UK Property – Farmland Market Review

Knight Frank Farmland Market Review – Second Quarter 2007 results

Surging demand pushes farmland prices higher at the fastest rate for 30 years

Headlines this quarter

  • Average farmland prices rose by 27.3% in the year to June 2007, the fastest rate of growth since 1977
  • Prices rose by nearly 10% in the three months to June 2007
  • Average farmland values (all types) hit £3,805 per acre in the second quarter, up from £2,988 a year earlier
  • Demand from lifestyle purchasers (non-faming buyers) rises 25% in volume terms (acres) but by over 50% in value terms over one year
  • 15% of all farmland is now bought by overseas buyers – with the Irish being joined by northern Europeans and Russian buyers

Clive Hopkins, Head of Farms and Estates at Knight Frank, comments: -

General market overview

Over the past 18 months the price of farmland has risen steadily on the back of strong demand and restricted supply. The rate of price growth has increased over recent months, with the annualised rate now hitting 27.3% - the highest rate since 1977 (when price growth briefly hit 40%). The rate of growth has increased rapidly with a 10% rise recorded in the three months to June alone. The market has remained strong despite the recent interest rate rises and the wet weather.

Supply has failed to match rising demand by a significant margin for a long period. Whilst demand (applicants) rose by almost 14% on a year on year basis to June 2007, supply only rose by 8%. The number of sales, on an acreage basis, completed in Q2 2007 was 5% higher compared to Q2 2006. We believe that marginally higher supply levels will see the rate of land traded rise slightly through the remainder of this year.

Purchaser profile

In terms of market composition: individual farmers still comprise the largest single share of the market (36.8%), followed by: lifestyle buyers (28.8%), agricultural businesses (19.4%), institutional investors (6.7%) and developers (6.8%) (with the rest of the market comprising “other” purchaser types).

There are two significant stories this year with regard to the market: lifestyle buyers and foreign buyers.

Wealth generation in London, and especially in the City, has contributed to significant additional demand and also has underpinned price competition, especially for farmland tied to residential estates to the west of London. With residential price growth at the top of the London market hitting 40% and above in some prime locations over the past 12 months, substantial equity is available for bidding up the price of country estates. Demand from the lifestyle purchaser segment has grown by 25% in volume terms (acres) but by over 50% in value terms since Q2 2006.

Whilst lifestyle trends have driven farmland prices higher – other key factors, including rising agricultural returns and potential development returns are leading to rising demand from individual farmers, lifestyle buyers, institutional investors and developers. Our quarterly analysis of market trends for the first time includes an analysis of the drivers of what we termed “green” or “eco friendly” issues. Interestingly it is not only lifestyle buyers, but also institutional investors who record these issues as being of “significantly rising importance”.

We estimate that approximately 15% of UK farmland purchases are made by international buyers. By far the dominant nationality within this overseas purchaser market are the Irish buyers – making up 7.3% of all purchases, followed by: Danish purchasers 2.9%, Russian 1.6%, Dutch 0.9%, Swiss 0.7%, Scandinavian 0.3% and finally “other” nationalities 1.3%.

There is a general division between Irish buyers – who favour western areas of the UK, and Scandinavian and other northern European buyers who look increasingly to East Anglia.

Vendors

The largest vendor category by a large margin, is the individual farmer (60.7% of all sales) – reflecting the trend towards continued consolidation and retirement in the sector. The next largest segments are lifestyle buyers and agricultural businesses (17.7% and 15.5% respectively). Institutions accounted for only 2.2% of all sales with developers only 2.5%.

A small but rising trend – perhaps 1 in 15 of all whole farm sales has been the rise of emigration of UK farmers, especially young farmers inheriting a farm and looking to farm abroad. Targets include New Zealand, Australia and Canada.

Investment sector

Farmland rents have risen on average by approximately 7% over the year to Q2 2007, with Agricultural Holdings Act (AHA) rents rising 8% to £57.50 per acre and Farm Business Tenancy (FBT) rents by 6% to £85 per acre over the period. The average price per acre for let AHA arable farmland in England in Q2 2007 was £1,900.

Until the past 12 to 18 months farm rents under AHA and FBT have remained static in recent years but with improved commodity prices (excluding the dairy sector) there should be the impetus for farmland rents to rise.

Future trends

Over the next 12 months we see the following trends to be the dominant influences:

  • We forecast that lifestyle buyers and the influence of City bonuses and income will rise still further over the next 12 to 24 months. International buyers will not disappear from the market and will become an ever larger feature of the marketplace.
  • Aside from lifestyle purchases - prices of bare land will continue to grow due to more positive outlook in agriculture and improved commodity prices which result from land being taken out of food production for non-food crops and increased demand for grain from developing countries
  • Farmland values will continue to rise, we believe 11% growth by June 2008 will be achievable
  • Farmland rents will rise by 9% over the same period

Courtesy: Knight Frank Residential Research

The Knight Frank Farmland Market Index

The Knight Frank Farmland Market Index is a valuation based index, compiled quarterly from valuations prepared by professional staff in Knight Frank’s Farms & Estates Department offices in the UK. The index is based on the valuation of a comprehensive basket of properties throughout all UK regions based on actual sales evidence.

Farmland is defined as agricultural land that has a dwelling and/or buildings located on it. Bareland is defined as agricultural land which does not have either dwellings or buildings located on it.

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