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UK Cross Sector Outlook 2021: Rural

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Despite political upheaval, rural land assets remain solid.

Commentators look at the correlation between policy change in agriculture and land values, and lament that Brexit is going to spoil the fortunes of farmland as an asset class. They are wrong. 

The evidence for the direct payments made to farmers being capitalised into land values is weak at best. Total budgets have been consistent both before and after the change to area-based payments in 2003. What changed in 2004 was the perception that land was cheap compared with other asset classes. What will change post-Brexit is not land value, but the perception that returns from farmland are more valuable than returns from other asset classes. 

In England, the shift to policy reflecting the long-term sustainability of land use means payments are received for ‘public goods’ delivered over and above the regulatory baseline. In Scotland, income-style support payments will be retained in the medium term at least. 

Our research shows that average earnings from farmland have stayed pretty consistent and pegged at about 1%, and we are  conservatively predicting that this will stay the same over the next five years. The smart owners should be able to do much better, but disruption during the post-CAP transition phase is inevitable and this will weigh on sentiment in the short term. 

Scotland may be cushioned by consistency but struggling farmers will struggle further wherever they are. Systems that have scraped through propped up by benefits and chasing ever diminishing efficiencies will buckle. Ultimately though, fortune will favour the bold, because the policy zeitgeist in both nations is similar: there are new, bigger and existential problems to tackle.

The macro-level drama playing out around trade, climate change and food policy casts land as hero, villain and victim. Accountability shifts for owners and investors on climate risk and impact means that some are already looking at the long term value of sustainable land management practices over and above conventional returns from land. Some are already deciding to take land back in hand or working with tenants so that natural capital opportunities in forestry or land use change can be captured and reported. To make sense of this changing policy and investment paradigm, land investors need to keep their eyes on the prize and adopt a clear strategy to ensure that land assets can successfully and sensibly play their part. 

The two golden rules to remember will be:

1. OVERALL ASSET MANAGEMENT STRATEGY NEEDS TO REFLECT THE TRUE COST OF CARBON

At present, a low market price and relative affordability of land for carbon offsetting (on marginal hill land) or carbon offsets (overseas) drives offsetting at the cost of actual carbon reduction plans, which are now getting expensive as the low-hanging fruit are taken. The regulatory baseline on asset performance will keep getting higher, which means that an aggressive internal carbon price is needed to ensure organisations make rational short-term investment choices for long-term security.

2. RURAL LAND IS, AND ALWAYS HAS BEEN, A MULTIFUNCTIONAL ASSET

Farmland values have always reflected returns from non-farming incomes, but stripping investment accountability back to a carbon value alone will risk appropriating an entire asset class to those able to afford carbon offsets, risking long-term food security and environmental wellbeing, and undermining efforts to protect corporate reputation and licence to operate.

Carbon is not the only metric of interest. But this is about income as well as capital value: developing a blended approach to land use that reflects the wide range of beneficiaries and co-dependencies in landscape management is more important than ever for leveraging returns from land investments. Occupation models need to reflect these new value drivers and earning opportunities, bringing diversity and resilience to land investments.

If we can get this right, rural land presents by far the most attractive long-term play of any asset class. It meets all of our core needs, offers security and non-correlated returns, and it now offers new and valuable income streams as markets for nature-based solutions to the vulnerabilities of human existence are expedited.

This is before all of the traditional benefits of land ownership in amenity and sporting value are considered. Developing the right strategy to rural asset management to meet these wide-ranging opportunities and expectations will be key as we move beyond the constraints of the Common Agriculture Policy (CAP) into a more liberal and entrepreneurial agri-economy.

Rural sector outlook 2021

Post-Covid-19, three emerging themes will drive investment opportunities in rural land.

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