Farmland prices to slow as income pressures take hold

Uncertainty surrounding CAP reforms, political issues and the pressure on farm incomes are causing farmers to be cautious about taking on large capital commitments.

"Although we do not expect the value of farmland to fall significantly we believe that, in certain segments of the market, growth may be zero or at best very weak," a new report by Savills highlighted.

But the value of prime arable land strengthened across the UK by 14% to average almost £10,000 per acre.

Alex Lawson head of Savills farms and estates comments, “The flight to quality, particularly in respect of arable farmland is a major contributor to the widening gap in values including between England and Scotland. If this gap continues widening the opportunity for investors to acquire land in Scotland starts to become quite compelling. Likewise there are buyers who are choosing to take

advantage of the relatively good value poorer quality livestock land.”

Buyers and sellers

Market activity continues to include a variety of buyers and sellers; last year non farming / lifestyle sellers accounted for more buyers than farmers compared with in 2000, when almost three-quarters of them were farmers.

On the buying side, political uncertainty coupled with the latest CAP reforms have encouraged some potential farmer buyers to sit tight.

They represented 45% of all buyers down from 60% in 2011. The proportion of overseas buyers has remained steady over the past three years at around 8%. This is almost double the activity during the height of the recession (2009-2011), but significantly below the mid noughties when collectively they accounted for over 20% of all buyers.

The effect of the diverse demand profile for UK farmland compared with other nations, where values are much more closely correlated to farm output and commodity prices is clearly illustrated in the graph below.

USA farmland values more closely aligned with farm output

According to our forecasts top quality agricultural land will be a long term performer (2015-2019) with 8% capital growth and 5-6% rental growth, while investors with industrial properties as well as secondary office schemes could be set to see as much as 10% capital growth in 2015, with secondary retail at 9%.

Ian Bailey head of rural research says: "Farmland supply is historically low, product is finite and competing land uses combined with diverse ownership keep values positive but a local understanding of market conditions is key to investing well in this sector, and only the top quality stock will achieve 8% growth."

The key to these returns is the focus on supply and demand fundamentals whilst taking into account factors such as the UK general election, mansion tax proposals and mortgage market review. However, whilst there may be an effect on sentiment in the run up to the election, the impact for commercial and agricultural markets is likely to be muted.

Drawing on the macro-economic story, Savills predicts base rates will not move in the short to medium term, low oil prices will boost UK consumer spend and UK real estate will continue to deliver high returns when compared to other asset classes (stocks, bonds).

Pressure

Continued improvements in the economy will put some pressure on farm incomes and therefore capital and rental values across all types of land and farming businesses, the Savills report said.

"We are already seeing pressure on commodity prices and this is likely to continue this year, affecting farm profits and cash flows."