Slowdown. ...what slowdown?

The shortage of global cash and credit has already had a significant impact through commercial and residential sectors but so far, agriculture and in particular, farmland values, continue to thrive. Market commentators had expected land values to stabilise this year with an expectation of an increase in the number of acres coming on to the market.

Despite the fact that the volume of agricultural properties being offered by vendors and their agents has no doubt increased, the performance of the market so far this year has negated the principle that land values only increased the way that they did in recent years as a result of the shortage of supply stacked against heightened demand. However, the main point of concern in the current climate is whether the (new) banking sector will continue to lend the support that it has done in recent years in order to finance the proposed acquisitions by eager purchasers wishing to take advantage of new opportunities, or if such support will be cut back as within the domestic property sector.

There has also been speculation that stronger returns from milking and more realistic values for beef and sheep all contributed to the rush to buy farmland over the last year or so. Indeed, buyers still currently significantly outnumber sellers, and future demands on land from both bio fuels and food crops in order to feed a growing world population appear to continue to support land values. This sustainability has been demonstrated within the local market with prices still booming. For example, last month Beech Holme, a 62 acre farm at Cardewlees, sold for £920,000, some £80,000 over the guide price and equating to nearly £15,000 per acre. In addition to the global reasons for the sustainability and further increase of land values, the fact still remains that in some cases, land is simply worth what your neighbours are willing to pay for it.

Farmland values have weathered the storm previously and many commentators are confident that they will do so again. Certainly demand from lifestyle buyers of lesser farms will no doubt slow down as City bonuses are cut. However, the market for commercial farms should, as often has been the case historically, move in a different cycle to the mainstream residential and commercial property markets. Agricultural profitability is no doubt a key factor for determining value. With input costs falling back from having peaked and output costs sustaining at current levels, profitability margins are still there. Also, from an investment point of view, farms are an excellent tax mechanism which, combined with ongoing government and European support, still make agriculture a very tempting prospect for investors in comparison to the turbulence of other economic markets.

In recent years, the much publicised Irish interest in local farms has been attributed as a major factor in the substantial increase in values. However, the Irish investors are not as prolific as they were as their own property boom is coming to an end and the “rollover” dates thereby lapsing. On the other hand, the Irish interest is still there and there has been a new wave of UK investors who now see agriculture as a sound investment compared to other sectors. British farmers surged back into the land market towards the end of last year as high output prices provided much needed encouragement for farmers to buy land in order to expand production, thus rivalling Irish and Danish buyers. In addition, in view of the recent track record of agriculture and with generally buoyant land prices, agricultural land has been increasingly acquired by fund managers and city investors as the stock market has collapsed.

As for the credit crunch, lenders appear to still be willing to provide funding for agricultural transactions. The only difference in the current climate compared to before the banking crisis began is perhaps that all applications will face greater scrutiny as to whether investments and new projects are economically viable rather than the most significant part of the criteria being the loan to value ratio. Banks will always support a strong industry and with agriculture looking to be a safer bet than most, this support and the renewed optimism of late looks set to ensure that this backing will continue for those who can economically justify their proposals.

With the agricultural sector currently sustaining its level of activity, agricultural solicitors, land agents and bank managers are undertaking increasing numbers of transactions. Hopefully, this trend will continue as the conditions affecting farm profitability improve. Agri-businesses can now re-adjust and take advantages of the revitalised focus on agriculture and the diverse opportunities in the market place. If these circumstances continue, this should fuel a renewed interest in buying land, the main resource of the industry. Indeed, with greater opportunities, farmers are becoming increasingly ‘business savvy’ and risk-aware and are coming to see advisers sooner and expect to receive specialist advice rather than the more generic advice which was often on offer previously.

Taking everything into account, professionals in the agricultural sector are likely to be kept busy while clients weather the credit crunch. The current financial climate must have an effect on this sector at some point but the hope amongst many is that this effect will be that the rate of growth will be slower than has been seen over the last two years. Land values are well placed to escape the effects of both a bearish economic outlook and soaring variable costs. After all, when those in the general property sector are asked:  “is this a good time to buy or a good time to sell?”, the answer is becoming increasingly uncertain and for most, the question is impossible to answer. However, thankfully for agriculture, the answers to the same question can still be more positive and are likely to be so for the long term as the global re-focus on our industry continues.

Richard Miller is Head of Agriculture at Burnetts Solicitors. For further information on buying or selling agricultural land and property, call Richard on 01228 552222.  

Nov 08