One of the strengths of the farmland market is the diversity of types of buyer and investment motives in the market. At present, the main groups could be broadly classified as farmers, investors, rollover relief driven, environmental and lifestyle buyers, although many cut across these rather than belonging to a single group. While the relative strength of demand and rate of success in transactions from each group varies over time due to economic conditions and policy drivers (see chart below), the market’s supply and demand imbalance means demand remains dominant.

FARMERS

Competition for commercial farmland was extremely strong last year and the season also offered the prospect of high profits to arable farmers in particular. Good yields coincided with high margins: harvest 2022 crops had a relatively low-cost base, and commodity prices increased due to the war in Ukraine. Moving forwards, short-term prospects are more mixed and depend upon when key decisions were taken to fix the price of fertiliser and energy, or received for the grain. Despite the 57% elevated cost base, a budget prepared in May 2022 for a harvest 2023 winter feed wheat crop showed that a margin comparable to harvest 2021 was achievable (see chart below). Seven months later and feed wheat futures have fallen more than fertiliser prices, so the projected margin is 60% lower.

Well-managed businesses will have more confidence in their financial resilience and ability to expand, for which there is a clear appetite. Defra’s April 2022 Farmer Opinion Tracker survey found 15% of farmers want to expand their businesses and that the ambition was more than twice as likely among larger-scale farms than small ones (26% and 10%, respectively). For many farmers, bare land that can be bolted onto an existing farm is ideal because it avoids tying capital up in a house that may not be required, or farm buildings that are unsuitable for modern agriculture.

INVESTORS

Historically, rising interest rates reduce demand for farmland. During the 2008 financial crisis demand boomed after interest rates were cut to 0.5% in March 2009. Farmland then became more attractive to investors, offering a way to diversify portfolios with an income return, unlike cash, which was eroding in value.

With interest rates expected to rise until the latter half of 2024, it is unlikely we will see a similar impact from the looming recession. In high-interest rate scenarios, cash-funded investors can rely on interest rates for capital growth as opposed to alternative investments, resulting in a drop in demand for farmland.

Exchange rates, however, can strengthen demand from overseas investors; the pound hit a record low against the dollar after the sweeping tax cuts that preceded the end of Liz Truss’s government. It has started to recover but still offers dollar-denominated buyers enhanced purchasing power. This could be most relevant in Scotland, where American buyers often compete for sporting and amenity estates.

ROLLOVER BUYERS

House prices fell by 1.4% in November, according to Nationwide – the greatest monthly fall since June 2020. Transaction levels are dropping and values are likely to continue to weaken until pressures on household finances start to ease. Developers are adjusting to reduced demand, which is likely to slow the rate of development land sales leading to fewer new “rollover relief” motivated buyers. Despite this, rollover buyers will continue to be a major force in the farmland market. Business asset rollover relief requires the new asset to be purchased within three years of selling or disposing of the old one (or up to one year before), which coupled with low farmland availability recently means there likely remains a pool of motivated buyers seeking to reinvest capital before their rollover deadlines pass.

ENVIRONMENT

Natural capital still provides a buzz around farmland, with tree planting, BNG, carbon markets and regenerative farming all increasing interest in the farmland market and policy actively welcoming the development of these sectors. Deep-pocketed investors, motivated by environmental and carbon outcomes, continue to chase scarce assets.

With BNG in England becoming mandatory in November 2023, this is likely to be an increasing factor in values over the next five years, particularly for poorer-quality pasture land. Additionally, the markets for carbon sequestration in soil are building. While trees and hedges for carbon offsetting remain easier to monitor, the ability to stack funding on the same land parcels will be a real benefit as subsidy payments fall. Development of a Hedgerow Carbon Code is well advanced and a recent Campaign to Protect Rural England survey found 59% of farmers have planted hedgerows in the last ten years and are likely to plant more in the next five years.

LIFESTYLE BUYERS

The activity of lifestyle or amenity buyers is correlated with the wider housing market, albeit influenced by additional trends such as the desire to move to the countryside prompted by Covid-19 lockdowns and increased flexibility over working location. As the housing market cools, demand from this group will do so too, making the quality, location and asking price of a property increasingly important to secure interest and buyers.

FORECAST VALUES

The most important factor in determining value is the relationship between supply and demand. While we anticipate supply to rise modestly, the demand for farmland remains high, with environmental motivations becoming more prevalent as the climate crisis deepens. Alongside this, we expect the taxation benefits and long-term outperformance of inflation to remain significant factors, with pent-up demand insulating farmland values from the impact of the economic downturn.

Given this imbalance, it is no surprise that the average value of GB farmland increased by 8.9% in 2022 to £7,800 per acre – its highest since our research began. Nationally, prime arable land values increased by 8.7% to £10,000 per acre. The value of poorer quality pasture land experienced the largest increase in value during 2022, climbing by 12.4% to a record of £5,000 per acre. Regionally, the largest growth was recorded in Wales, the East of England, the South West and Scotland, all increasing by over 10%, demonstrating that natural capital and commercial agriculture-focused opportunities are both in high demand. Prime arable land in the East of England is now, on average, worth over £10,000 per acre, having increased in value by 15.5% in 2022. This increase highlights the supply and demand imbalance, as supply was also high in the East of England, indicating that there is capacity for more supply without influencing prices.

With the exception of poorer quality pasture, national average land values unsurprisingly did not quite keep up with shock inflation during 2022; however, farmland has a strong record of outperforming inflation over the medium and long term. With inflation anticipated to fall in 2023, we forecast real values for prime GB arable land will increase by an average of 2.5% per year and poorer quality pasture land by an average of 6% per year over the next five years (see chart below).

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