Agricultural land market review
- What’s been happening with land values?
Over the 25 years between 1982 and 2007 agricultural land values increased by 87.5 percent, from £1,600 per acre to £3,000 per acre.This is in stark contrast to how the market has performed over the last seven years. During the recession, average land values have increased to over £10,000 per acre – an uplift of over two hundred and thirty percent.
2. Current average land values
The national average for prime arable land is now in excess of £10,000 per acre. However, this hides significant regional variances, with the eastern region having some of the highest values in the UK.
Even regional averages hide significant variances with marked differences between one parish and another.
To put this into context, last autumn saw the sale of two competing farms in our region. One farm comprised of approximately 280 acres of good quality arable land consisting of large fields, but with no buildings, or any opportunity for development. The second included a house, cottage, range of buildings and approximately 200 acres of arable land, thought by some to be of poorer quality, but still classified as Grade 3. These farms were within 4 miles of each other and were for sale at the same time. The first achieved a price in excess of £13,250 per acre. The second sold for £8,700 per acre.
So why the variance?
The buyer profile is predominantly existing landowners and farmers. Farming businesses are often geographically constrained as the logistics of transporting large agricultural machinery restrict farmers to a reasonable radius of the main farm. This is the key to the price differentials. The price of land surrounded by large, progressive farmers is driven higher through competition whilst land that is surrounded by smaller farmers who have difficulty justifying the cost of borrowing against returns, struggles to achieve the average price. It is also fair to say that buyers are becoming more sensitive over quality, reflecting a greater disparity between the best quality land and that which is, or is perceived to be, poorer.
3. How have we got to this point?
Ultimately, it is a simple case of supply and demand – and supply continues to fall year on year, a continuing historic trend.
At the same time, demand has strengthened over the recessionary period, bringing more buyers to the market.
One may argue that agricultural land was an under-performing asset, particularly if we consider the relatively low period of growth between 1982 and 2007 when land values increased by 87.5 percent. By way of comparison, the average house price, over the same period, increased from approximately £24,000 to £214,000 or eight hundred percent. There was, to some effect a latent, or pregnant, growth built into values which had not been realised in the market.
At the start of the recession, many investors switched from higher performing assets into land as it was considered a safe haven. Low yields were not a concern as they were comparable to what could be achieved elsewhere. At around the same time, foreign investors and landowners also realised that UK land was undervalued, and as a result there was an influx of Irish buyers in the west and Dutch and Scandinavian buyers in the east. This demand drove prices higher, attracting the attention of other investors frustrated in the wider recessionary market. Effectively a snowball effect continued the increases, with unprecedented growth year on year.
4. What is the attraction?
Many investors have simply looked for a safe haven over the recession and have been fortunate to have entered a market which has seen unprecedented capital growth. They have certainly not been attracted by the yields, with an average rental return of approximately 1.3 percent. That said, agricultural borrowing is relatively cheap and the capital growth, especially for those who purchased five to six years ago, has more than made up for the comparatively low income.
Couple this with the tax benefits of agricultural land, with rollover relief for Capital Gains Tax and the potential for one hundred percent Agricultural Property Relief or Business Property Relief for Inheritance Tax then we have, effectively, a subsidised market.
Indeed, the Inheritance Tax reliefs continue to be a major driver for investors looking at succession planning. In addition, it allows the land owning, or farming, buyer to plan his investment on a generational basis. Consider this – a farmer may have a once-in-a-lifetime opportunity to purchase 300 acres immediately adjoining his existing farm. That purchase may cost in excess of £3 million, and include borrowing which appears unviable when considered in the context of the income that could be achieved from the land over the life of the loan. Farms are often inherited and may have little or negligible borrowing over the core farm so that the cost of buying the additional 300 acres could effectively washed out over the whole acreage. In addition, the farmer is not only considering the life of the loan, but the fact that the asset can be passed down to the next generation without 40% of its value being crystalised for Inheritance Tax purposes. Therefore the value of the asset to the farming family may be considered over a much longer period.
5. Where will land values go?
The outlook continues to focus on capital growth however we expect the price increase to be more muted over the next two quarters. The current low commodity prices, fears over CAP reform, potential increase in interest rates and general uncertainty surrounding the election raise concerns for potential purchasers. That said, concerns over food production and food security, as well as competing land uses such as energy production, house building, and general infrastructure continue to put pressure on the finite supply of UK land. We therefore consider that the long-term forecast is for continued growth over the next four to five years, although we expect that some of the headline rates will move closer to the average, with some of the lower values catching up – narrowing the broad band of values.
This is ultimately a subsidised market, either in the form of income for the farmer through the agricultural subsidy scheme or via the preferential tax treatment of agricultural property.
Will the result of the general election put a question mark over tax treatment?And what happens if the Eurozone crumbles?
Fenn Wright has dealt with nearly £18million worth of agricultural property over the last year or so. Much of this has been off-market, reflective of the buyer profile and the fact that many landowners wish to transact privately and with discretion. If you would like to talk to us, in complete confidentiality then please do so.