27 March 2024

Back to earth? Our take on the future of farmland prices.

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2023 was another strong year for farmland. Prices jumped by nearly 10%, comfortably beating inflation – which isn’t something you can say about other property classes. The average price is now well over £9,000 per acre, up from £7,000 in 2020. If you want to buy the very best, expect to pay at least 50% on top of that.

That’s the good news for landowners, but this is a stark contrast to the fortunes of the small to mid-sized family farms, where things are tougher than ever.

A perfect storm.

In one sense, quite literally. Climate change concerns us all, but farmers are wrestling with it first-hand, as the UK is having its wettest year since records began.

On top of flooding, there’s heavy pressure on farm-gate prices, labour shortages and wage hikes, a substantial spike in input costs such as fuel and fertilizer post-Ukraine and a red-tape burden that certainly hasn’t been eased by Brexit. The Government’s recent decision to remove the tax advantages enjoyed by short-term holiday lets won’t help. Completing the list is a lack of certainty about future subsidies and support. The Sustainable Farming Incentives scheme is welcome, but farmers want clarity on the long-term plan.

Many of these issues aren’t unique to the UK, of course. Across Europe, farmers are venting their frustration by burning hay bales, organising tractor-blockades and pelting the European Parliament building with eggs.

Tenacity in the face of adversity.

Even if they’re hanging on by their fingertips, no true farmer wants to sell. Farming runs deep in the blood and many have a generational attachment to the land they steward.

But the economic logic is tipping. The chance to sell at record prices and earn a risk-free 5% on the proceeds looks attractive when compared to remorseless work for, at best, a 1% yield. However committed they may be, many will be thinking hard about what to do with off-lying land or secondary farms. It’ll go against the grain, but some may conclude that now is the right time to take what’s on the table and shrink back to a core holding.

Insatiable demand… but for how long?

To date, every acre of available land – whether sold on or off-market – has been hungrily snapped up. Many acres have been bought by traditional farmers ‘rolling over’ gains to achieve increased scale. Rollover relief whether business or agriculture allows the land or business owner to defer the payment of capital gains tax where the disposal proceeds of the asset are reinvested. The other, probably even more significant players have been the institutions and mega landowners such as John Whittaker (chairman of the Peel Group) and James Dyson. Both groups have been prepared to pay top dollar to unlock opportunities. More recently we have seen institutions and private individuals pay strongly for land with ESG opportunities, rewilding and general green credentials. This has been a major force behind land price rises in the more remote areas and it is difficult to judge how long these conditions will last.

Increasingly, this is a global game. To take just one example: it’s a widely known secret that the purchaser of some 10,000 acres of prime Hampshire farmland over the past few years is an Irish business consortium. Rivals for the land, especially traditional local farmers, have complained they simply cannot compete with the prices being offered.

This acquisition spree is one of the main reasons why the cost of farmland has risen so sharply. But things might be about to change.

Waning appetites.

If there is to be a pullback, the first to go will be the institutions. They have some fat gains on their balance sheets and will be tempted to realise the profits. It won’t take much to turn temptation into action: either an outcry over greenwashing or the prospect of richer pickings elsewhere. Some are already succumbing. Having bought the Alpraham Estate in Cheshire for £10m in 2011, the Wellcome Trust put it back on the market last year – with a price tag of over £26m.

This feels like a straw in the wind. If Labour wins the next election and incentivises a new wave of public/private partnerships, especially ones that tick the ESG box, many other institutions will start trimming their investments. There are very early signs of political involvement in the latest Scottish Land Reform Bill, and perhaps this is a foretaste of the political colour in England?

As things stand, the mega landowners are more likely to stick the course. This isn’t necessarily because of a deep-seated love for the land. It’s down to the invaluable tax benefits that ownership confers. As we’ve written before, the most significant of these is Agricultural Property Relief (extended in Jeremy Hunt’s budget to cover Environmental Land Management schemes). APR continues to be a superbly effective defence against both inheritance and capital gains taxes.

It’s entirely conceivable that a Labour government would have an impact here too. The party has always taken a less sympathetic view of the countryside and the rural economy. Even more importantly, it will have a desperate need to find new sources of revenue. Land, and especially the unearned income it brings to the super-wealthy and their families, is likely to fall under the spotlight at some point. If (or perhaps when) it does, the mega landowners may be forced to re-think their investment and tax planning strategies. Land manifesto policies, the like of which we saw before the 2019 election, should be dusted off and reread.

Our advice to clients.

It’s always dangerous to call a peak, and farmland may not be there yet. But we do think the dynamics are set to shift. Over the next few years, we anticipate a gradual increase in supply coupled with less frenzied demand. As a result, the traditional amenity farm which surrounds the house and buildings in which our clients are typically most interested, will start to look relatively more affordable.

This doesn’t mean that would-be buyers should sit on the sidelines. It’s always worth being in-market, simply because you never know when the ideal property will show up: one that offers good amenity, an attractive but not isolated location, and the potential to farm in ways that future governments are most likely to reward. Going forward, the sweet spot will be land that’s right for regenerative agriculture, has areas for rewilding and encourages public access as a social good.

While properties like this will never be thick on the ground, we specialise in finding unexpected opportunities and opening doors. With a growing number of owners amenable to persuasion, now could be an excellent time to start the search for your perfect piece of farmland.

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