Surging demand pushes farmland prices higher at the fastest rate for 30 years


Date: 10 January 2008  | PDF version

Headlines this quarter

 

  • Average farmland prices rose by 33.2% in the year to September 2007, revealing the second consecutive quarter of record annual growth.
  • Prices rose by nearly 10% in the three months to September 2007
  • Average farmland values (all types) hit £4,178 per acre in the third quarter, up from £3,137 a year earlier
  • Demand from lifestyle purchasers (non-faming buyers) rises 25% in volume terms (acres) but by over 50% in value terms over one year

 

  • 15% of all UK farmland is now bought by overseas buyers – with the Irish being joined by northern Europeans and Russian buyers

 

Clive Hopkins, Head of Farms and Estates at Knight Frank, comments: -

 

General market overview

Over the past 18 months the price of farmland has risen steadily on the back of strong demand and restricted supply.  The rate of price growth has increased over recent months, with the annualised rate now hitting 33.2% - the highest rate since 1977 (when price growth briefly hit 40%).  The rate of growth has increased rapidly with a rise of almost 10% recorded in the three months to September alone.  The market has remained strong despite the increasing cost of debt, global financial uncertainty and outbreaks of Foot and Mouth disease and Blue Tongue.

 

Supply has failed to match rising demand by a significant margin for a long period.  Whilst demand (applicants) rose by almost 12% on a year on year basis to September 2007, supply only rose by 3% which is down on the previous quarters figure of 8%.  The number of sales, on an acreage basis, completed in Q3 2007 was 2.5% higher relative to Q3 2006.  This pent up demand, coupled with a reduction in supply will increase the scarcity of farm land on the market, which is expected to drive value growth further.

 

Purchaser profile

In terms of market composition: Q3 2007 has seen lifestyle purchasers (38%) exceed individual farmers (32%) as the largest sector within the market, followed by Agribusiness (11%), Institutional Investors (11%) and Developers (6%) (other investors made up the balance of the market).

 

There are two significant stories this year with regard to the market: lifestyle buyers and foreign buyers. 

 

Wealth generation in London, and especially in the City, has contributed to significant additional demand and also has underpinned price competition, especially for farmland tied to residential property to the west of London.  With residential price growth at the top of the London market hitting 40% and above in some prime locations over the past 12 months, substantial equity has been available for bidding up the price of country estates.  Demand from the lifestyle purchaser segment has grown considerably and subsequently now constitutes the highest proportion of farmland purchasers.

 

Whilst lifestyle trends have driven farmland prices higher – other key factors, including rising agricultural returns and potential development returns are leading to rising demand from individual farmers, lifestyle buyers, institutional investors and developers.

 

We estimate that approximately 15% of UK farmland purchases are made by international buyers.  Previously the dominant overseas purchasers were the Irish, recently the dominance of the Dutch has increased, subsequently in Q3 2007 the Dutch were the dominant overseas farmland purchases, occupying 6% of the market, followed by the Irish at 5.5%, Scandinavians 3%, Danish 3% and the Russians 1.5%.

 

There is a general division between Irish buyers – who favour western areas of the UK, and Scandinavian and other northern European buyers who look increasingly to East Anglia. 

 

Vendors

The largest vendor category by a large margin, is the individual farmer (61.4% of all sales) – reflecting the trend towards continued consolidation and retirement in the sector.  The next largest segments are lifestyle buyers and agricultural businesses (18.6% and 10.8% respectively).  Institutions accounted for 5% of all sales with developers at 4.2%.

 

As the average age of the UK farmer increases (increasing the number of retirees) and less farms are inherited, retiring farmers will constitute a higher proportion of farmland vendors.

 

Investment sector

Farmland rents have risen on average by approximately 9.25% over the year to Q3 2007, with Agricultural Holdings Act (AHA) rents rising to £72.00 per acre and Farm Business Tenancy (FBT) rents by 12% to £95.00 per acre over the period.  The average price per acre for let AHA arable farmland in England in Q3 2007 was £2,800. 

 

Until the past 12 to 18 months farm rents under AHA and FBT have remained static in recent years but with improved commodity prices there should be the impetus for farmland rents to rise.

 

Future trends

Over the next 12 months we see the following trends to be the dominant influences:

  • We forecast that while lifestyle buyers will remain dominant in the market, the “Credit Crunch’s” effect on City bonuses and incomes, and the London residential property market generally, will see the growth in the number of lifestyle purchasers slow over the next 12 to 24 months.  International buyers will not disappear from the market and will become an ever larger feature of the marketplace. 
  • The pending changes in the UK’s Capital Gains Tax structure, due in April 2008, may result in a marginal increase in the supply of stock on the market in Q1 2008
  • Aside from lifestyle purchases - prices of bare land will continue to grow due to more positive outlook in agriculture and improved commodity prices which result from land being taken out of food production for non-food crops and increased demand for grain from developing countries
  • Farmland values will continue to rise, we believe 15% growth by September 2008 will be achievable
  • Farmland rents will rise by 19.5% over the same period

 

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