What is the right price for farmland and why not buy shares instead?
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. None of these tools is particularly helpful when we look at agricultural land. Rental yield, when one takes out some management costs, is miniscule and, there are many uncertainties, of which Brexit is only one. If we valued any other business asset with such 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, many times what it would be for any other business asset?
The real answer to the question is threefold. Firstly farmland is an attractive asset. Unlike company shares, 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.
The second reason is that it is a long term asset. The lack of liquidity keeps the market in a tight cycle of supply and demand. Only 1 or 2% of UK farmland comes onto the market in any year so 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 so the pricing equation is often simply “how can I raise the money?” rather than “is this the best investment for that money”
Finally, 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 then eliminate a CGT liability, limit IHT exposure and acquire an attractive asset. Although the number of such investors is small, the market is very liquid 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 year end “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!”
This article orginally appeared on Monahans, MHA member firm, website.