The past eighteen months have been a period of adjustment in the rural land market. 2016 was a year of relatively restricted supply, suppressed commodity prices and (therefore) a cooling in the fervour of aggressively acquisitive buyers.
The same trend continues into 2017 and would appear to be the same for this year, along with added uncertainty around the result of the Brexit negotiations. There was a further fall in the national average land price in 2016, but across the country we experienced values ranging from £7,000 to £13,000 per acre for unequipped commercial arable holdings with bare land in the eastern region.
Interestingly, relatively few land deals fell through as a result of the vote to leave the EU. The impact on currency has had a short term positive effect on commodity values and this year’s subsidy payment. But, ultimately, the main reason for reduced values on ‘pure’ agricultural units is the weakened income return from farming itself.
What are the current key drivers of value?
Location has the most critical impact on price. Offering diverse income streams helps to retain value as does diversity of interest, ranging from pure agriculture as seen in the Fens to strong amenity/residential value in the south and west.
In 2014 investors were pursuing large commercial farms (500+ acres). Now, where premiums are being paid, they are for smaller parcels in good locations, large scale estates in higher value residential areas or units that offer options for future uplift in value and additional income streams.
The productive capacity of land should always be a key driver of value. In some areas this goes hand-in-hand with location while in others the location is almost incidental.
In some cases we’ve witnessed productive land with limited amenity appeal being withdrawn from the market due to lack of interest, or offer levels not seen since the mid-2000s being the best the market will produce.
Elements such as grain storage, irrigation and good access have almost always ensured a premium value. Now they are vital to obtaining a respectable result on commercial agricultural units – a note of caution of the Water Reforms and the impact on Licences.
Where residential values are strong, a small portfolio of cottages will be a positive addition (particularly if they can be let in premium markets). Generally, traditional investors want to minimise residential elements, while buyers mindful of inheritance tax are keen to keep dwellings ‘character appropriate’. However, with Agricultural Property Relief coming under further scrutiny, how long will this driver of the marketplace remain relevant?
In the face of reducing farming returns, all types of purchasers are looking to add value to their holdings from development and diversification. Any imposition of overage or development clawback will need to be considered carefully, and in conjunction with local development plans. However, in certain locations we’re seeing the proceeds from development supporting the demand for land from buyers with roll-over funds.
Against the backdrop of weaker farming returns, purchasers could be inclined to look at what opportunities are achievable from let holdings where vacant possession will deliver value in the future. They may also be keen to explore opportunities for imaginative development to improve on the statutorily depressed income from rents.
What does the future hold?
Commercial farmland remains a consistent, robust and tangible asset class with long-term appeal. However, the next 12 to 24 months are likely to see a further cooling of prices in some locations - and relative volatility. Below are the major influences likely to impact value and sector appeal in the coming months:
- future trade arrangements with the EU and the rest of the world
- future subsidy regimes
- the future of tax relief, APR and BPR
- reform of the Water Licensing regime
- currency fluctuations
- interest rates
- climate change.
It’s the decisions taken in Westminster and Brussels in the coming months and years that will have the most telling impact on the land market, and subsequent repercussions for the rural economy.
£7,000 - £13,000
per acre for unequipped commercial arable holdings with bare land in the eastern region