Falling prices hit British farm land

The UK housing market has dominated headlines for almost a year now but there is another property sector looking set to dip too – farming.

This has become a surprisingly popular international investment choice. A third of farms sold in the United Kingdom since 2003 have been purchased by Danes (the result of their own farmland being even more expensive than that of the UK) and a growing number are being bought by Middle Eastern purchasers keen on equestrian land. Until now, agricultural land was the one piece of good real estate news in the UK this year but the farming sector, too, is about to hit problems for several reasons.

First, there will be no City bonuses for the far distant future in Britain.

This has a bearing on agricultural land because in southern England some 45 per cent of farms sold in recent years have gone to City bankers (often willing to pay heavily inflated prices) who sought the status and privacy of farm ownership. They would modernise the old farmhouse and live in it with their family, renting out their land to local agricultural workers to do the "real" farming. Farms well away from London were largely unaffected by this trend but those within a 90-minute commuter train radius of the capital were more in demand from this well-heeled niche buying group.

Secondly, there has been a sharp drop – possibly temporary, possibly longer term – in commodity prices.

Earlier this year it looked as if diminishing world cereal stocks, increased bio-fuel use and poor harvests in some countries were helping push up commodity prices for the long term. But the UK's own wet summer, politicians' re-thinking over the merits of bio-fuels and improving harvests elsewhere make the surge in prices in early 2008 appear a blip now.

Thirdly, fuel and fertiliser costs have of course increased.

Rural specialists at estate agency Knight Frank calculate that farm diesel has risen 61 per cent in the past year, with oil up 19 per cent and fertiliser more than doubling.

"Farmland prices rose 38 per cent in the 12 months to the end of June as soaring commodity prices brought farmers back into the market. That growth has now come to a halt" said Knight Frank farming supreme Andrew Shirley. He said typical farm houses have fallen in price by eight per cent so far and that farmland – currently at a strong £5,060 (Dh32,000) per acre on average – looks set to slip by five per cent in the near future.

So far there is no glut of farms on sale (the traditional sign of a distressed market about to see its prices go into freefall) but he warned: "The volume coming forward in the run up to Christmas could set the tone for 2009, especially if some fail to find a buyer." In addition, the banks still appear willing to lend to farmers in the United Kingdom so there has not been the scale of credit crunch seen in the industrial commercial and residential real estate sectors.

In addition, many farmers have diversified into organic produce, or hiring out their farmland for sports and community events, or running specialist shops to sell their own "artisan" produce and tapping into growing demand for locally-produced food. Some of course have also converted farm buildings into homes, and most did so before the recent slump in the housing market.

So for these reasons, some farmers will be insulated from the forthcoming farmland price fall. Nonetheless, the good times of the past two years now appear at an end.

One problem afflicting farmers – unlike, say, young first time home buyers – is their image.

Rural land agents admit that farm owners actually did well, financially, from the foot-and-mouth crisis that afflicted the UK five years ago. This was thanks to generous compensation schemes from the government that had been battered by TV images of animal carcasses burning on mass pyres in the countryside. In addition, large subsidies operated from the UK and European Union authorities create a perception that farmers are property owners who are much more insulated from the vagaries of the market than most others. The public now knows this, changing the image of the "poor" farmer to someone who may be better off than in the past.

Yet farm owners are amongst the most vocal of all property groups in lobbying governments for benefits ranging from greater tax breaks to more direct subsidies. It will be interesting to see if this new self-interested image will result in farm owners receiving less sympathy than other groups suffering in the downturn.

I suspect they may realise that these days farmers are not universally regarded as struggling land owners but as people who – appropriately – made hay when the sun shone.

- Graham Norwood is the Property Correspondent for The Observer