Driven by weakness in commodity prices since 2014, the average uplift in rents has fallen from just over 7% between 2013 and 2014 to around 4% during the last two years. We continue to note the reduced number of reviews taking place, as well as an increase in the number of no change and downward revisions.

During the past 10 years, our Estate Benchmarking Survey shows that average rents have increased by just over 4.5% per annum (compound annual growth). Farm business tenancies (FBTs) recorded closer to 5.5% growth, yet underperformed traditional tenancies (AHA) during 2016 and 2017.

^{Source: Savills Research, Bank of England}

We estimate annual growth in AHA rents has averaged more than 6% in the last two years. The value gap between tenancy types has also narrowed since 2015, albeit remaining marginally above the long-run average of around 30% FBT premium to AHAs.

While returns appear modest in comparison with the heightened risk posed to agricultural earnings, long-term capital appreciation remains the prime attraction to the asset class. Although we remain bullish on farmland’s role as an inflation hedge, income returns could come under pressure if cash flow from agriculture declines. This is particularly salient for farm businesses which have relied on direct subsidy payments to remain cash-flow positive during the downturn in commodity prices.

Should the agricultural sector’s position weaken post Brexit, we see material benefit in landlords engaging with tenants to assess rents in relation to the realisable earning capacity of both the farming operation and the land utilised. While this could lead to rents commanding a larger share of cash flow, scarcity of supply should offer protection for newer, shorter terms tenancies.