Arable land values continue to climb

English arable land has continued to post strong gains in recent weeks and is now worth £1000/acre more on average than a year ago, according to the latest figures from Strutt & Parker.

“Arable land is averaging £6164/acre, compared with £5107/acre last June,” says the company’s Charlie Evans.

“Half of that gain has happened in the past eight to 10 weeks. Some decent blocks of land have come onto the market, but the overall lack of supply has forced people to compete.”

Farmers, however, have been more reluctant to reach for their chequebooks. “In the second quarter of 2009, they accounted for 56% of purchases; now the figure is 35%,” says Mr Evans. “Investors are really driving the market.”

Fears that the coalition government would raise Capital Gains Tax (CGT) on profits from the sale of non-business assets in the emergency budget on 22 June had little impact, he said.

“The main effect so far is that some people who already have property for sale are pushing to exchange contracts before the budget. Overall, we don’t think CGT changes will have an enormous effect on the land market.”

The original plan to lift CGT from 18% to the same level as income tax – as high as 40-50% – could well be scaled back following widespread concern in the Conservative Party that the proposals would harm entrepreneurs and hard-working families investing for retirement, he said. And exemptions were likely to safeguard bona-fide businesses.

Those with let land, Agricultural Holding Act land in particular, could still be vulnerable. “But the general feeling is to sit tight and see what happens – we don’t even know what type of assets will be caught by the new tax.”

Low commodity prices, potential rises in interest rates and the general tax hikes to help offset the UK’s budget deficit remained the key bearish factors in the market. But land remained a good long-term investment and the general feeling was that commodity prices would rise, said Mr Evans.

“Land values may level off over the next 12 months – I can’t see them rising at the same rate, but neither do I see them falling away – there’s too much demand.”

James Brooke of Bidwells said while an increase in CGT was likely, it remained to be seen by how much and what strings might be attached.

“Many accountants predict parity with income levels, suggesting a 40% or even 50% rate. Whatever happens, CGT is unlikely to be partnered by the reliefs and indexation we saw the last time rates were at these sorts of levels.

“If we see a considerable rise and it is deferred until next April, then we could experience a flurry of autumn activity, particularly around land with development potential.”

Let land also looked vulnerable, said Mr Brooke. “We may see a move away from FBTs [Farm Business Tenancies] back to contract farming or farm management agreements, where the owner is seen to play an active role. And AHA holdings may not be so attractive to investors.

“But it would be wrong to react to one particular scare. Everything has to be looked at in the round. No-one has talked about changing Inheritance Tax, so as things stand land still looks a very attractive long-term investment opportunity.”

The most likely reason for prices to soften was declining confidence in agriculture, including poor commodity prices, doubts over the CAP review and rising input costs.

“But each instruction will be taken on its own merits. Soil with access to water and capable of supporting diverse cropping could well command increasingly large premiums over traditional cereal land.”