Farmland values are forecast to increase in the short term as the key drivers of supply and demand come into play, but rates of growth vary depending upon land type, geography and quality, according to new analysis.
From 2022 to 2026, Savills believes poorer quality livestock land value growth (6% per annum) will outperform prime arable land (2.5%) excluding inflation against a backdrop of continued constrained supply.
The forecasts are included in the latest report from the agency's rural research, Spotlight: The Farmland Market, published this week.
The supply of publicly marketed farmland during 2021 reflects a slower than excepted 'bounce back' in the number of acres available from the low volumes of 2019 and 2020.
This suggests that supply levels are unlikely to recover to those seen historically in the short to medium term, Savills explains.
It was widely presumed the government's lump sum exit scheme, designed to assist farmers in England with retirement by capitalising their subsidy payments, would lead to more supply. However, the proposed scheme was met with little enthusiasm.
Emily Norton, head of Savills rural research said: “Many in the industry benefited from strong commodity prices this year, which cushioned farm profitability from the effects of the first fall in subsidy support.
"Whether this just delays the inevitable remains to be seen however, the ongoing rise in input costs will put a dent in farm profitability this year.
“We expect some under diversified businesses may begin to feel the effects of the transition away from the direct subsidy environment.
"This may result in an increase in supply, as some choose to leave the sector, but not to an extent to impact on values.”
The forecast for GB farmland values build on the performance of this year’s market and reflect that the risk posed by uncertain trade and agricultural transition plans 13 months ago has now reduced.
In the 12 months to December 2021, average values for all land types rose by 6.2% as a restricted supply coupled with a continued interest from the traditional sources of farmland buyers along with the newer ESG motivated buyer supported price growth.
Alex Lawson, head of Savills rural agency said: "From a macroeconomic perspective, farmland historically has acted as a good hedge against inflation and in the continuing low interest environment it has increased appeal as an asset class in a mixed portfolio.
"More recently its new value as a tangible store of authentic carbon and important environmental credentials has only added to its investor appeal, and we see no reason for this to change.”
This reinvigorated interest in farmland coupled with a lack of supply has led to a revision of Savills' forecasts.
It anticipates that real values for poorer quality grassland will climb, on average, 6% per annum in the short term (2022 – 2026) as the ability for pasture land to provide valuable carbon and water management services is increasing its demand over other land types.
Also, woodland planting projects for carbon offsets are targeting grassland, seeking sites which do not have any limiting factors for tree planting.
For prime arable land, commodity prices in the short term look set to hold and an increasing interest in energy crops and renewables may continue to support profit from production and consolidation of the most productive businesses will drive competition for the best land.
In its research, Savills says it expects this to support growth, estimated at 2.5% annually excluding inflation, in the short term.
Mr Lawson said: “It’s also clear demand for farms with a strong amenity or lifestyle appeal is expected to remain as a result of the pandemic's long lasting impact on working practices.”
