Supply, in the historical context, remains tight and we do not expect any change in the short term. Our research shows that current demand remains strong with those motivated by investment objectives competing with farmers expanding their businesses.

Savills has revised its average farmland value forecast upwards following an improvement in sentiment for the prime country house market and factoring in what we expect to be a reasonably robust run of strong commodity prices (see Graph 8 in the gallery). Growth may soften in 2012 as the outcome of the latest CAP reform becomes clearer.

Prospects for this year will be interesting. Supply will remain limited and, while demand is not expected to falter, buyers will remain price sensitive especially where income-generating opportunities are limited.

Quality matters

In addition to the main baseline forecast for the short to medium term, it is expected that growth in values will be diverse and largely related to quality. This is illustrated in Graph 9 in the gallery and summarised below:

• Lower range: Growth is likely to be weak and to be below 5%. This scenario could play out where the market is dominated by grassland farms, which have no real residential or amenity appeal or where small blocks of land are not in prime locations. The former may reflect a reasonable proportion of the market in Scotland.
• Average: Savills' baseline forecast, which is believed to be a realistic base forecast for average values across Great Britain, has been revised upwards to 9.7%.
• Upper range: Strong demand for good quality commercial farms, predominantly arable, may lead to value growth in the region of 15%. This likelihood strengthens if the current uplift in commodity prices remains robust. In addition, Savills expects the value of top quality estates to record growth at a similar level.

A significant increase in interest rates, although countered by inflation prospects, could potentially dampen the current run of value increases. However, most commentators believe a rise is unlikely before this summer and a return to ‘normal’ interest levels is likely to be some way off.

Threats to growth

As we have noted earlier, less than 30% of buyers used loans in 2010 as the primary source of funds, therefore the impact at current levels of supply would be relatively small.

An additional threat to the current growth rates would be significant adverse changes to land taxation.

We believe a fall in values is highly unlikely given the fundamentals of growing populations, food security, increased wealth, renewable energy and land being a finite resource.

Taken from
Market Survey: Agricultural Land, 2011