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Kelly Hewson-Fisher discusses the opportunity farmland poses as a solution to environmental challenges and a source of long-term capital growth for investors
Farmland importance undisputed
Farmland remains a solution to many of the challenges being faced by society and certainly is being looked at as the saviour for meeting many of the environmental targets the government has set. For investors, farmland continues to provide long-term capital growth potential and often shies away from the reactive fluctuation to market forces that other asset classes exhibit. Global conflicts continue to reinforce the importance of UK land providing for food, fuel and fibre, and while faced with a potential political change, this importance is undisputed.
Ducking the short-term volatility for long-term growth
Farmland performs well in inflationary environments by delivering a stable return over a long holding period. Over the medium and long term, it consistently outperforms, and across the last 30 years, farmland has done so by an average of 3.4% per annum. Having said this, farmland is not completely benign to inflationary pressures. Over the last 18 months, energy price rises have affected input costs, specifically fertiliser, and this, in turn, has affected income in the short term. However, capital growth continues, which confirms the long-term investment opportunity farmland offers.
In recent times, interest rates have risen to over 5%, and while this hasn’t negatively affected land values so far, we may see growth slowdown in the short term as investors, once again, review their portfolios in line with current market returns.
Farmland supply and values
GB farmland supply for 2023 will be at its highest, 157,000 acres, since Brexit and the start of the agricultural transition, which surpasses the 10-year average. We forecast the three-year upward trend to continue to reach around 180,000 acres per year by 2028.
Average farmland values continue to grow; however, growth rates are increasingly varied across the land grades – figures to date show grade 3 pasture at £7,100 per acre and prime arable at £10,200 per acre. The drivers of values continue to include location and purchaser type. In summary:
- Prime arable land values have increased by 2.1% in 2023
- Poorer quality pasture land values have risen by 10.9%
- National land values have increased an average of 5.4%
We forecast that average GB farmland values are likely to be sustained for the next five years with modest increases. This will be reflective and responsive to specific criteria such as location and neighbour interest, which all have an impact and influence on land values.
Decisions will need to be made
As we move into 2024 and the impact of the agricultural transition continues to be felt, there will be more decisions to be made. These may include reviewing the opportunities and markets that farmland presents from food production, development, energy and renewables and the emerging nature markets or, the more final decisions of retirement or exiting the sector. Farmland will continue to appeal to a broad range of investors and outperform inflation over the long term.
Savills recent blog on the task force on climate and nature-related financial disclosures (TCFD/TNFD) explains that whilst, as small businesses, farms are not required to report on TCFD/TNFD, they are increasingly being asked for information on carbon and climate risk from customers and suppliers who are reporting against these metrics. Most supermarkets are listed businesses, and all banks will be required to comply1. The importance of land in being able to support the supply chain will continue to be felt.
Nature markets – stacking, bundling and sequencing
Whether funded through private investment or the public purse, farmland values will be sustained due to the multiple demands from it. The UK has set targets to achieve net zero emissions by 2050 and for 30% of land and sea to be protected by 2030. A recent report by The Royal Society stated an additional 10.8 million acres of land would be required to meet targets by 2050 (an area twice the size of Wales). In addition, farmland can be part of the solution required to meet nutrient neutrality, water neutrality and biodiversity net gain (BNG) requirements.
The answer to our prayers is going to be the sequencing, bundling and stacking of opportunities. This will provide the profitability required to secure farmland values and, will provide the outcomes needed to meet the ever-increasing demands on land. The need will be for cohesive integration. As more is being understood of the environmental financial incentives available, more confidence is being gained and more informed choices are being made.
Are trees the answer?
The UK forestry market slowed over 2023 from its peak in 2021, however, we consider this temporary in response to a number of external pressures in late 2022 and the future forecast is a return to steady capital growth for 2024 of 2.5%. There continues to be limited supply of forestry investments marketed and prospects for growth are linked to market dynamics, timber prices and environmental co-benefits. Planting trees continues to be the name of the game in terms of carbon sequestration solutions and meeting net zero targets and the UK set its target to plant nearly 2.5 million acres of new woodland by 2050, subject to land availability. This would increase tree cover from 13% to 17–19% of the UK’s land area.
Investors continue to look to acquire tree-planting land for offsetting in order to meet their carbon emission targets and from January 2024 woodlands will be used to offset farmland lost to development for BNG in England. Payments for offsite habitat enhancement in woodland areas represent a real opportunity to generate income, although it is unclear if other UK nations will adopt this.
Is a decarbonised power sector possible by 2035?
Over a normal year, fossil fuels provide around 40% of the energy demand, but on the right day, specifically 17 August 2022, zero-carbon electricity generation hit its highest share at 85% made up of:
- 39% from wind turbines, both on- and offshore
- 25% from solar photovoltaics, transforming sunlight into usable electricity
- 20% nuclear, not renewable, but still without carbon emissions
- 1% hydro, generated from the flow of water turning a turbine to generate power
When conditions are right, a net-zero power sector does not seem so implausible. Having the right conditions applies to more than just the weather, however. Augmenting the UK’s renewable capacity is more than a case of building more; it requires the right mix of policy, investment and suitable sites (see diagram below).
As with land purchases for agriculture, there are specific requirements when purchasing land for renewables. Terrain, access, shading, infrastructure proximity for connectivity, local policy, any planning restrictions and land parcel size which will dictate the type of renewable energy option appropriate. Policy certainty around developing renewables on certain grades of land is needed, and the liberalisation of onshore wind in England has also been widely called for.
Return on investment will provide adequate incentive already. The average return on investment for a solar farm in the UK is between 10 and 20%, meaning most solar farms pay off their installation costs within 5–10 years. Innovation is constantly creating new technologies such as energy storage, which will simultaneously stabilise the supply of low-carbon electricity and inspire confidence in investors.
The planning process can be long and laborious, though announcements made by the government in November 2023 have stated homes and businesses will be able to install rooftop solar panels more easily with changes made to permitted development rights riles avoiding the planning system. Also, the Energy Act 2023 has more clearly defined technologies such as energy storage, making the planning journey smoother for these assets.
It is infrastructure that currently provides the largest obstacle to more renewables. It is not unknown for projects to receive planning permission and have the backing of investors, only to be provided with a connection date more than a decade in the future.
The Energy Act 2023 has been branded as the biggest piece of energy legislation in the UK’s history. The government has stated it will unlock nearly £100 billion of private investment, contribute to net zero, and improve energy security. That investment must be targeted to unlock the UK’s renewables potential and allow days like 17 August 2022 to become the norm, rather than the exception.
1. Direct carbon emissions from farms in producing food products are the Scope 3 emissions of customers and financiers. Farmers will be expected to create carbon balance information and disclose it as a condition of doing business with them.