Key Themes for UK Real Estate

Key Themes for UK Real Estate in 2016
 
Agricultural

10 December 2015, by Ian Bailey

With the drop in commodity prices and the potential for UK exit from the EU, the future for farm incomes remains uncertain

 

Forecasting future values for the farmland sales market is far from easy, particularly following a year when a wide range of sale prices were achieved.

Agricultural incomes are under pressure as some commodity prices are back to 2008/2010 levels. The key global forecasting organisations, including the FAO, USDA and IMF, have all cut their already pessimistic forecasts for commodity prices in the medium-term to 2020. Lower energy and feed costs will partially offset lower output prices but the strong pound makes exports less competitive.

Debt may increase the number of farms coming to the market although if this is the case it is likely to be smaller farms. Overall, we don’t expect supply to increase significantly unless there is a threat to direct farm subsidies from UK exit from the European Union or a significant negative change in the capital tax treatment of farmland. Both of these factors remain threats to watch but are unknown at present. UK exit could have a significant negative impact on farm incomes and land values, dependent on how the UK Government supports farming, which is currently unknown.

In 2015, our research recorded falls in arable land values in the eastern counties of England, where values have been highest. Grassland values, which have lagged behind arable values, have continued to increase and this land type is still regarded as good value by large livestock and dairy operations which are trying to expand to spread costs. This demand will help support prices in this segment of the market.

Localised Demand

In the short-term, demand for farmland will be more localised, with areas of strong and weak demand, often quite close to each other. Top-performing farmers will continue to be in the market for the right opportunities. Non-farmer demand, and the expected growth in prime country residential markets over the next five years will continue to support prices especially on residential and amenity-type farms but investor demand may weaken as the performance of alternative assets improves. An increase in buyers with rollover cash is likely to follow increased development activity and will add to the mix of local demand.

Downgraded forecast

In the light of recent market evidence, the short- to medium-term expectations for commodity prices and therefore farm profitability, we have downgraded our forecasts for the next five years. We expect values to be much more varied than in the past five years. Exceptional prices may still be achieved if all the right factors come together but conversely it is very likely that there will be more farms where potential sale prices fail to reach expectations or they fail to sell, as illustrated on Figure 3. We expect this market will last three to four years until commodity prices start to recover, following stronger global growth.

However, the fundamental factors driving UK farmland value growth remain. Supply is historically low, the product is finite, competing land uses and ownership motives will all support farmland values growth in the long-term.

FIGURE 3

Farmland value forecasts

 
Figure 3

Source: Savills Research

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Key Contacts

Ian Bailey

Ian Bailey

Director
Rural Research

Savills Margaret Street

+44 (0) 207 299 3099

 

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