Land markets worldwide have struggled against pressure from weak grain prices, which, in cutting farm profits, curb prospects for investment returns.
In the UK, the market has had Brexit to deal with too, and the fallout of UK’s vote in June to quit the European Union.
But Brexit this has increased political uncertainty – and is seen as likely to lead to less generous subsidies, which are supported within the EU by strong French and German agricultural lobbies – the vote has not been all bad for UK farming. Crop prices in local terms have recovered as sterling has fallen.
How will such themes play out in 2017? Experts give their views.
The trend over the [last 20 years] represents an average annual increase of 5% [in land values], although this masks periods of no growth or slight decline and also periods of significantly higher growth than the long term mean.
Currently there are indications that land prices have stalled and we may be in a period where prices stagnate. This can be partly linked to the current political uncertainty, but another factor is the affordability of land.
Recent price increases have pushed the market to a level that many buyers find difficult to justify. Reduced farm incomes over the past couple of years have not helped.
Against this must be set the fact that UK land has become 10-20% cheaper for foreign purchasers due to the drop in sterling, and that borrowing costs look set to remain low for the near future.
Whilst the current sentiment in the land market is negative, there seems little expectation that there will be much change in the long-term trend of prices. The view remains that land ownership can provide long-term secure assets for the farming sector.
The typically low-yielding rural sector recorded negative returns in 2016, following five years of strong performance.
Rural returns are forecast to be mildly positive in 2017, although many landowners and potential investors will be waiting to see how Brexit may affect agricultural policy.
A decline in returns in the rural market can in part be attributed to a natural market correction, as well as the impact of the [Brexit] referendum result.
Over the next 12 months, rural land is expected to remain in high demand, as margins in the sector continue to recover due to lower costs and increasing commodity output prices.
Low commodity prices and patchy local demand are the principal factors affecting the land market.
The fall in values continues to be principally driven by pressure on arable land values, especially in the eastern regions of England. Despite the benefits of the weak pound on outputs and subsidies we expect the average value of ‘all types’ of farmland across Great Britain to remain under some pressure in the short term as current debt in the industry filters into sales.
Debt pressure is the single biggest factor which has the potential to increase supply. We expect debt related sales to be in the region of 20-25% of all transactions but the effect will be tempered by the increase in 2016 subsidy and the positive effect of the weak pound on output prices.
In the short term, the downside of Brexit on farmland values is likely to be muted. The weak pound creates a favourable buying environment for overseas buyers and this, along with the potential reduced supply driven by uncertainty, will help support farmland values.
In the event of a significant reduction in farm subsidies in 2020 and therefore incomes, the negative effect is likely to be greater on rents than land values.
Strutt & Parker
The Brexit vote may have been the defining moment of 2016 politically, but its immediate impact on the land market has been more muted than perhaps some anticipated.
Brexit’s biggest impact was to cause uncertainty, which did result in a slowdown in the amount of land coming forward over the first nine months of the year. However, there was resurgence in the last quarter.
The big story in the farmland market has continued to be the impact of the squeeze on farm profits as a result of low commodity prices. With around half of all farmland transactions being “farmer-led”, it is not surprising that as farm incomes have dropped, so have average land prices. Arable values are averaging 4% lower than a year ago.
However, the average price only tells part of the story as it masks a huge range in the prices achieved. The market is now more polarised than in living memory, with demand extremely location specific.
An improvement in commodity prices, due mainly to the weakening of sterling, may well have a positive effect on land prices going forward. However, location rather than quality will continue to be the key factor in determining farmland values.
The level of supply in 2017 will also be a critical factor.
(Source – http://www.agrimoney.com/feature/uk-land-prices—how-will-they-fare-in-2017-amid-brexit-uncertainty–495.html)