Land prices are likely to fall substantially post Brexit if Defra secretary Michael Gove delivers on his intention to redirect farm support away from direct payments into rural development and environmental programmes.
Addressing a Berks, Bucks and Oxon Wildlife Trust conference in Oxford on Saturday (14 October), Natural Capital Committee chairman Dieter Helm said current land values are totally distorted by the payment of subsidies and bear no relation to the earning capacity of the land.
See also: Tips on selling land for development
“If you look at the price of agricultural land in this country, and then work out what a farmer has got to earn per acre to yield a normal rate of return – let’s say 5-10% – well, it just doesn’t add up,” he said.
“The fact is, if you give someone an amount of money per acre for owning it (as under the Basic Payment Scheme), it will be capitalised in the land price.”
Prof Helm said high land prices were so prohibitive on young people coming into the sector that the EU Commission has had to devise new entrants’ schemes, pumping more money into the system to overcome the problem.
There are two further reasons why the price of land is disproportionately high in the UK, Prof Helm added – the excessively low interest rate and the impact of overseas investors.
“With inflation at almost 4%, the real interest rate in this country is -3.75%. That tells us why asset prices everywhere are rocketing. Investors are searching for a safe return, such as buy to lets in the housing market, or farmland.
“That drives a wedge between the normal economics of farming, and the cost of the land.”
Prof Helm also pointed to the fall in the value of sterling since the EU referendum in 2016, which has made land look “a hell of a lot cheaper” for overseas buyers.
Against this background, the Natural Capital Committee has recently recommended to Defra that future subsidies for agriculture should only be paid for rural development and environmental delivery, and not on the basis of land ownership.
Prof Helm said going down this route will have a double benefit – stopping the inequality of large farmers receiving more simply because they have more acres, and triggering a significant drop in land prices, helping to improve UK competitiveness.
But NFU deputy president Minette Batters insisted future support for farming should not lose sight of the importance of food production.
She added that the greatest impact on land values would come from the terms of trade the UK agrees with the EU and other countries post Brexit.
If recent analysis by the AHDB is anything to go by, farm incomes will come under serious threat if a free-trade deal is not struck with the EU, and that will drive land prices lower still.