A decade of growth for agricultural land

The agricultural sector has undergone a period of significant structural change over the past decade. The UK's departure from the European Union and changing support payment structures have put farmers into a state of flux. Coupled with more recent rocketing inflation and the increasing cost of finance, the sector has felt immense pressure and uncertainty.

However, longer-term trends show that farmland has the potential to protect investors against a loss of value in real terms (adjusted for inflation). While there are many short-term influences that have caused fluctuations in the market over the past 10 years, the overall trend is largely positive. 

Farmland vs. inflation

Carter Jonas research shows that average arable land values could exceed their previous peak in Q2 2016 by the end of the 2023, while average pasture land values are at a record high. In the 10 years to Q2 2023, average arable land values in England and Wales have increased by 33.2%, and average pasture land values have increased by 43.6%. When annualised over the 10-year period, this equates to 2.9% and 3.7% growth respectively. 

Encouragingly, and despite recent high levels of general inflation, arable land has held its value in real terms over the last 10 years. Meanwhile, pasture land values have outpaced inflation by 7.8% (see figure 2).

Lifestyle land, which is typically sought after by high-net-worth individuals for its associated residential offering, has seen values rise at an even greater rate. Over the last 10 years, values have increased overall by a sizeable 58.2%, or 4.7% when annualised. When adjusted for inflation, lifestyle land has grown by 18.8%, or 1.7% annualised, over the same period, far outstripping inflation and demonstrating the strength of premium holdings.

Inflation started to rise sharply in Q3 2021, and this has led to a decline in the real value of land in the short term. Nonetheless, inflation is now decelerating rapidly and is forecast to continue to do so (5.0% in Q4 2023 and 2.7% by Q4 2024, according to July HM Treasury Consensus Forecasts). In the face of tight market supply and sustained high demand from an increasing array of buyers, we can expect land values to continue to rise and, subsequently, the real value of agricultural land to rebound.

Farmland outperforms equities and other property assets

Agricultural land has outperformed other key assets over the past 10 years, many of which have experienced greater volatility. Although the equities market, using the FTSE All Share Index, has outpaced growth in farmland values in the short-term, growth has been somewhat slower in the longer-term. In the 10 years to Q2 2023, the index has increased by 24.5% (2.2% annualised), but has fallen by 6.5% when adjusted for inflation. 

Both commercial and residential property markets have been undergoing a price correction in recent months. MSCI reports that capital values for all (mainly commercial) property (MSCI Quarterly Index) have increased by a modest 14.3% since Q2 2013 (1.3% annualised) but declined by 14.2% in real terms. Following an upsurge in values from the end of 2020 until Q2 2022, the index has plummeted by 19.0% (-25.3% after inflation) from Q2 2022 to Q2 2023.

Meanwhile, house prices increased by 34.6% overall in the 10 years to Q1 2023, reflecting an annualised growth rate of 3.0% (ONS). When accounting for the impact of inflation, prices have only risen by 2.9%. Yet, prices started to decline in Q4 2022 and are forecast to fall further (-5.1% by the end of 2023, and -3.1% in 2024, according to HM Treasury Consensus Forecasts).

Figure 3: Annualised Change in Commodity and Asset Prices from Q2 2013 to Q2 2023 (Capital Values)

Demand outpaces supply

In a number of ways, the farmland market has become more resilient over the past decade. In particular, farming businesses have increasingly diversified their operations beyond agricultural uses. According to a survey by Defra, farm businesses with diversified activity has increased by 21.4% in the 10 years to 2022, helping to provide income stability and generate capital growth. The greatest increases were for solar energy, which accounts for 22.5% of respondents (up from 1.4%). This is followed by other sources of renewable energy (10.8% of respondents) and then tourist accommodation and catering (7.1% of respondents). There was also a notable increase in those leasing buildings for non-farming use (to 46.9% of respondents).

Research from Carter Jonas shows that diversified estates have likely seen significant growth over the last 10 years. The ‘Model Estate’, a notional mixed rural estate, has increased in value by a healthy 64.2%, or 5.1% when annualised over this period. In real terms, this represents an impressive 23.3% overall increase. Although the rate of growth will vary depending on the specific asset mix of the estate, they typically provide secure and consistent assets.

Furthermore, there has been an increasing array of buyers entering the agricultural land market, which is helping to keep demand high and put upward pressure on values. In 2014, Carter Jonas reported that ‘demand has become increasingly localised across the farmland market’. Although neighbouring farmers continue to be an important source of demand, the market has shifted from its position in 2014. Levels of supply are below long-term trends, with new supply in Q2 2023 down 29.2% from the 10-year average (data from Farmers Weekly). This is forcing buyers with ‘waiting cash’ and rollover funds to look further afield.

We are also seeing a surge in activity from environmental buyers. As we move closer to the autumn deadline for mandatory Biodiversity Net Gain, we can expect investors to inject more ‘green money’ into the market to offset the effects of development. This will further increase the demand for land, particularly for secondary and tertiary land which can be used to produce significant environmental gains.

It cannot be ignored that the effects of inflation have bought significant challenges to the industry, notably an imbalance in spiralling farming input costs and output prices, the cost of labour and the increasing cost of finance.  Despite this, and in stark contrast to other property assets, average farmland values have continued to strengthen.