UK farmland – will this asset class keep on growing?

The "farmland market" – which is seen by many as our countryside and the preserve of farmers – has over the last two decades performed extremely well as an investment.

There has been a significant rise in capital value since the millennium but, with increasing pressures on farming profitability and other uncertainties, including Brexit, what is the outlook today?

Arable land values in England and Wales have risen by over 400% in the last 20 years. They have risen from an average of £2,000 per acre at the turn of the century to an average of £9,000 per acre in 2018-19, although this average hides a wide range of values achieved. This is down from a peak of over £10,000 per acre in 2015. The range of buyers and different demands for land means there is little correlation between land values and any other asset class.

Location in 2019 has become a much bigger driver of value than the quality of land. This is another reason why investors like it – the diversity of risk it represents. Understanding why land prices have risen so much over this period is important when looking ahead to the future.

UK farmland vs other investments
Recent decades have seen impressive growth

Source: Strutt & Parker

Explaining UK farmland price increases

On the face of it, farmland is not a particularly attractive investment. It is an illiquid asset which requires costly management and generates an annual return of somewhere between 1.0% and 1.5% (for arable land). However, there are many reasons why people buy land – many of which are not directly related to its ongoing profitability.

At the turn of the century, once there was more certainty about how agricultural policy – the EU’s Common Agricultural Policy – would be reformed, we saw a steady increase in prices throughout the period 2000 to 2010.

Guaranteed payments for every acre owned supported farming profits and were capitalised into the price of the land. The global financial crisis, which unfolded in 2007-2008, made farmland even more popular. Investors saw it as a safe haven for their capital, all the more so as much farmland had been undervalued for some while.

There were increasing pressures on land for a variety of uses: development, food production and for producing energy. In addition, the alarming spectre of food shortages and food security became a greater concern.

This, coupled with an increase in commodity prices, saw land values rise up to a peak of over £10,000 per acre in 2015.

Who are the big buyers of British farmland?

The buyers of farmland fall into a number of categories.

Existing farmers are a major category. They are often looking to increase their land holdings to create economies of scale. They see the opportunity to buy neighbouring land as a once-in-a-lifetime opportunity.

It often is: only a tiny proportion of land in the UK comes on to the market each year, so when it comes up for sale the neighbours see it as a rare chance. Existing farmers accounted for over 60% of the buyers in the market up until the end of 2017.

Equally as important now, however, are the non-farmer buyers who fall into a number of categories.

First are the investors motivated by tax incentives. These investors have seen land not only as a safe haven for their capital but also an excellent tool for wealth preservation, thanks to existing beneficial inheritance tax legislation. Equally, landowners who have made a substantial capital gain from the sale of land for development are able to roll over any tax gains payable.

Another category of buyer are the wealthy individuals who want land for amenity, lifestyle and sporting reasons. There has been very strong demand for "residential" farms within commuting distance of London from families who want to have a private property they can live at or go to at the weekend.

Next are institutional owners. Small and large institutional investors have invested in farmland for centuries due to the income it generates, the capital appreciation and, if actively managed, the windfalls from development or changes in tenure. When a protected agricultural tenancy ends, the capital value of the farmland can increase by around 40%.

Many charitable trusts own land, often for historic reasons of bequests or local ties. Other charitable organisations invest for the same reasons that motivate everyone else – the fundamental attractions of the asset.

This blend of ownership adds to the appeal of farmland, limiting its correlation to other assets and helping it perform in a way that is counter to cycles in other markets.

Slow shift in ownership ofg UK farmland
Existing farmers continue to form the largest category of buyer

Source: Strutt & Parker 

Land: they aren’t making it anymore – or even selling it...

Author Mark Twain famously said of land that "they aren't making it any more" – but you might add that they are less likely to sell it, too. The amount of land on the market has shrunk.

We are now seeing only about 100,000 acres in England and Wales marketed in public each year, down from about 200,000 acres in the 1990s and 400,000 acres in the 1980s.

One of the reasons for the fall is that there are very few forced sales – the guaranteed payments for owning land made through the Common Agricultural Policy have provided a financial safety net for many farmers.

The scarcity also means that it has become more difficult for a buyer to find the right farm in the right place. This has led to the growth in what are called private or offmarket sales, where buyers identify farms that they like and make a discreet enquiry to see if they are for sale.

Farmland and Brexit

Brexit will bring significant changes for farmers, as the UK leaves the EU’s Common Agricultural Policy and creates its own measures. The Government’s draft Agriculture Bill proposes that the current type of support payment to farmers are phased out by 2027 and replaced in some form by environmental payments subject to various conditions.

Preserving natural capital, which is all natural resources including water, soil, the air, plants and animals, has become a key driver in future agricultural policy. The new mantra is paying farmers "public money for public goods".

Despite this uncertainty, farmland prices have tended to hold firm, possibly as a result of greater scarcity; and also as other policies that make farmland attractive – such as beneficial inheritance tax legislation – remain an anchor.

The views expressed above are those of the author and/or Strutt & Parker and do not represent the opinion of Cazenove Capital.

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