At a private meeting that I attended last year 18 agents specialising in agricultural land sales from around the UK gathered together to discuss the prospects for land values. A remarkably varied picture emerged with bare land struggling make £5,000 per acre in Cornwall and North Lincolnshire and £11,000 being achieved in one notable sale in Hampshire. It seems that where there is no amenity or residential element in the sale, the highest figures will not be achieved but more importantly the regional variations are mostly a function of the varying profitability of the different types of farming carried on those areas.
Across the board farmland prices have nearly doubled in the last 5 years but the indications are that having plateaued in 2012 they may now start to soften. Investors have been attracted by the safe haven this form of investment offers, which unlike gold, they are not making any more of in this country. On the contrary agricultural land is being gradually consumed by urbanisation.
The nature of this safe haven is particularly interesting to foreign investors for two reasons. Firstly value accrues to land and property holdings only if secure land tenure is sponsored by a stable administration. The UK has an ancient tradition of honouring property ownership as against countries like Zimbabwe which have not. Secondly the weak pound has recently made this safe haven look cheap.
The comparison with gold is worth looking at more closely when one considers their similar escalations in value. Like gold, the previous Government sold a large proportion of it’s holdings at the bottom of the market. Unlike gold, which has a holding cost and no yield, the holding cost of agricultural land is nominal and there is a yield albeit small. On a more prosaic level, when the going gets tough you can live on your land and sustain your family whereas gold has no nutritional value.
Recently however these yields have turned negative as agricultural land values have risen and the value of the commodities produced from it have either remained static or fallen. With average land values now having reached £6,000 acre it is not possible to purchase a farm and service the debt of the purchase price through farming the land. This mirrors to some extent the negative yields experienced in the prime commercial office property market before the recession. At that time the costs of purchase of these commercial investments could not be serviced through rental income, the yield was therefore negative when looking at the yield purely in terms of rental income. The prices were however justified by the market at that time by the concept of an equated yield, namely including capital appreciation as part of the total yield. This makes the sums work providing values continue to rise and capital appreciation exists. Obviously it does not if they don’t.
My prediction, last year, that prices would plateau has proved to be correct. It will be interesting to see this year if the plateau holds or prices soften slightly. The illiquid nature of agricultural land means that price fluctuations are very slow but I believe that a modest softening of prices during 2013 is the most likely outcome.
Gideon Sumption MRICS