Rents and land prices – latest developments

Today, the Health and Harmony discussion paper published in 2018 and the impact assessment which followed it all seem a long time ago. At that time, the concept of phasing out direct subsidy payments was floated, and it was anticipated that as a result some 41% of farms would be operating at a loss. However, the impact assessment offered a crumb of comfort by suggesting that the removal of direct support would lead to a reduction in farm rents  because “As direct payments have led to an increase in rents, their withdrawal will see the reversal of this impact”. The document went on to provide illustrations showing what might happen to rents and suggesting a fall of between 50-75%.

Some commentators were sceptical of this assertion, suggesting that support payments are only one of the factors driving rental movements (which are in any case only react sluggishly to changing circumstances). Other factors will come into play when rent is reviewed including general profitability, competitive pressures in the market, the domestic rent on the farmhouse and simple inertia on the part of the tenant.

A recent report from DEFRA has underlined how right those sceptics were. In a series of extracts taken from the 2021/22 Farm Business survey and covering the year up to February 2022, rents have continued the pattern of the last four years and remain virtually unchanged over the period. Whilst there are both regional and sector variations (with arable and milk rents generally being significantly higher than grazing rents and rents in the Midlands and East Anglia exceeding rents in the North and West), both the Agricultural Holdings Act (AHA) and Farm Business Tenancy (FBT) rents fell by only 4-6%, returning to levels last seen in 2019. AHA rents averaged out at about £177/Ha and FBT rents £225/Ha.

In addition to the lack of linkage between subsidy and rental levels, recent evidence from the freehold market has also pointed to a renewed interest in farmland.  A number of reports and forecasts from both local and national land agents have indicated a strong market over 2022 and prospects for further growth in the forthcoming year. There is some unanimity in the view that most sales of bare arable land in recent months are taking place at prices in excess of £9,000 per acre with farms regularly selling at levels well above guide prices. Some anecdotal evidence suggests that the £12,000 level is now being tested.

The reasons behind this resurgence of prices beyond previous highs are, as usual, multiple. Better commodity prices and profitability will be a factor, but rising inflation, global insecurity, and an excess of demand over supply will all be important in a very restricted market. The advantages for both capital gains tax and inheritance tax, and the search for “green” investments of course, will also be relevant for some buyers

Further analyses of the land market are available from the websites of the main agricultural land agents, and the rental survey can be found on https://www.gov.uk/government/....

According to MHA partner Joe Spencer

It is clear that the forecast slump in both rents and land prices has failed to materialise. Whilst this is comforting for the freeholder, tenants should not rely on falling rents to trim their costs over the next few years. Survival in an era of falling subsidies will depend far more on rising market prices, greater efficiency and reducing overheads – none of which can be predicted with any confidence.