Following a decade of consecutive annual growth farmland values throughout Great Britain are forecast to continue their upward trend and increase on average by a further 40% over the next five years, according to research released today by Savills. This is in stark contrast to the other property success story of prime central London, which after three and a half years of considerable price rises is likely to endure a period of little or no growth next year, but total price growth of 26% by the end of 2017.

Alex Lawson Director of farms and estates comments, "It is no longer a case of one size fits all and there are now clear divergences in value between the prime quality, well located blocks of arable land and the rest, which are likely to widen further. Across all property asset classes the economic uncertainty has pushed investors towards quality and farmland is no exception. This against a backdrop of limited supply is set to continue with the best in class continuing to be bought in competition while secondary and tertiary quality land and farms may struggle to find buyers, when priced unrealistically."

 View the Diversity of market increases graph

Our forecasts for which we have three scenarios* (base, strong and weak) take into account a number of factors, which have varying degrees of influence on the farmland values.

 View the farmland forecast

Macros factors

  • The agricultural industry has suffered dramatically with lower yields and for the livestock sector higher costs due to increased housing of animals and higher consumption of forage.  Average farming incomes are estimated to be slightly lower for 2012/13. Slower growth in farmland values is forecast after 2013 as the effects of CAP reform come into play and the rise in future commodity prices is estimated to be more conservative.
  • The forecasts factor in expected growth in the residential markets in line with data from our residential research team.
  • In isolation interest rates are unlikely to have a significant effect in the short term; the consensus of opinion being that base rates will be limited to below 2% over the next five years. Rises beyond this could have an effect in combination with other business pressures.
  • During this recession farmland has been regarded as a good hedge against inflation and the high inflation rates have helped fuel demand for land. Exchange rate plays have put some pressure on overseas buyers as the pound has strengthened, which has led to a fall in the number of overseas buyers.

Supply

The volume of farmland coming to the market is crucial to our forecasts. Since 1998 the overall trend line is down although during the past decade the average annual acreage publicly marketed has been fairly static. We don't expect this scenario to change significantly but there may be some debt pressures following the extreme weather of this year and the knock-on effect in the livestock sector.  In contrast we expect continued healthy commodity prices to limit the number of good quality commercial farms that are marketed. 

 View the supply of farms chart

Demand

We have over £6billion worth of funds from registered buyers looking to invest in farmland with a strong bias towards good commercial arable farms with investment returns and tax benefits being the key drivers.

Cash remains the predominant means of purchase providing the principle funds in three-quarters of all transactions, while the debt-funded purchase has been steady since 2006, which is perhaps surprising given the availability of cheap money.

Ian Bailey head of rural research comments, "The short to medium term outlook for farmland values remains a positive one, although the rate of growth will become increasingly varied depending upon land type, location and the economics of simply supply and demand. At a wider level the fundamentals supporting global values are strong; land is a finite resource coming under increasing pressure for food, fuel, development and infrastructure."

Our Scenarios

* Base - This is our average forecast and factors in increased futures wheat price in 2013 (£218 per tonne) with trend wheat prices going forward but below the high's experienced now. Reduced wheat yield in 2012 (7.5t/ha) due to weather (approx. 1 tonne per ha lower) is included. Lower subsidies are not likely to kick in until 2014. Includes a steady level of overall farm profitability ironing out any differences between sectors. Prime residential forecasts are factored in and we expect fairly steady supply

Strong - This scenario illustrates the potential growth for good commercial arable and the best dairy farms. It enhances profitability to reflect top performers in the arable sector who are likely to compete with investors for a limited supply of suitable farms.

Weak - This scenario illustrates potential weakness in the market for livestock farms which often have a significant residential component of the total value. It factors weak profitability pressure, resulting in more debt related supply resulting in weaker demand for these more 'residential/amenity' farms. We anticipate significant recovery will be linked to residential markets and more certain economic times and therefore could be several years off.

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