The Leave vote in the UK’s EU referendum and the political resignations in Britain that followed have left a leadership vacuum as well as political and economic ambiguity. Ian Monks, a consultant at rural sales and advisory company Bidwells, analyses how Brexit and the fallout will affect investors.
Farmland is sometimes compared with gold in its long-term strength and lack of correlation to equity and stock markets, and while political events will temporarily affect confidence in British farmland values, the UK is a nation with some of the longest-term investment in farmland in the world. Some of my clients have owned land for over 500 years.
The lack of clarity over a replacement for a Common Agriculture Policy and investor interest in sterling-denominated assets dropping away adds to existing stress on the sector from low commodity prices, which were affecting farmland prices before Brexit was mooted.
The two-year negotiation period, if triggered by Article 50, will maintain the existing trade agreements and CAP payments. In the meantime, uncertainty is likely to see increased liquidity in the market as retirement sales or restructuring efforts are undertaken. For some this could present an investment opportunity. But in a time of heightened risk, if indeed this is a time of heightened risk, any investor going into the market must make due diligence key.
[quote]Some of my clients have owned land for over 500 years.[/quote]
Whether an acceptable agreement can be reached within the negotiation timeframe is an unknown, and understandably, confidence in farmland values and agriculture will be at its lowest whilst negotiations are under way. The continued support from banks and other lenders, whose stance has so far appeared relatively conciliatory, will also have an impact on market liquidity of farmland.
In the short term, more farms producing on land which has low profitability and is most reliant on EU subsidies (for example grazing land with little optionality for other uses) are likely to come on to the market, for lower prices than they would otherwise have fetched. This reduction could be as much as 30 percent whilst there is maximum uncertainty.
The best quality land which is least reliant on subsidies and capable of producing high value crops that are import denominated, such as horticulture, potatoes and pig meat will be less affected by market and political turbulence. However due to its profitability and possible gains through competitive advantage, these holdings and opportunities will not be pushed to the market by distress (unlike the poorer land where banks may force farmers to face reality). It is possible that the value of this land will stay stable, and could even go up in value within three years.
While these holdings have a higher unit price per hectare at entry and are less liquid assets, it is their scarcity and profitability, independent of market and political volatility, that make a strong case for income and capital gains as opposed to grazing land, which is unlikely to be of investor grade. The sophisticated investor taking a long-term view will favour large, well-equipped holdings often with water security in this category. In the coming two years or so the change in the farmland investment market will be most visible with a gradual withdrawal from poorer land.
[quote]Individuals and institutions will be looking to minimise their exposure to vulnerabilities in the financial markets[/quote]
The withdrawal from the CAP may provide a shift in the direction of payments towards environment and social driven schemes that provide alternative income streams for some rural trophy or amenity assets where buyers are looking for a returns alongside a lifestyle property. This will provide a further split in the values for land between prime agriculture, trophy assets and poorer land reliant on social and environmental subsidies.
The predicted fall in the pound has materialised, making UK soft commodities more attractive in the global market place, which should translate into an uplift on UK farm profits and income yields. Whether this is a short- or long-term phenomenon depends on where the pound settles.
In the face of this uncertainty, individuals and institutions will be looking to minimise their exposure to vulnerabilities in the financial markets. In the long term, British farmland is still likely to be a safe haven and a relatively robust area for investment for the long-term investor looking beyond an 10-year horizon. I am confident in the long-term value of the UK farmland market with Brexit likely to appear a minor blip when reviewed in 25 or even 50 years’ time. We expected CAP payments to the UK to decrease gradually over the coming years. That decrease could be sharper in some areas in a Britain outside the EU, but in the long term, we have confidence that farmland investment will be a bright spot in the UK’s future.
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