Dont rush to buy land…
THINK hard before buying land. While the recent fall in land prices may be tempting, even those looking to offset capital gains may be better off waiting.
The RICS Farmland Price Survey for the quarter ending Dec 1997 shows a 7.5% drop in land prices, says Mark Hill of chartered accountants Deloitte & Touche Agriculture.
"This is the first real indication that the dramatic downturn in farm incomes is starting to bite. It is tempting for those looking to buy, but decisions need to be based on the bottom line effect – the net farm income."
Good net farm incomes of the three harvest years 1994-96 have allowed significant reinvestment and, in some cases, the build-up of significant cash reserves. But Deloitte &Touche suggests a halving of profit is likely for harvest 1997, says Mr Hill.
The bad news could get worse. Product prices are likely to be lower in 1998. Cereals and oilseeds are under further pressure, sugar beet is down 20% on last year and potatoes remain depressed. In the dairy sector, milk prices are set to fall, he warns.
Longer term, the Agenda 2000 package offers little hope, Mr Hill believes. Modulation, lower intervention prices for wheat and milk and a large reduction in oilseeds aid will, without a rise in commodity prices, cut incomes further.
A weaker £ would push prices up. "However, with uncertainties about EMU and the UK economys relative strength, this ray of hope cannot be taken for granted.
"Against this gloomy outlook the current land price of, say, £2800/acre for eligible land bears little relation to medium term farming incomes," says Mr Hill.
"Investing in land may be the right strategy for a few lucky people with capital gains tax problems. But at todays prices I have to counsel extreme caution. High capital gains tax liabilities will often persuade people down the reinvestment/rollover route but a degree of practicality is required."
Where the tax take has been planned down to an affordable level – perhaps less than 20% of proceeds – best advice may be to pay the tax and wait. Another year of low returns could mean more land coming onto the market.
Prices could fall to less than £2000/acre, similar to those seen when net farm incomes were at similar levels from 1991 to 1993, he predicts.
That saving could be more valuable than simply deferring capital tax liabilities, advises Mr Hill. "Land prices doubled in three years from 1993 to 1996. There is no doubt that prices will fall."
Net farm incomes
1997/98 (projected) 142
Falling land prices means it may be best to pay capital gains tax now and wait before buying acres, says Deloitte and Touches Mark Hill.