Farmland values – where are they going?

As ever, there are the usual cyclical factors of weather, commodity prices and disease. There are also sectoral issues, such that currently, for the first time in the last few years, the livestock sector seems to be outperforming arable, but overall the whole industry is seeing a reduction in profitability as the historic Basic Payment Scheme is being phased out and the environmental budget has not fully replaced it. The fiscal environment has changed, with the reduction in the value of Agricultural and Business Property Reliefs casting a long shadow over the viability of almost all family farms. Whilst the spike in input prices from 2021-2 had fallen back, a basket of inputs is still some 30% higher than it was in 2020, whilst the key wheat price is virtually unchanged.

Faced with the two factors of declining profitability and the reduction of fiscal advantage, one would have expected that land prices would be showing a significant reduction, yet there is little evidence to support this. The quarterly reports of the major land agents indicate a quarterly movement which is slightly downwards, but to a degree which is almost negligible (and after very strong growth over the last five years). As usual, there are regional variations but, on the whole, the price per acre remains static, despite the acreage coming up for sale showing a marked increase. The consensus view seems to be that good arable land is selling at between £10-11,000, but in special circumstances could be much more.

Why, then, is the linkage between productivity and capital value not having a significant effect? The land agents are not unanimous on this point, but it seems likely that:

• Farming is a long-term business where change is a generational issue which falls outside the usual rules of supply and demand. It takes time for the effect of changes to sink in and it also takes time and much soul searching to withdraw from the industry. We may not yet be seeing any significant impact from the major changes which are happening and, to some extent, the industry is still benefitting from the effect of recent levels of profitability.
• Whilst the impact of the fiscal changes within the 2024 Budget will be huge, most businesses will be hoping that they are a long way off. Reconstructions and succession planning are taking place across the industry at speed and, although it will involve some “jumping through hoops,” with luck most family farms will be able to avoid the worst of the anticipated IHT charges (which makes one wonder what the point of them was).
• At worst, farmland will still only be subject to IHT at a 20% rate, which makes it an attractive asset compared to cash or other investments
• The actual and anticipated growth in residential housebuilding is resulting in more land being sold for development. The consequential rollover money may well flow back into the farmland market. The combination of a 24% CGT deferral and, eventually, a 50% IHT saving makes a powerful incentive to pay more for replacement land.
• In an unstable world (or economy) the ownership of farmland gives an element of certainty and security. Whatever else happens there will be a market for food.
• Environmental changes are also having an impact. If food prices plummet, longer term environmental schemes, such as Biodiversity Net Gain or Nutrient Neutrality, will give alternative and potentially more lucrative income streams. On-farm solar will also have a similar impact.
• The “Naboth’s Vineyard” effect should not be underestimated. Whatever professional opinion might say to the contrary, the words “grandpa always said if that land comes up for sale, we must buy it” carry a lot of weight in decision making.

Most practitioners will have come across the situation where a large and unexpected figure emerges in the year end accounts, which is explained by the response “we bought another 100 acres next door – I didn’t discuss it with you at the time because I knew you’d say no…” It remains to be seen whether such transactions will cease.