The average price of English farmland hit a new record price of £8,306 an acre in the third quarter of the year, but values rose by just 0.5%, the latest index shows.
Year on year growth the sector has seen price growth of 8% but this has slowed after a period of exceptional growth, according to the data from real estate firm Knight Frank.
The report shows that over five years growth has averaged 43% and 198% over the last decade so a slowdown was to be expected, particularly as availability has started to increase and agricultural commodity markets remain weak.
The big question now is whether prices will actually start to fall. ‘Our view is that in terms of supply and demand the farmland market has now reached a state of equilibrium,’ said Andrew Shirley, head of rural research at Knight Frank.
‘This means that while prices may rise or fall slightly on a quarter by quarter basis over the next year or two, we are unlikely to see the price growth of the past 10 years significantly eroded, unless supply increases substantially or demand drops off drastically,’ he added.
The report forecasts a period of potential price stability and points out that over the past five years farmland has outperformed many other asset classes, including gold which is down 10%, and it has even kept pace with London’s luxury residential market which has seen growth of 43% over the same period.
‘This strong performance brought new buyers into the market, including a wide range of investors from both the UK and abroad. However, potential purchasers, particularly farmers, have gradually become more considered in their approach to acquisitions since the beginning of 2015,’ the report says.
‘This is partly due to a prolonged period of low commodity prices, but also reflects the perception that the market was reaching a peak,’ it adds.
The report explains that the availability of farmland has also increased. So far this year around 20% more land has been advertised publicly compared with 2014. ‘As a result, what we are experiencing now is a market that is much more in equilibrium in terms of the balance between supply and demand. Prices are unlikely to fall or rise to any great extent over the next few years because buyer demand remains strong, albeit cautious,’ said Shirley.
‘Supply, while up on the year, is also low in historic terms and the market is unlikely to be saturated,’ he commented, adding that a sudden upwards shift in interest rates could put some pressure on more farmers to sell up, but the indications from the Bank of England seem to point to a gradual rising of rates starting in the second half of 2016.
Price variability on a local, as well as a regional level, is also likely to grow as a dominant theme of the market, he suggests. ‘Extremely high prices will continue to be paid for large blocks of top quality land where a number of buyers are in the running. Where interest is more limited, vendors will need to temper their expectations,’ he pointed out.
He added that while neither seems likely at present, the ongoing commodity price slump may dent farmer and investor confidence more seriously if it continues for too much longer and a vote to leave the European Union in the upcoming referendum could also have interesting consequences for agriculture.
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Source: Property News Spain