Rural property market update
David Ward MRICS, Partner at Fenn Wright, provides a summary of the rural land and property market over the past 12 months and looks ahead to 2019 and beyond.
Market conditions over the past 12 months
Average arable land values across the region have softened since the highs of 2015/16, when values regularly exceeded £10,000 per acre. Today, average land values lie in the region of £8,000 per acre.
In some respects, this reflects a correction in the market, as the year on year increases we saw previously took values to unsustainable levels. Following this ‘correction’, values have stabilised, however, we are now seeing greater divergence in the market, whereby values in one area can be significantly different to those in another. In some circumstances, these variances are seen between parishes, rather than a wider geographical area.
The main driver remains lack of supply, which has generally continued on a downwards trend. Last year actually saw a reversal of this trend in the eastern region, however these figures were distorted by one transaction – Strutt & Parker Farms owning 13,000 acres freehold, with a further 20,000 acres subject to third party agreements. This aside, land availability was slightly down on the previous year. The lack of supply has supported values and created some frustration from buyers. That said, buyers are becoming more selective, and are less likely to travel significant distances to farmland away from their main holding. As a result, values in certain areas can achieve between £8,000 and £8,500 per acre, whereas others will struggle to exceed £7,500 per acre, depending on the circumstances and buying power within the locality.
Farmers and existing land owners remain the largest buyer profiles. Investors who returned to the market during the recession are less prevalent, disinterested by historic low yields and the perception that a capital growth will be negligible in the short term. However, this is not the only driver for the purchase of agricultural land, with preferential tax treatment, both in terms of rollover relief for Capital Gains Tax and the Inheritance Tax treatment both being a major factor.
Once again, this points towards a two tier market. As the planning landscape continues to change, particularly in regard to the development of Greenfield (farmland) sites, many landowners who have the benefit of cash from development will look to reinvest and benefit from rollover relief. Again, the highest values will be paid for land close to their home base and therefore land values near the major towns and villages, where development is being seen, will attract a premium.
Conversely, concerns over farm income make farming buyers in the more rural areas less positive. Without wishing to mention the “B” word, what is happening in Westminster is having an impact on the market. There are concerns over the future of farm subsidies which are only guaranteed until 2022, subject to Brexit, a change of Government etc.; potential influx of cheap imported food and increasing input costs are all a concern.
Income fears will often be reflected in rental values but this is not being seen in the market. Once again, scarcity is the principle driver. It is generally considered that the sustainable rent under a Farm Business Tenancy is in the region of £130-£140 per acre. One of the largest single blocks to test the market locally was marketed by Fenn Wright in 2017, where 600 acres of arable land was offered on a five year agreement commencing 29th September 2017. Here the client looked for a sustainable rent within the above bracket however, a competitive situation saw numerous tenders exceed this figure, with the final rent being agreed in excess of £160 per acre. With rents being based on direct open market comparables, it is hard to see how tenants can argue any form of reduction when the market shows this level of competition for land. Again, location, quality and size of holding are all major factors.
The UK land market has historically been a spring market, and we are yet to see how this will unfold in 2019. With concerns over Brexit, farm incomes and a potential fall in values, many speculated that the supply of land would increase. So far, within our region anyway, this does not seem to be the case, with most agents reporting a lack of activity, however April and May will prove whether this is actually the case.
From Fenn Wright’s perspective, we are currently marketing Princes Hall (pictured), a substantial family home with 260 acres of land, offered with a guide price of £3.65 million. This was launched last autumn and has seen a modest level of interest. In some respects, the property is unusual in the fact that there is no farmyard and it is difficult to split the house from the surrounding land due to an occupancy restriction. If this had been possible, we would have expected to see significant interest in the land that would have generated a competitive bidding situation. As of today, we are in negotiation with two parties over the purchase as a whole.
Later in the spring we will be bringing two farms to the market, one with 160 acres of land and the second with 300 acres. These are in different locations and it will be interesting to see the results of those sales.
In summary, we still anticipate strong, competitive interest in purchasing land – particularly when it is within reasonable distance of major towns and villages. Preferential tax treatment of farmland and lack of supply being the major drivers.
Looking further ahead, the industry has concerns that current or future governments may attack the preferential inheritance tax treatment of farmland. If this happens, we are likely to see a significant negative impact on values, both in terms of the incentive to buy and land availability, as long term investors and lifetime farmers see reduced incentive to hold onto it for future generations.
Call our Farms & Estates team on 01206 216550 for an informal discussion.