By Stewart Hamilton, Head of Farm Sales.
With our financial system so heavily intertwined with both the EU and the rest of the world, Brexit presents some interesting questions for those wishing to sell/buy farm land.
And one of the questions regularly asked always seems to relate to high historical land values. As a trainee in 2006, one of the first big pieces of news I was party to, was the first farm in Scotland to break the £5,000/acre barrier. The general consensus was one of disbelief and an agreement that prices would go no further. Fast forward 12 years and we are seeing triple this amount for top quality arable land in Angus, with Perthshire, the Borders, East Lothian and Fife not far behind. Aberdeenshire demand is strengthening after a few quieter years and it appears that farmer optimism has returned.
Forestry has continued to perform well with the Scottish Government’s target to plant 10,000 hectares of new forestry annually, having a big effect on underpinning values, with significant premiums paid for easily accessible marginal land. Whilst it is unlikely that current demand for timber will be sustained in the longer term, it is likely that we will see a drop in the amount of mature forestry over the next 10-15 years which continues to drive investor interest.
So then, what is likely to happen in 2019 and beyond? One can only learn from one’s mistakes and taking an objective view of the past 30 years, it appears that the trend has continued steadily upwards, regardless of interest rates, financial meltdowns or global commodity trends.
Borrowing £1million today at an assumed rate of 3% at £10,000/acre, the annual cost to repay the debt would amount to £66,550 per annum if taken over 20 years. Using this as a baseline and looking at 2006 then further back to 1990 makes for interesting reading. Taking the annual budget of £66,550 per annum would have covered the purchase of circa 150 acres in 2006 assuming an interest rate of 6.5% and land at £5,000/acre. In 1990, it would have stretched to 190 acres, even with interest rates at circa 17% and land at only £2,000/acre.
This simply highlights that yes, while borrowing money has never been cheaper, the increase in land values has meant that for the same output, today’s farmer can only purchase approximately half the amount of land compared to his father’s generation.
As such, and given the volatility in every aspect of global trade, financial markets and commodity fluctuations, the increase in land values must be purely landowner driven. Sentiment alone pushes neighbouring farmers to pull out all the stops to buy a neighbouring property. Rates of return, yields on investment and levels of gearing all get forgotten when the competition begins. It is for this reason, combined with favourable agricultural property reliefs available when passing the farm to the next generation, that I see no reason for land values to decline, regardless of the outcome of Brexit. The continuation of the weak pound, slow economic UK growth and steady inflation are unlikely to raise the cost of borrowing in the short to medium term which should continue to maintain demand.
Another reason to remain optimistic about longer term farmland values relates directly to the political direction being taken in the EU. Germany is currently pushing for 10% of all land to be used for ecological purposes along with a co-decision with France to try and ban Glyphosate in 2022. Renewed enthusiasm relating to environmental land uses will only help to strengthen the market for the best land with more marginal and upland land being targeted for future subsidy payments, assuming the UK government pushes ahead with the plans currently being mooted.
Article posted on 19/08/2019