After several years of falling, or stalling, 2021 saw average farmland values climb 6.2 per cent, the strongest annual growth since 2014. This growth was led by grassland, with values for low grade livestock land and average quality livestock land increasing 8.8 per cent and 8.7 per cent respectively since December 2020. By comparison, prime arable and Grade 3 arable values grew 4 per cent and 5.5 per cent.

Analysing the reasons why grassland values are climbing faster than other land types sheds some light on how the farmland market might behave over the next five years.

Demand for farmland to meet environmental objectives is one of the strongest drivers for growth. This includes companies who see that land ownership, over partnerships with existing landowners, is the most secure option for delivery due to the lack of investible nature-based offset models. However, there is also demand from individuals who are seeking land for personal projects such as rewilding and those responding to the Government’s ambitious net zero target.

To illustrate this, forestry values have increased 60 per cent since 2020 and this unprecedented demand is causing buyers to spill out into the market for low grade livestock land, seeking assets that may be suitable for commercial forestry planting or to meet environmental objectives by using land’s natural capital to provide ecosystem services such as carbon sequestration.

It is this emerging natural capital market that is predicted to bolster farmland values as land is the only asset class that can offer an immediate solution to climate change and biodiversity loss. In a report co-sponsored by Savills, the market value of UK land-based carbon credits has been estimated to be as much as £1.7 billion annually by 2050. These markets have the potential to offer new income streams for existing landowners who are keen to mitigate the impact of falling agricultural subsidy support on their bottom line.

The shift in agricultural policy away from the area-based subsidy of the Basic Payment Scheme (BPS) to the 'public money for public goods' regime under the Environmental Land Management scheme (ELM) exposes some farm businesses to lower returns and higher risks. The lump sum received annually under BPS underwrites the financing of next year’s crop, helping alleviate risks that are outside farmers’ control such as weather. Without this, some farm businesses may not survive from one year to the next.

Supply chains cannot ignore this. Disruption to the food chain caused by the Covid-19 pandemic highlighted how fragile the system is and the imperative to improve its resilience, but of increasing importance to supply chains is their environmental footprint. For farmers to be able to deliver environmental services and high quality food, they will need to be paid fairly by supply chains and consumers might have to accept higher food prices as a result.

Due to the strength of the environmental movement, low grade livestock land is forecast to continue outpacing arable land, at 6 per cent real growth per annum. For prime arable land, growth is still expected due to increasing demand for agricultural products like food and biofuel, but at a lesser rate of 2.5 per cent real growth per annum.

Comparing this forecasted growth with other property assets, low grade livestock land outperforms all but two property asset classes. Savills forecasts have a total return (net income yield plus capital growth) of 8.8 per cent annually for low grade livestock land, beating all types of residential asset classes from prime central London to student housing.

While prime arable forecasts, at 5.6 per cent annualised total return, are nearer to the bottom of the forecasts, it still maintains its investment appeal as a safe, reliable asset and may come into its own as the market for alternative crops such as hemp develops.

Further information

Contact Louise Harrison

Spotlight: UK Cross Sector Outlook 2022