Outlook and historical context

Farmland values continued to be muted during 2017, with a significant price difference across both land type and geography. Grazing land proved most resilient, falling around 1.5% year on year compared with the average 2.5% drop for prime arable land.

Poorer-quality arable land recorded the largest fall, reflecting the lower productive capacity coupled with uncertainty over the sector’s future prosperity (trade and subsidy). Conversely, despite exposure to post-Brexit trade arrangements, lower-quality grazing land remains insulated, falling by only 1% as demand remained strong for lifestyle holdings with higher amenity value.

At the close of 2017, Savills GB Farmland Value Survey shows average prime arable commanded close to £9,000 per acre, with average grade 3 farmland trading at £7,500 per acre. Grazing land was trading at between £4,400 and £5,500 per acre, reflecting the variation in quality and geography across the holdings marketed.

While the spread between prime and average arable land is at a 10-year high, the difference between average and less productive grazing land has fallen from a 2012/13 high, although it is still well below the levels recorded in the late 1990s and early 2000s, where the premium was almost 50%.

On average, the decline in capital values has persisted since the downturn in commodity prices during 2014. We calculate an average cumulative drop of 6% across the market for all arable farmland over the past three years, with a 3% fall for grazing land. But the results of our quarterly Farmland Value Survey indicate this decline is slowing, with an increase in Brexit-related clarity likely to bring more certainty to the marketplace.

Five-year outlook

Our outlook for the next five years shows an overall recovery to positive growth, albeit at a pace below historic trends. However, much will depend on the outcome of trade negotiations and revisions to agricultural subsidy.

On the supply side, unless the national political and economic picture materially worsens, we believe annual volumes will increase over the near-to-medium term and return to long-run average levels.

Interest from lifestyle buyers is likely to continue, particularly for holdings with scope for diversification away from agriculture.

Over the medium term, a weakened trade position and reduced subsidy, coupled with any further softening in commodity pricing, could put pressure on earnings for lower-performing commercial arable and livestock businesses. This is priced into our forecast, with an average decline of 2 to 3% per annum expected for pure commercial farmland, but rising values of around 2% per annum for amenity holdings which have options to diversify away from agriculture (see below).

^{Source: Savills Research | Note: The land value forecast uses Savills rural data and considers factors ranging from the macro-economic outlook, the performance of competing asset classes, through to the individual components influencing farm earnings}

Values in an historic context

Over the past 100 years, the value of GB farmland has, on average, increased by 6% per annum (see 11 key events, below). Yet, when adjusted for inflation, real-term growth equates to just over 1% (compound annual growth). While the lion’s share of nominal growth has occurred over the past 15 years, real-term values indicate higher volatility.

Despite the sector-specific and macro-economic factors which influenced values, we also note that the fundamental shape of land ownership has shifted. At the turn of the 20th century, the bulk of farmland was held by a comparatively small number of owners, with more than 90% of land let. Over the period of our research, this has fallen to around 35%. Today, annual supply equates to around 0.5% of total GB farmland.

Following the Second World War, growth was largely driven by a combination of market intervention by the British Government and inflationary pressures. The uptick in protectionism and initiatives to encourage domestic output bolstered the earning potential from agriculture while also reducing downside price risk. This, in turn, prompted increased interest from both domestic and foreign investors, who entered the market in search of stable and relatively low-risk cash flow.

The UK’s entry into the European single market in the early 1970s, and, subsequently, the Common Agricultural Policy, further spurred demand-led growth, amplified by strength in commodity prices.

While the correlation between farm profitability and land values has become somewhat diluted with the emergence of non-farming lifestyle buyers, any reduction in farm subsidies and/or weakened trade position would likely exert downward pressure on the value of commercial holdings. Yet, we see no reason why farmland will not retain its status for long-term wealth preservation.

11 key events that have shaped farmland values: 1900 to 2017

The impacts of historical events on farmland values inform our forecasts for the next five years.

^{Source: Savills Research, Bank of England}

View our updated report on rural land values in the UK