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Savills reports that the value of farmland in the United Kingdom (UK) is set to make significant gains in the next few years and some analysts have even said that the gains will outstrip those typically seen for prime properties located in central London. Experts say the growth will be driven by continued uncertainty and investors’ belief that farmland will exist as an asset that will not so easily shed its value due to economic troubles and slowdowns in typical business and consumer transactions. Despite any jumps in value, market specialists do expect availability and transaction volume to remain largely static. For more on this continue reading the following article from Property Wire

Following a decade of consecutive annual growth farm land values throughout Great Britain are forecast to continue their upward trend and increase on average by a further 40% over the next five years, according to research released today (Friday 07 December) by Savills.

This is in stark contrast to the other property success story of prime central London, which after three and a half years of considerable price rises is likely to endure a period of little or no growth next year, but total price growth of 26% by the end of 2017.

‘It is no longer a case of one size fits all and there are now clear divergences in value between the prime quality, well located blocks of arable land and the rest, which are likely to widen further,’ said Alex Lawson, director of farms and estates at Savills.

‘Across all property asset classes the economic uncertainty has pushed investors towards quality and farmland is no exception. This against a backdrop of limited supply is set to continue with the best in class continuing to be bought in competition while secondary and tertiary quality land and farms may struggle to find buyers, when priced unrealistically,’ he explained.

The firm has produced forecast for three scenarios, base, strong and weak, which take into account a number of factors which have varying degrees of influence on farm land values.

The base forecast is for values to rise 8.8% in 2013, 6.7% in 2014, 6.4% in 2015, 6.6% in 2016 and 6.4% in 2017. It factors in increased futures wheat price in 2013 of £218 per tonne, with trend wheat prices going forward but below the high’s experienced now. Reduced wheat yield expectations for 2012 due to the weather is included.

It points out that lower subsidies are not likely to kick in until 2014 and the prediction includes a steady level of overall farm profitability ironing out any differences between sectors. Prime residential forecasts are also factored in.

The strong forecast sees values rise by 14.6% in 2013, by 8.7% in 2014, by 9.5% in 2015, by 9.9% in 2016 and by 10% in 2017. This scenario illustrates the potential growth for good commercial arable and the best dairy farms. It enhances profitability to reflect top performers in the arable sector who are likely to compete with investors for a limited supply of suitable farms.

The weak forecast illustrates potential weakness in the market for livestock farms which often have a significant residential component of the total value. It predicts values to rise by 4.2% in 2013, by 4.4% in 2014, by 3.9% in 2015, and by 4.5% in 2016 and in 2017.

It factors weak profitability pressure, resulting in more debt related supply resulting in weaker demand for these more residential/amenity type of farms. ‘We anticipate significant recovery will be linked to residential markets and more certain economic times and therefore could be several years off,’ the report says.

It also points out that the agricultural industry has suffered dramatically with lower yields and for the livestock sector higher costs due to increased housing of animals and higher consumption of forage. Average farming incomes are estimated to be slightly lower for 2012/13. Slower growth in farmland values is forecast after 2013 as the effects of CAP reform come into play and the rise in future commodity prices is estimated to be more conservative.
 
It adds that in isolation interest rates are unlikely to have a significant effect in the short term; the consensus of opinion being that base rates will be limited to below 2% over the next five years. Rises beyond this could have an effect in combination with other business pressures.

The report points out that during this recession farmland has been regarded as a good hedge against inflation and the high inflation rates have helped fuel demand for land. Exchange rate plays have put some pressure on overseas buyers as the pound has strengthened, which has led to a fall in the number of overseas buyers.

In terms of the volume of farmland coming to the market, the overall trend line is down since 1998 although during the past decade the average annual acreage publicly marketed has been fairly static. ‘We don’t expect this scenario to change significantly but there may be some debt pressures following the extreme weather of this year and the knock on effect in the livestock sector. In contrast we expect continued healthy commodity prices to limit the number of good quality commercial farms that are marketed,’ says the report.

The firm has £6 billion worth of funds from registered buyers looking to invest in farmland with a strong bias towards good commercial arable farms with investment returns and tax benefits being the key drivers.
 
Cash remains the predominant means of purchase providing the principle funds in three quarters of all transactions, while the debt funded purchase has been steady since 2006, which is perhaps surprising given the availability of cheap money.
 
‘The short to medium term outlook for farm land values remains a positive one, although the rate of growth will become increasingly varied depending upon land type, location and the economics of simply supply and demand,’ said Ian Bailey head of rural research at Savills.

‘At a wider level the fundamentals supporting global values are strong; land is a finite resource coming under increasing pressure for food, fuel, development and infrastructure,’ he added.

This article was republished with permission from Property Wire.