The voice of reason would be cautious entering a market in the midst of ongoing uncertainty. With question marks still hanging over the future trade environment and agricultural policy reform ongoing, many landowners are still playing the waiting game. Farmland attracts investment for different reasons and whether it’s business, lifestyle or environmental, the value proposition is influenced by an increasing array of factors.

Our Farmland Forecast is delivered with greater confidence following the decisive election result on 12 December 2019, but the election is part of a bigger story that still needs to be resolved. A strong Conservative majority implies continuity in the farm business environment, even if a great deal of regulatory change faces the sector over the coming five years. However, our analysis shows many typical market drivers are having less impact in the current market, as influences to buy, sell or transfer land trend more towards local and personal circumstances.

So where is the market heading?

With regulatory uncertainty expected to ease over the short to medium term, landowners will be reassessing business options. The likely restructuring of agricultural payments is expected to put pressure on returns from farming and force the hand of those who are unable or unwilling to invest or restructure. This is expected to bring a variety of land types to market. The prevailing low cost of funds and a volatile global trade market may also attract a greater number of buyers, providing other investment objectives are met. The current weaker pound boosts this sentiment towards inward investment.

In a broader context, the UK population is set to rise 5% over the next decade, adding further demand to food, energy and water systems. Land is a finite resource in the UK and with numerous competing land uses under pressure to grow, we consider any major contraction in land values unlikely.

Our forecast identifies the major influences that, in combination, could create three possible market scenarios over the next five years; an appreciating market, a static market and a depreciating market. The outcome of trade deals is the major macro-economic factor to be determined, and more clarity over domestic policy is expected in the coming months. Overall, we predict that the broader economy is more likely to perform positively in the next five years, at least once the first Brexit hurdle is passed. Therefore, we expect the capital appreciation scenario will prevail for land, with local factors remaining the predominant influence on land values. In any event, we predict the upside potential of capital appreciation to be greater than any potential reduction in average values in a capital depreciation scenario, largely due to environmentally oriented demand for land underpinning the lower end of the market.

A trend that is likely to continue is the disconnect between productive capacity and farmland values. Many factors influence this dynamic, including diversification of farm incomes, expectation of planning gain, buyer sentiment and demand from non-farming buyers, all to varying degrees. The critical element that underpins this is the ability for the landowner to service the debt portion of their land investment.

As a vehicle for preserving and building wealth, farmland has demonstrated a long and successful history. Landowners may leverage returns from other sectors to continue servicing farmland investments, particularly those without farming scale. Agricultural policy reform will stress this serviceability dynamic, as budgets are focused away from income support and towards environmental investment. There remains concern that this policy shift implies that farms with high natural capital will attract lower levels of ongoing public support than poor ones, reducing income from public grants for those who arguably deserve it most. Opportunities to purchase should increase, as the regulatory shift brings forward more business strategy decisions. With new policy likely to favour environmental enhancement objectives, including forestry, opportunities to enhance capital value at the ‘bottom’ end of the market may surface.

We expect farmland to continue its longterm growth, low volatility and negative correlation to other more conventional assets. While values have fallen back over the past five years, the stability of capital has increased average values 20% (in real terms) over the past decade. The predictable market drivers are arguably softer in today’s market, but the fundamentals still remain strong; competing land uses and the ever-increasing demand for food, fibre and fuel.

NB: Our forecasts are subject to political and economic forces that are somewhat uncertain at the time of writing. Should any significant change in these factors occur, these forecasts may be revised to consider the result.

_{Read the articles within Spotlight: The Farmland Market below.}