Britain's troubled Co-op to cash in with farms sale

* Co-op selling farms and nearly 18,000 acres

* Sale of land alone could fetch more than 150 mln stg

* Group facing huge 2013 loss due to problems at bank

By Jemima Kelly

WHITTINGTON, England, April 15 (Reuters) - Financial difficulties may have helped to push Britain's Co-operative Group into selling its farmland in England and Scotland, but the market timing could not be better for one of the biggest UK land sales in recent decades.

While London property prices have grabbed all the headlines, in rural Britain valuations for prime land have shot up at double the pace of prime residential property in the capital in the past decade, as a lack of supply and strong investor demand have combined to create a windfall for farmers looking to sell.

With its 17,808 acres - equivalent to more than 10,000 football pitches and almost 13 percent of the 139,000 acres sold in Britain on the open market in 2013 - the Co-operative's sale could run to hundreds of millions of pounds.

"This is one of the most significant agricultural sales in recent years," said Tom Raynham, head of agricultural investment at Knight Frank, who could not recall another sale of this size.

"I have a number of private investors and funds actively looking for more land in the UK and this could be an interesting option for them," he said, suggesting a pension fund as the most likely buyer.

About 15 miles away from one of the Co-op's farms in south-western England is Whittington, where 69-year-old Jan Rowe will put his own 500-acre farm up for sale at the end of the month. He expects strong interest from buyers who see farmland as a safe, long-term investment.

"Nobody's making any more land and those people astute enough to think 20 years ahead are going to realize that these land values aren't going to stop," Rowe said. "It's not something this country has a huge surplus of."

(Graphic showing land on the market vs. farmland prices:

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Graphic showing prime farmland prices vs. prime London:

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Co-op's farming business dates back over 100 years and employs some 250 people in 15 farms and three packhouses across England and Scotland, producing cereals, fruit, vegetables and honey. The group wants to transfer the whole business - staff included - to a single buyer.

The sale comes after a crisis at the mutually-owned group's banking unit, which on Friday announced a loss of 1.3 billion pounds ($2.2 billion) for 2013.

Co-op said the sale of the farming unit was "not driven by the need to realise cash because of the issues at the bank or the under-performance of any other parts of the business", but rather a decision that the business was "non-core".

It said proceeds of the sale would go to the group, which is owned by its 7.2 million members, without elaborating.

RECORD HIGH PRICES

Co-op's buyer may well come from outside Britain; 8 percent of UK farmland buyers in 2013 were foreign, according to Savills (LSE: SVS.L - news) . Not only is Britain perceived as politically stable but, out of the 20-plus countries surveyed by Savills, only the UK and Ireland (Other OTC: IRLD - news) are without restrictions on foreign ownership.

"In exactly the same way as central London property, farmland is now recognised (by foreign buyers) as a good, safe, solid investment - actually more so," Knight Frank's Raynham said, adding: "If there are troubles in Europe or Africa or America, then we see investors coming into the UK."

While the average value of prime residential property in London has grown by 135 percent over the last decade, the value of prime British farmland has increased 273 percent to an average price of 8,500 pounds per acre, according to Savills, which is advising the Co-op on its sale.

At that rate, the buyer would face a price tag of more than 150 million pounds for the land alone.

Investor (Other OTC: IVSBF - news) interest in farmland is growing, with a December report by investment manager Aquila Capital showing 28 percent of institutional investors wanting to increase their exposure to agricultural land in 2014.

"I've never talked so much money in my life as in the last half year," said Aquila (Paris: FR0010340711 - news) head of farm investment Detlef Schoen. He is not tempted by the Co-op sale though, as he is not sure the pace of growth in UK farmland prices will continue.

"The real problem is that past subsidies have been capitalised into land prices so you would need to expect that the current subsidies would last forever," Schoen said.

The European Union spends about 50 billion euros ($69 billion) a year on its 50-year-old common agricultural policy (CAP), which provides farmers with subsidies, but last year announced that 13 percent would be cut from the CAP budget between 2014 and 2020.

Yet while Savills had forecast slower growth in the price of farmland this year - 6 percent versus an average 14 percent over the past decade - it shows no sign of slowing, with the average price of English land up 6.5 percent in the first quarter of 2014 on the quarter before, according to Knight Frank.

SUPPLY & DEMAND

Prices are largely driven by the imbalance between high demand and shrinking supply, with agricultural land losing 0.2 percent per year to infrastructure, housing and even the sea, according to Savills, giving it a premium.

"There's a lot of pressure on land for all sorts of other uses ... particularly in a crowded island like Britain," said Whittington farmer Rowe.

In such a market, some worry that the size of Co-op sale will affect prices, but Richard Quinn, the head of the Co-op's farms business, dismissed such concerns.

"Given that farms are bought and sold each week and that they are geographically spread, we don't expect that the sale will have an impact on land prices," Quinn said.

Andrew Shirley, head of rural research at Knight Frank, said the Co-op sale stood out not just because of its scale but also because the whole business was on offer, not just the land.

"I don't think that something like this has really been sold before," he said. "It's one of those sales where you just don't know who's going to buy it because it's so unique."

Experts say that there is no shortage of interest.

"All of a sudden a huge amount of land, which is very high quality and well-managed, has come onto the market," said Reza Vishkai, head of specialist investments at fund manager Insight. "The interest is going to come from all over the place."

That could ease some of the pressure on the Co-op Group, which is expected to announce a loss of at least 2 billion pounds when it unveils 2013 results on April 17.

($1 = 0.7201 Euros)

($1 = 0.5980 British Pounds) (Editing by Carmel Crimmins and Mark Potter)