Cautious optimism for land markets in 2009

As 2008 draws to a close, latest sales figures suggest land and farms have not escaped the vagaries of the wider agricultural and financial markets, but agents insist land markets remain fundamentally sound.

This year has proved that land prices are still inextricably linked to agricultural markets. Agents have turned away from residential and City money, and back to the basics of farming. Most predict we will see farmland values remain at a similar level over the next two or three-quarters, with growth returning to the market thereafter and the upward trend continuing over the next few years.

“It was a year of two equal parts,” said James Laing of Strutt & Parker. The first part saw rising land values and a frenzy of interest in land driven almost entirely by commodity prices and a strong pound, which attracted new overseas as well as domestic buyers.

“Between January and June, arable land prices increased, arguably by £1000/acre,” Mr Laing said. “But part of that was just froth, which then came off the top of the market in mid-summer with the collapse of commodity prices and the credit crunch hitting the overseas rural economies, for example Ireland, much quicker than it did here.

“Buyers dried up, the weather got wetter, a bumper harvest became soggy and in the space of a month agriculture became unfashionable again and the market suffered from everyone talking it back down. With the downturn in commodity prices, rising costs, and a growing awareness of a heavy world harvest, it was unavoidable that the extra £1000/acre would slip away again,” Mr Laing said.

Bullish outlook

Nevertheless, his positive outlook remained undiminished by what, at times, had been an undignified collapse in parts of the market in the past three months. He said a straightforward, uncomplicated, good arable farm in eastern England would still sell for £6,000/acre. “Okay, so it’s not £7000, and ‘ordinary’ land in ‘ordinary’ places is more likely to be between £5000/acre and £6000/acre, but it would all have been £3000/acre two years ago.”

Average farmland values

 

Q1 08

Q2 08

Q3 08

Q4 08

2008

South East

26.3%

12.2%

-1.4%

-4.7%

33.2%

South West

13.9%

17.4%

-1.1%

-3.4%

27.7%

Eastern

22.4%

2.3%

-4.2%

-6.6%

12.0%

East Midlands

15.4%

6.8%

-8.6%

-3.3%

8.8%

West Midlands

33.9%

13.4%

3.7%

-2.4%

53.8%

Wales

15.7%

13.2%

-1.0%

-5.5%

22.5%

North

11.8%

9.6%

1.0%

-5.7%

16.6%

Scotland

0.0%

8.3%

0.4%

-3.0%

5.6%

England

20.1%

10.1%

-1.9%

-4.5%

23.9%

GB

17.2%

10.2%

-1.6%

-4.4%

21.5%

           

Land Type:

Q1 08

Q2 08

Q3 08

Q4 08

2008

Prime arable

17.6%

8.7%

-1.7%

-4.8%

19.6%

Average arable

18.6%

8.0%

-4.0%

-5.7%

15.9%

Average livestock

17.8%

11.6%

0.1%

-2.5%

28.4%

Prime dairy

16.8%

14.5%

1.2%

-2.3%

32.2%

Poor arable

22.6%

2.9%

-5.9%

-1.7%

16.8%

Poor livestock

14.9%

14.1%

-0.5%

-9.4%

18.2%

All land types

17.2%

10.2%

-1.6%

-4.4%

21.5%

Source: Savills Agricultural Research

 

The tone of the market was much more cautious than it was three to six months ago, with buyers having to make decisions in the context of an increasingly difficult general economic climate.

Much will depend on commodity markets stabilising, if not rising, and on fuel and fertiliser prices continuing to fall, in a global market where population growth and climate change and alternative energy sources are the principal driving factors.

Land is also now perceived as a safe haven for cash, offers outstanding tax breaks, cannot be removed from its owner and offers a better yield than anything else at the moment. “There will be more land on the market in the first half of the year, but land prices will start to move up again in mid-summer, without the froth,” Mr Laing predicted.

Smiths Gore is offered an equally bullish outlook. It predicted farm prices would rise 5% in 2009 as better land values compensated for falls in farmhouse values. It also said farms with houses and cottages would be harder to sell, as buyers expected residential values to fall further and only start to recover in 2010 or 2011.

Smiths Gore’s forecasting model predicted turnover would fall next year, but recover in 2010 and increase quite sharply in 2011 and 2012 as other markets settled and trading resumed.

“Two positive factors should make bare land values continue to rise farmers’ and banks’ optimism,” said the firm’s Jason Beedell. “Unlike those for houses, cottages and buildings, I am not convinced that bare land prices have fallen significantly. Many farmers are still optimistic about the core business of farming, albeit less so than in spring 2008 before commodity prices fell. Banks and other lenders still view farming as a secure, well-capitalised sector.”

Land uncertainty

However, Dr Beedell said there was already strong evidence of farms remaining unsold on the market and asking prices being reduced.

In the eastern counties, Jim Bryant of Bidwells agreed. “The outlook for 2009/2010 is more uncertain,” he says. “Land still looks like a steady investment compared with the fluctuations of share prices but it is unclear whether the current level of bare land price will continue. I expect shortage of supply to be in evidence as those who might have been potential sellers when they saw prices in the region of £7000/acre may have had a rethink – if they sold their farm and realised a few million pounds there are not that many alternative, safe places to put the proceeds.”

Good quality land was still in short supply and selling well, he said. Sales average bare land recently suggested there were not too many buyers in that queue.

“The two-tier market will become more pronounced,” Jess Simpson of Savills said. “Good quality, commercial farms with viable acreages will sell well, but others may not, especially if they are residentially weighted.”

Much would depend, she said, on agricultural profitability over the next 12 months and on the ensuing decision about whether or not to sell. “We may see a bit more on the supply side, but it may not all come onto the open market. Whatever happens, the farmland market is now about agricultural profitability, not amenity.”

More land on to markets

Mr Bryant believes the amount of land which came to the market in eastern counties in 2008 was “roughly in line with the national trend, showing an increase in acreage marketed of around 30%, with more sales of large estates than in 2007, particularly in Norfolk where two major estates were snapped up immediately”.

Such patterns were less consistent elsewhere. Provisional figures from Savills Research put the total supply of land publicly marketed during 2008 at just 4% higher than last year in England.

It showed land prices eased across a range of land types during the second half of the year, and by an average 4.4% across all sales in Q4 – the hardest hit period.

Arable land, which enjoyed the steepest climb earlier in the year, fell the most, with average quality standing at around £5300/acre. Pasture land experienced a less turbulent year and remained at a similar level, Savills said.

Over the year, however, land values are still 21.5% higher than 2007, and 136% higher than five years ago, said Ian Bailey, head of Savills’ agricultural research.