At this key turning point in UK agriculture’s history, there is growing discussion over the direction of farmland values in light of subsidy reform plans and the post-Brexit trade environment. Market activity has been reduced due to uncertainty about these factors, with farmland supply at record lows and values largely static as many people seek clarity before making major strategic decisions. The underlying sense, however, is that despite the possible short-term disruption, farmland will continue to be an attractive asset, with unique diversifying capabilities across many competing land uses.

In England, the announcement of the Agricultural Transition Plan for 2021-2024 has provided the detail on how Basic Payment Scheme subsidy reductions will take place, while pointing to where new schemes are being developed and trialled, including the Environmental Land Management scheme (ELM).

While there is still detail required on the mechanisms of ELM, the basic principle of environmentally conscious farming is gradually being accepted as the way forward in the sector and is, in essence, an acceleration of the current trend.

Alongside the headline scheme, there are a number of other provisions designed to incentivise retirement from the sector and encourage new entrants. A question mark hangs over how compatible the new policy is with existing agricultural tenancy law and practice, but we expect a competitive contract farming sector to fill much of this void.

Conversely, Scottish agricultural policy has moved to retain the overarching Basic Payment Scheme legislation until at least 2024, while also enabling improvements to be made from 2021 onwards. Limited information has been provided beyond the 2024 commitment.

However, government and stakeholder groups are expected to deliver policy reform targeted at sustainably increasing rural productivity, profitability and innovation in line with Scotland’s more progressive green agenda. Interestingly, in both Scotland and Wales protecting food production is given much higher policy priority than it is in England.

The recent announcement of a free trade deal with the EU, which will provide continued access to the single market, is confidence-boosting for the sector. Although the potential impact of trade on capital values is limited, the outcome does reduce profitability concerns in some major export-focused agricultural sectors such as lamb.

Exchange rate volatility is also expected as the economy reacts to the effect of new trade agreements and the ongoing effects of the Covid-19 pandemic. The pound sterling has been weak by historical standards for some time, but added volatility may present favourable buying conditions for non-sterling denominated buyers.

Short-term outlook (0–5 years)

Over the near term, we are expecting average values to remain steady as pent-up demand filters through the market. Quality farms are expected to be in great demand, as are those with strong amenity value and scale.

Beyond this, we may see some localised volatility in areas most vulnerable to subsidy reform and trade adjustments. Location, land type, sector exposure and local market dynamics are expected to strengthen as market drivers over the coming years and will continue to result in a large range of prices achieved either side of average indicators.

From a commodity perspective, global cereal prices are forecast to strengthen, which is likely to translate to domestic pricing. The new Brexit UK-EU trade deal should largely see trade continue as normal for the majority of sectors, albeit with some disruption for importers and exporters due to the introduction of new non-tariff trade measures. Farm gate prices are unlikely to be affected to any significant extent. Furthermore, talks are also ongoing to expand trade agreements with new trading partners beyond the EU. Some of these have already opened up, allowing for new market opportunities.

Current thinking on taxation is business asset rollover relief (formerly capital gain rollover relief) is less likely to be reformed as the government has already signalled its intention to ‘build’ its way out of recession and promote development, investment and enterprise. Exactly where the balance lies on tax is difficult to surmise in the absence of any meaningful announcement. For this reason, we have not included the effect of any tax changes in the forecast period.

Taking all these factors into account we are forecasting a 0.7% annualised decrease in average values over our five-year forecast period, but expect that supply will start to recover back to levels largely in line with 10-year averages that predated the Brexit vote. To put this in context, the area of land traded annually equates to approximately 0.5% of the total farmland area.

Our forecasts account for what is known from a policy and trade perspective as at early January 2021. Assumptions have been weighted to predict the impact at GB level, noting some differences in policy across the three countries considered. Should any major change in these assumptions arise, this forecast may be updated.

Medium- to long-term outlook (6+ years)

In the longer term, we expect caution to give way to renewed investor confidence after the initial shock of subsidy reform and Brexit abates. The fundamentals that have historically underpinned the sector’s performance should strengthen – shortage of supply, demand from competing uses and a thriving consolidated rural sector.

Further to this, we anticipate new value offerings of environmental and ecosystem services to be proven income-generating ventures layered on top of and alongside existing land uses and operations. These developing markets will enhance the multifunctional nature of rural land and the diversity of factors that influence value.

The UK is among the first developed countries to recognise these services from a national policy level, and we expect increasing interest from the private sector as accountability grows in favour of considered Environmental, Social, and Corporate Governance (ESG) objectives.

Overall, while we are not anticipating a repeat of the significant price increase recorded in the decade to 2014, we would expect the market to return to its long-term historical real-term growth of around over 1% per annum (i.e. 1% above inflation).

Farmland has a long history as a safe, secure and inflation-hedged investment class, particularly during times of economic uncertainty. The strength and balance of key market drivers may bring about some individual sector or localised volatility, but we see no reason why farmland would not retain its status of long-term security.

Low supply, very low interest rates and strong amenity appeal should support values as the sector deals with interim volatility related to subsidy reform and trading adjustments. Strong fundamentals, an array of competing land uses and increasing interest in the environmental value of land support long-term growth prospects.

_{Read the articles within Spotlight: The Farmland Market below.}