Farmland

These are interesting times for farmland values. The abandonment of the Common Agricultural Policy following Brexit and the introduction of a UK Agricultural Policy must surely mean that the Single Farm Payment will be means tested or capped. Either way, I predict that the SFP, currently about £75 per acre of free money, will be a pleasant memory. It cannot be politically sustainable to give an asset rich group of people more money the more assets they have.

Across the board farmland prices have nearly doubled in the last 10 years but having started to plateau in 2014 and remained virtually static in 2015 they started to soften in 2016, fell a little in 2017 and I believe will fall slightly again this year as the prospect of a new UKAP sinks in.

Farms with a value in excess of £1m have a distinct advantage over other types of property when in comes to the cost of acquisition. With the recent stamp duty changes came revised rates for farms and mixed use properties peaking at 5%.

For properties above £1m, being designated as a farm or mixed use can generate a very significant tax saving.

So the importance of establishing the status of a farm as actually being a real farm rather than a residential house with land is crucial and something we can advise on. The difference on a £2m purchase is as follows:-

Stamp duty on a £2,000,000 house:-

£0-125,000 @ 0% = £0

£125,001-250,000 @ 2% = £2,500

£250,001-925,000 @ 5% = £33,750

£925,001-1,500,000 @ 10% = £57,500

Over £1,500,000 @ 12% = £60,000

Total = £153,750

Stamp duty on a £2,000,000 farm or mixed use property:-

£0- 150,000 @ 0% = £0

£151-250,000 @ 2% = £2,000

Over £250,000 @ 5% = £87,500

Total = £89,500

Investors have been attracted not only by the inheritance tax concessions available but also by the safe haven this form of investment offers, which unlike gold, they are not making any more of. On the contrary agricultural land is being gradually consumed by urbanisation.

The nature of this safe haven is particularly interesting to foreign investors for two reasons. Firstly value accrues to land and property holdings only if secure land tenure is sponsored by a stable administration. The UK has an ancient tradition of honouring property ownership as against countries like Zimbabwe which have not. Secondly the weak pound has recently made this safe haven look cheap.

The comparison with gold is worth looking at more closely when one considers their similar escalations in value. Like gold, the previous Government sold a large proportion of it’s holdings at the bottom of the market. Unlike gold, which has a holding cost and no yield, the holding cost of agricultural land is nominal and there is a yield albeit small. On a more prosaic level, when the going gets tough you can live on your land and sustain your family whereas gold has no nutritional value.

National Farmland prices (courtesy of Strutt & Parker)

Recently however these yields have turned negative as agricultural land values have risen and the value of the commodities produced from it have either remained static or fallen. With average land values now having reached £8,250 acre it is not possible to purchase a farm and service the debt of the purchase price through farming the land. This mirrors to some extent the negative yields experienced in the prime commercial office property market before the recession.

At that time the costs of purchase of these commercial investments could not be serviced through rental income, the yield was therefore negative when looking at the yield purely in terms of rental income. The prices were however justified by the market at that time by the concept of an equated yield, namely including capital appreciation as part of the total yield. This makes the sums work providing values continue to rise and capital appreciation exists. Obviously it does not if they don’t.

As I mention above, the effect of BREXIT on farmland subsidies is going to have an impact on values too. It is one thing for land owners to get free money from the EU, (and the richer they are the more the get) but quite another for the British taxpayer to see their money going directly to wealthy landowners. There will have to be some means testing or cap to make the continuation of farmland subsidies at anything like their current level politically palatable.

My prediction, last year, that prices would soften has proved to be correct. It will be interesting to see this year if the prospect of revised or reduced SFP translates into permanent falls in value in 2018.

The iliquid nature of agricultural land means that price fluctuations are very slow but I believe that during 2018 a continuing softening for grade 2 and below, is the most likely outcome, unless of course the pound falls again and significantly.

Farmland prices in the South West (courtesy of Strutt & Parker)

Recently however these yields have turned negative as agricultural land values have risen and the value of the commodities produced from it have either remained static or fallen. With average land values now having reached £7,250 acre it is not possible to purchase a farm and service the debt of the purchase price through farming the land. This mirrors to some extent the negative yields experienced in the prime commercial office property market before the recession.

At that time the costs of purchase of these commercial investments could not be serviced through rental income, the yield was therefore negative when looking at the yield purely in terms of rental income. The prices were however justified by the market at that time by the concept of an equated yield, namely including capital appreciation as part of the total yield. This makes the sums work providing values continue to rise and capital appreciation exists. Obviously it does not if they don’t.

As I mention above, the effect of BREXIT on farmland subsidies is going to have an impact on values too. It is one thing for land owners to get free money from the EU, (and the richer they are the more the get) but quite another for the British taxpayer to see their money going directly to wealthy landowners. There will have to be some means testing or cap to make the continuation of farmland subsidies at anything like their current level politically palatable.

My prediction, last year, that prices would soften has proved to be correct. It will be interesting to see this year if the prospect of revised or reduced SFP translates into real falls in value in 2018.

The illiquid nature of agricultural land means that price fluctuations are very slow but I believe that during 2018 a continuing softening for grade 2 and below, is the most likely outcome, unless of course the pound falls again and significantly.

Call Gideon or Christy to discuss what you are looking for.
Tel: 01884 849144 / Tel: 07739 090068

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