership, these can range from on-shore limited companies and partnerships to off-shore trust structures and unit trusts. Land can then be managed through contract or share farming arrangements, which are essentially contractual in nature, or by agricultural tenancies which grant an interest in land to the occupier, but which can (under current legislation) be structured in such a way as to be terminable easily if the investor wishes to pursue a particular project, such as mineral extraction. English agricultural law is notoriously complex and there are many traps for the unwary, but with care and good advice these can be avoided and an effective management strategy maintained.
In the UK, there is now a real political interest in the delivery of sustainable residential development and renewable energy projects, providing opportunities for investors to generate substantial additional income. The UK government has instigated challenging targets for residential development which should benefit landowners in those rural areas which have been identified as in need of more homes.  In addition, small-scale renewable energy projects are fast growing in popularity with political support for their role in the reduction of CO2 emissions. For example in the case of wind farm projects, landowners can benefit not only from the sale of electricity to the National Grid but also from the receipt of renewable obligation certificates which can then be sold on to major utility companies.  
Although there are potential issues – the planning process can prove cumbersome and expensive and there is a need to bring on board advisers, or in some cases partners – these issues can be managed via a range of legal structures, allowing delivery of projects in a tax-efficient way with appropriate risk exposure. For example, investors may choose to grant options to developers or energy companies, thus insulating themselves from potential risks and costs and minimising commitment. At the other end of the scale investors may enter into joint ventures and engage actively in the project in order to maximise potential returns. This may involve the use of special purpose vehicles to limit liability to tax and risk.
Consequently, agricultural property in the UK can provide a secure long-term investment. It has a track record of stability, and combined with the increasing importance of food security it can seem even more attractive. In addition, there are real opportunities to maximise returns through development and other projects, with the ability to manage risk through flexible legal structures. It is not surprising therefore that the UK market is seeing increased inward investment from Europe and the Middle East. With prices and confidence beginning to rise again, this will be an area to watch.

• Amanda Tagg is an associate at Mills & Reeve

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