Prospects for further growth in UK farmland values remain positive but land quality and location are becoming increasingly critical.

Location as a factor of demand is a crucial component of the market. The absence of interest and competition from neighbouring landowners can have a significant impact on the outcome of marketing a farm in terms of the price achieved or if a sale is successful. This can be clearly illustrated in the Eastern counties of England.

Although prices here have outperformed other areas of the country there was a significant variation in values within this region. The thin market for quality arable farms in the right location in the East of England, notably Norfolk and Suffolk, drove consistent and strong growth across the region with average prime arable land reaching £9,600 per acre and recording growth of over 20%.

In contrast, although still strong, average prime arable values across the East Midlands reached just under £9,000 per acre, up 14% since the beginning of the year. More diversity, especially across Lincolnshire, in terms of land quality and desirability of location created a patchier demand from buyers leading to a wider range of sale prices achieved.

Historical growth

In many ways farmland is different to other assets in that it is tangible; you can live on it, play on it, bring up your family on it and it also offers income generation opportunities and a safe haven for your cash.

The question is whether the significant growth of the past decade is breaking new ground and will continue, at least in the short to medium term, or whether a significant correction is on the horizon?

Fundamentally, land is required to produce food and with rising populations food is currently high on political agendas across the world. In the UK, history shows us that land values rise significantly when there is pressure to feed the population.

A good example is the period between 1937 to 1950 which included the Second World War (1939-1945) and created the need for greater output. This resulted in a 50% increase in arable area, guaranteed prices and assured markets bringing with it a revival of interest in agricultural prospects with a ‘sellers’ market being established for vacant possession land. During this period land values increased over 230% from £24 to £80 per acre.

Graph 7 shows that this pattern has been regularly repeated since 1960 with policy changes to boost income prospects also creating an environment for rapid capital growth.

Forecasts

Our Farmland Value Model, based on historic data back to 1975, shows that the current trend for rising average values recorded over the past 11 years (see Graph 7) is likely to continue.

We expect average farmland values across the UK to grow at around 6% per annum over the next five years, but there will be significant variations in the rates of growth with the best performance being quality driven as noted in Table 2.

Our forecast modelling factors in all the core drivers of the market, which includes farm profitability, subsidies, commodity prices, crop yields, prime rural residential markets and market supply.

Although there is currently reasonable optimism in the industry we have erred on the side of caution in modelling our land value forecasts. Despite a conservative outlook the fundamental supply and demand equation is driving average capital growth.

During the next five years we expect average growth for all types of farmland to be more muted than that recorded over the past decade (14%).

However, as we have noted throughout this report the market is diverse with quality and locational demand driving top performance. We expect this to continue with the best commercial farmland and estates realising annual growth of towards 10%, whereas growth at the bottom end of the market is likely to be sub 5% with the value gap continuing to widen.

With the beginnings of a revival in the country residential market forecast for this year, prospects for the residential farm, which in recent years has often failed to generate interest in all but the most popular lifestyle locations such as the Cotswolds, could begin to improve. Shrewd buyers will see now as the time to take advantage of the future potential uplift in values.

Potential risk to growth

Set against this recovery there are always issues which threaten to upset the balance including interest rates, debt due to pressure on profitability and cash flows, changes to taxation and subsidy regimes – all of which have the potential to increase the supply of land available.

In addition, any uncertainty caused by the possible accession of Scotland and the 2015 General Election in the UK may also affect the supply/ demand balance putting pressure on value growth.

Taken from
Market Survey: UK Agricultural Land 2014