Farmers reluctant to plough cash into land
The Financial Times carried a report on 31 January, stating that Strutt & Parker reported that in 2018, investors and lifestyle buyers accounted for more purchases than farmers in the UK. This is a first, since Strutt & Parker commenced their annual survey and report in 1996. We all have the Brexit effect on our minds, but what is indicated by this change?
Perhaps it heralds an agricultural revolution, not only in who owns the UK’s rural property, but also how it is utilised and for what purpose?
First principles: land ownership is the basic building block of capitalism and security of a market economy. If you own land, it unlocks a multitude of opportunities. In a rural context, you can farm it, let it, contract farm it, use it as security for a loan, build houses on it, let it for renewable energy. I am sure that you, the collective reader, have lots more examples.
Brexit heralds a legal revolution, the like of which only comes around every two generations. What we are experiencing now, is like the aftermath of World War Two, when a slightly surprised to find itself in power Labour Government brought in the Agriculture Act 1947. Its aim was to maintain high levels of agricultural production, by a guaranteed prices system for produce, negotiated with the Ministry of Agriculture and the NFU. Any shortfalls between market prices and farmers’ income requirements, were subsidised by the Government.
Seventy-two years later and (at the time of typing this anyway), Brexit heralds the end of that system. The current Agriculture Bill is a revolution. It is a basic structure for how DEFRA sees the agriculture industry operating in the UK. Well, apart from Scotland, but the Act says that they are welcome to join this structure, if they want. That involves another legal topic, which we will leave parked in terms of this article!
Brexit has an impact on who buys land. My late maternal Grandmother was from a farming family near Walesby in Nottinghamshire. She had a saying: “It’s not what you can do with, it’s what you can do without”. In terms of Brexit, if you don’t know your business future, there’s no point buying (or leasing) land, if you don’t have a commercial need for it, nor think it is an asset that will produce profit.
Until the Brexit debacle is sorted, there will not be confidence by many agricultural buyers. By the Autumn we should have resolution on the withdrawal agreement, combined with the new statutory framework to the agriculture industry with the new Agriculture Act. There are diverse views on the Agriculture Bill. I take an opportunistic view: let’s take the structure and work with DEFRA and other organisations to create the agriculture industry that we want.
Confidence will return in land purchases, as knowledge and confidence of our new structure is built. Brexit heralds change and for some farmers, they will elect for a change that will involve exiting the industry. There will be changes to how agricultural businesses are structured and operate. This will affect land use, availability and pricing. So, the confident lifestyle and investor purchasers will have challengers from farmers.
Sales statistics are many. The guides produced by Strutt & Parker and other land agents are good guides. The RICS and Royal Agricultural University produces half yearly rural land market reports. Their report for the first six months of 2018 stated that there was a cautious outlook, with both residential and commercial elements decreasing. It would be interesting to know whether both the individual reports from firms of agents and the RICS rural survey, includes the farms and rural properties that never reach the open market before sale. Likewise, statistics from the District Valuers Office and Land Registry would be interesting. To my knowledge, neither produce such specific surveys.
A key litmus test of the value and trust in land is that of the banks’ collective willingness to lend against it. I would argue that lending criteria and rates are varied: what the AMC and private banks in London offer are different. It’s a morose point, but equally if the removal of subsidies strikes at the ability of farms to trade, there could be a number of farms sold at the behest of banks. This affects supply and could bring much land to the market in the next two to six years.
Of course, such land may be brought to market, but the question here is who will buy it? The baby boomers (the post-war generation, i.e. 65 years old plus) are having a massive effect on the country’s entire property market. Did you know that one in five baby boomers are millionaires (so reported the Financial Times on January 9)? They have accrued wealth post 1980s recession, through property prices increasing, their own inheritances and final salary pension schemes.
Particularly in the south east and south west of England where wealth permeates out of London, there is an immense amount of buying power with the baby boomers. There is accrued wealth/savings and some pension lump sums only now being unlocked and utilised. Link this with Agricultural Property Relief under Inheritance tax, and it is clear that a lot of land has been purchased by the wealthiest baby boomers for lifestyle and tax planning.
This wave of land and tax planning will cease. Conversely, those aged between 25 and 54 have seem their wealth increase at one-tenth of the increase enjoyed by the baby boomers (source: FT). So, as the baby boomers’ purchases settle in a post-Brexit environment, property prices will fall but settle. I do assess that there will be another surge in 15-25 years, as the baby boomers’ wealth is passed onto their children.
In some places, there is lasting damage to the landscape, as once rural areas of the country such as Surrey, have in part been split up into patchworks of expensive houses with small areas of rural land, used for horses/let out for grazing.
Brexit is the key to property values of agricultural land in the future. The Brexit bill provides a structure to the future of Agriculture. As subsidies decline, as farmers have to make hard commercial decisions about the future of their businesses, different ways of structuring businesses may come about. Whereas traditionally farmers owned or rented land, other agri-business types have developed, particularly share farming and limited liability partnerships.
Further land use mechanisms may fall out of the (future) Agriculture Act 2019, to enable businesses to have joint ventures in different fashions. This will further affect land being entered onto the market. Flexible and innovative business sharing between those who have the passion and drive to be in business together is the future, where previously such people may have been landlord and tenant.
A new generation with innovation will drive a change in land tenure and use (assisted by rural specialist solicitors & surveyors). This change in attitude of land ownership and use, will have other effects. It is slightly analogous, but the flagship right to buy house purchase policy of the 1980s, created a huge social housing issue. What we do now in terms of land policy, tends to have ramifications a generation later.
There are other factors: we are faced with a housing crisis due to massive political under-emphasis and investment and national and local level. Many landowners are approached with the possibilities of housing development promotion agreements.
Landowners are faced with an array of potential purchasers, when they may not even wish to sell. Housebuilders, lifestyle purchasers, other farmers, tax planning purchasers. Different purchase reasons & different purchasers have different price effects. For example, a housebuilder will offer a different deal to the marriage value of the farmer next door.
In summary, the Brexit pause factor and the influx of baby boomer wealth is having an effect on the type of successful purchaser of land. The changes to the City of London post Brexit (less wealth, less financial services workers based there) and the south east rural residential marketplace, linked with the 2019 agricultural revolution, may bring a balance back to farmers as overall land purchasers. Yet, this revolution will prompt change in land ownership, types of occupation and use. This may have a further effect, but will be part of a thriving rural economy.
Jonathan Thompson, Senior Associate
This article was published in Farmers Guardian and can be accessed here.