Implications for Rural Real Estate

29 March 2016, by Ian Bailey

We expect average farmland values to come under pressure in the short term

 

Given UK farmers currently receive €3.2 billion of Common Agricultural Policy (CAP) funds annually – with CAP direct payments making up 60% of the average farm’s net income – the EU plays a significant role in the current UK agricultural economy. In addition, 60% of the UK’s food exports go to the EU and 70% of food is imported from the EU. Whatever the outcome of the vote on 23 June we need a positive and enabling platform for future rural and agricultural productivity.

Pre-referendum

As with other real estate markets, in the run-up to the referendum rural property is experiencing some uncertainty.

At present we do not have clarity on what farm policies and support may be introduced if we leave the EU: DEFRA Ministers have made it clear that it is up to those supporting an exit to develop proposals; to date politicians have only released their personal ideas. It is therefore impossible to provide a sensible analysis of future farm support impacts, but it is important to note that Norway and Switzerland have higher agricultural subsidies than the EU and this is an important reason why they are not members (subsidies account for over 50% of agricultural receipts in Norway and Switzerland, compared to about 20% in the EU).

Post-referendum

If the UK chooses to remain in the EU, current commodity prices will mean farm incomes will continue to be under pressure and the prospect of rising interest rates in 2017 will squeeze incomes further. This may make debt a significant issue for some farm businesses and 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. We expect average farmland values to come under pressure in the short term, with greater distinctions by reference to land quality and location.

If the UK chooses to leave the EU, there are various trade relationships that the UK could retain with the Union, depending on the level of integration desired. The most likely scenario is that trade in agricultural commodities would operate via a Free Trade Agreement, as recently negotiated with Canada and the USA. This would mean lower tariffs than under World Trade Organisation rules. Any tariffs would add cost to exports and reduce returns to farmers – although lower domestic grain prices might benefit livestock producers.

In terms of subsidy levels, as Phil Hogan, EU Commissioner for Agriculture, has suggested that the CAP already has a contract to support UK farmers until 2020 when the Multi- Annual Financial Framework ends, it is likely that in the event of a Brexit, farmers will have a couple of years’ ‘breathing space’ to understand the new rural policy and make plans to adapt to it.

However, Labour and Conservative policy has historically been aimed at reducing the annual subsidy payment with a higher proportion diverted initially towards the public good. This suggests that the UK is likely to reduce direct support to farming further, which will probably be resisted in Northern Ireland, Scotland and Wales, if not in England. Nonetheless, indirect support such as agri-environment payments, the promotion of the public good and support for disadvantaged rural communities are likely to still feature and may be boosted.

With regard to land values and rents, in the event of a significant reduction in farm subsidies and therefore incomes (at least in the short term), the negative effect is likely to be greater on rents than land values, as the relationship between rents and agricultural profitability is stronger than for land values.

Uncertainty affects land market activity: prior to the UK joining the EU, and during each CAP reform negotiation, the volume of land marketed has reduced, recovering once the new position becomes clear. In terms of land values, when most countries joined the EU their land values increased, however in England they reduced and took four years to recover to their pre-accession level. Some commentators have suggested significant falls in land values, but without any detail on alternative policies it is difficult to predict. Values are already under some pressure.

Overall, in the medium and longer term, it is suggested that the agricultural sector will adjust and productivity could improve with a Brexit, similar to when New Zealand farmers lost their subsidy. However, there are unanswered questions about levels of support for the industry and this will create a measure of uncertainty in the short term.

placeholder

Key Contacts

Ian Bailey

Ian Bailey

Director
Rural Research

Savills Margaret Street

+44 (0) 207 299 3099

 

Subscribe to Savills research

 

Would you like to be notified via email about new research?