Whenever I’m considering a prospective purchase of land for a client, I ask myself one question before I do anything else: “Who would buy this farm if we decided to sell it?”
I want to feel confident there would be a queue of would-be buyers, ideally seeking to acquire it for a range of reasons, if my investor decided to move their money elsewhere. If I can’t answer that question, I’ll walk away.
This approach has served me well throughout my career and it’s also useful when it comes to understanding the current UK land market.
Prices have weakened slightly in the last 12 months, after a period of prolonged increases, with averages rising from £3,400 ($4,140) per acre in 2007 to about £7,000 in 2018. Averages can conceal a big range – vegetable land and ground suitable for viticulture can be worth more than £20,000 per acre – but the rise was indicative of the wide variety of interested parties in many farms.
These included farmers looking to expand, and who had been buoyed by relatively good returns from agriculture, subsidy income and, sometimes, money from development. There were ‘lifestyle’ buyers, some of whom will have been motivated by the tax advantages of owning farmland.
There was also demand for land for other uses such as commercial and residential development, road and railroad projects, mineral extraction and landfill. Plus, of course, there were investors who have always viewed farmland as a tremendously safe place to put their money.
But now, farming subsidies from the EU are likely to disappear and farm incomes have fallen, and this could mean downward pressure on rents and investment yields in the short term.
This, in turn, means buyers will become much more discerning, with the difference in value between what’s viewed as ‘good’ and ‘bad’ land becoming more polarized.
Quality arable land producing high yields, ground for niche uses such as potatoes and feedstock for anaerobic digestion plants, or land suitable for the rapidly expanding viticulture sector are all less vulnerable to reduced subsidy payments. Their rents and capital values will remain robust.
Such land, ideally with buildings and access to water and in blocks of 200-plus acres, will always represent a good investment because of its versatility.
In contrast, when it comes to poorer arable acres and land restricted to growing grass – to which subsidies have been key to shoring up values for many years – the lack of EU subsidies is bound to create downward pressure on values and rents.
Until 2018, for example, the difference between good arable land and modest-quality grassland was roughly £3,000 per acre. This gap is now likely to widen.
Brexit – a limited price impact?
To understand why any further dip in land values will be small and temporary, we need to consider the fundamentals. We have a growing global population that has to be fed, with the UN predicting it will shoot up from 7.6 billion in 2017 to 8.6 billion in 2030 and 11.2 billion in 2100.
Meanwhile, the supply of land is ultimately limited and there is a lack of it currently coming on to the market.
Brexit is causing huge concerns. But during times of uncertainty, money has previously moved into farmland, as investors have looked for a safe haven for their cash.
This is what happened after the financial crisis, when many felt the tax benefits and small default rates on rents made agriculture more appealing than the commercial real estate. This is despite the fact that annual returns are likely to be in the 1-3 percent range for the former in comparison with the 5-10 percent achievable in the latter.
Good UK farmland will remain a great investment, but be discerning about what you buy. Now is not the time to acquire poor-quality land that can’t easily be sold. If you’re considering an acquisition, ask yourself the question: who would buy this land from me?
If you can visualize a queue of buyers, it might still be one of the best investments you’ve ever made. If you can’t do that, walk away.
Matthew Berryman is a director at CLM, a land agency and rural consultancy firm