Farmland prices: correction or downward trend?

The counter-cyclical nature of farming economics was never more evident than in the rise and rise of UK farmland prices, which hit their peak around 2015 with averages of around £10,000 an acre.

More recently, though, prices have come under pressure, although East Anglia’s land agents point out that there are still market factors which will buoy prices in one place over another.

But is this the end of the farmland boom, or should farmers and landowners view the price dips as merely fluctuations in an ever-upward trend?

Simon Gooderham, joint managing partner at Cheffins, said while some are predicting a drop in land prices throughout this year, his team viewed the recent fall in values as reflecting a recorrection of the market following a sustained period of growth, rather than a long-term downward trend.

“A combination of lower input costs, improved output prices and a better Basic Payment Scheme cheque has helped boost confidence for increased profitability in the arable sector throughout East Anglia,” he said.

“The industry would benefit from a stabilisation of prices to help underpin asset values, and our expectation is that they will plateau in 2017 as the market finds a sustainable level of pricing.”

There has been a shortage of good quality larger farms for sale in East Anglia throughout 2016, he points out, and a combination of a gap between supply and demand and improving arable profits has helped to maintain values in the eastern region.

“East Anglia has always been attractive for investors and with the increased investment from non-farming businesses and development in our region it will continue to retain its status as one of the most sought-after areas of the country.

“In the short term, we have seen Brexit stabilise the farmland market but the longer term impact of the vote on UK land values will depend on what the post-EU landscape looks like – and even the bravest commentator would do well to predict that.”

Oliver Holloway of Clarke and Simpson admitted that land prices in East Anglia had fallen slightly from their 2015/16 peak, reflecting the market trend nationally.

“Having said this, as with most markets, what goes up, will typically, also come down,” he said.

“If one looks at land prices over the past 50 years, there have been numerous peaks and troughs throughout this period. What has been so unusual in recent years is the pace in which prices have risen – they have increased by some £8,000/acre in less than 15 years.

“By way of contrast, land prices were at the same level in 2001 as they were back in 1980 – at around £2,000 per acre. “In my view, the main factor causing falling land values has been the extended period of low commodity prices that farmers have and are still experiencing. This along with falling rents and uncertainty over future EU subsidies, understandably, has caused some caution in the market place.

“In predicting what will happen with land prices in the year ahead, I am of the opinion that we will continue to see good activity within the market place, but that there will be a widening disparity of prices being achieved, a trend which has emerged over the past 12 months.

“Despite the movement in the market, historically, good quality blocks of commercial farmland have attracted strong demand and this trend is still likely to apply in 2017.”

Robert Fairey, land agent and partner at Brown & Co, said land prices in East Anglia were dropping back in most areas but not all, as there is still some sales evidence at 2014 prices in a few places.

“Prices probably peaked in early 2015 and by the end of that year they were starting to come off (by up to 10% in some instances) mainly as a result of the downturn in profitability in the sector as output prices fell,” he said.

“This continued through 2016 and was not helped by the Brexit vote which introduced more uncertainty into the market with farmer buyers particularly starting to show signs of caution pending the outcome of the Brexit negotiations. By the end of 2016 prices were down by a further 10% plus in some places.

“Whether prices fall any further this year depends to a large extent on supply and how much land comes forward to the market . If supply remains at similar levels to last year then I expect land prices will either stay at current levels or fall slightly in some areas.

“Uncertainty will continue until we know more about the next subsidy regime and when that happens it could mark a major turning point in the market, one way or another, depending on the outcome.

“In the future, issues of food security and land being a diminishing resource still persist and I am sure long term landowners can take heart from this. Indeed some may see a further weakening in prices as a good buying opportunity. After all, we are still well above the £4,000 per acre prices seen in 2007.”

Giles Allen, partner at Strutt & Parker, said while land prices are falling in East Anglia, they are not falling as quickly as many might think.

“In our opinion, average values have fallen by about 5% since the beginning of 2016, but the values are more polarised than in previous years.

“This, of course, ignores parcels of land that have failed to sell, possibly due to vendor resistance to the level of offers perhaps submitted. By our reckoning less than 50% of the farms brought to the market are under offer or have exchanged contracts.”

This is happening in part due the fall in commodity prices and farm profitability, and uncertainty caused by the referendum result is not helping, but values were declining before the result, he pointed out.

“Values are not falling that quickly because of the lack of supply of land being brought to the market,” he said. “Just over 5,000 acres was brought to the market in East Anglia during the second half of 2016, which is 45% less than in the corresponding period in 2015, and just 35% of acreage brought to the market in the first half of 2016.

“Whilst supply is tight, land values will remain relatively level, despite the fall in incomes.”

How much prices will fall will depend a lot on the prices of soft commodities, as well as the fallout from Brexit, he believes.

“But possibly the biggest influence will be the amount of land brought to the market, and if this increases significantly then the pace of change in values could speed up.

“Intriguingly, the market for good quality residential farms and large arable unit (more than 800 acres) was largely untested in 2016 and these sectors could experience contra- cyclical price increases as a result of pent-up demand.”

But farmers should not be worried about the trends, he advised.

“Farmland has always been a long term investment and therefore there should not be any knee-jerk reactions. It is a time to exercise strong farm management practices, assess all costs and look even more closely at budgets and cash flows for the forthcoming year.”

Edward Baskerville of TW Gaze said his analysis of the 2016 sales year whre his company has sold land in excess of 1,000 acres was that it had been a “very stron” sales year with “excellent” prices achieved for all land offered up for sale.

“To say that land prices are falling is a bold statement indeed,” he said.

“The land market is most unlike the residential market as the same parcel of land generally only changes hands once in a lifetime whilst the same or very similar houses will change hands on a far more regular basis.

“You are thus never comparing like with like so you could have sold high quality farmland in a land acquisitive area in one year whilst you had the complete opposite the following year which will skew the statistical analysis.”

But in contrast, Will Hargreaves, of Savills in Ipswich, said low commodity prices and patchy local demand continued to affect the land market.

“Despite the benefits of the weak pound on outputs and subsidies, Savills expects the average value of all types of farmland to remain under some pressure in the short term as current debt in the industry filters into sales,” he said.

“The impact of the UK’s vote to leave the EU on farmland values is likely to be muted.

“The weak pound creates a favourable buying environment for overseas purchasers and, for those willing to venture from traditional assets, farmland offers the opportunity to diversify portfolios. This, along with the potential reduced supply driven by uncertainty, will help support farmland values.”

Eleanor Havers, of Clarke and Simpson, said purchasing or selling land was always done taking the long-term view.

“I don’t think that farmers should be concerned and I do not expect that values will fall further,” she said.

“Borrowing rates remain at a record low and those who want to purchase land will still do so and take advantage of these rates. With the increase of non-agricultural development opportunities I expect there will be an rise in demand for agricultural land as these opportunities progress.”