There is at least one piece of good real estate news in the UK, and it is its farmland. This has long held an iconic and affectionate status – globally as well as nationally – but it is now a serious asset class outstripping many of its rival investments.
The average price of British farmland rose by 21 per cent in 2008 to £4,200 [Dh22,961] per acre, despite signs of a late-year slowdown. This is remarkable compared with, say, mainstream housing prices that fell 15 per cent in the same period. It takes the five-year increase for farmland to 135 per cent, well ahead of the commercial property market too.
Returns from agricultural-related uses of land, including farmland and forestry, have outpaced those from other property markets as well as gilts and equities in recent years. It is not surprising, therefore, that since the credit crunch began most banks and building societies have taken a less restrictive approach to borrowers seeking to invest in farms than those in other property sectors, because of its track record.
Relatively straightforward access to funds means more than just farmers are interested in farmland. In 2008, farmers accounted only for just 53 per cent of UK purchases. Of the rest, 23 per cent were 'lifestyle' buyers wanting a country home to live in while 13 per cent expanded holdings with additional fields or paddocks. The remaining 11 per cent went to corporate and institutional investors choosing farmland above other assets.
With lifestyle buyers likely to be thin on the ground in 2009 – many of these have historically been recipients of handsome City bonuses, so they won't be seen this year – there is likely to be more opportunity for new investors.
Buyers from overseas – mainly Europe but also including America and Australia – have had a presence in the UK farm market every year except for 2001, when Foot and Mouth Disease blighted the industry. But whereas until 2003 overseas buyers were involved in only one per cent to six per cent of British farm transactions, the period 2003 to 2008 has seen that proportion rise significantly to a new norm where 10 per cent to 20 per cent of farms over 50 acres go to foreign purchasers.
So why the surge in international interest in British farmland now?
Partly it is, perhaps surprisingly, because land prices are not as high in Britain as elsewhere. Another reason is that Britain does not have the scale of bureaucracy seen elsewhere – believe it or not – and also because the exchange rate movements of the past year have created real agricultural bargains for foreign buyers.
Farmers in Denmark and Ireland, both north and south of the border, face high local land prices. For the Danes there are also extensive restrictions over the volume and location of additional land they can buy nearby. Therefore farmers from both of those countries look enviably at Britain's relatively farm-friendly climate and regulatory regime, and have arrived with us in increasing numbers.
Scotland has been a particular target for Irish purchasers. Ease of access and the relatively similar cultures between the two countries add to the appeal, but it is the cost advantage of British farmland that is perhaps the most persuasive argument. Buyers from throughout the rest of the eurozone in particular are also attracted by the increasingly competitive price of British land as sterling slides from its highs against the euro.
In early 2008 when the euro was worth 70p, a 500-acre farm at £5,000 per acre would have cost a purchaser £3.6 million; now, with the euro worth about 90p, that same farm would cost only £2.775m. Sterling's slide means British farmland prices, once at or near the very top of the European league table, are now roughly mid-range. British farmland today is less expensive than farmland in Italy, Belgium, much of Germany, the Netherlands and Spain, as well as Denmark and Ireland.
There will always be demand for land from those who want to buy good farms or who want privacy around their existing farmhouse. If UK government housing targets are confirmed when the recession ends, so it is expected that some agricultural land may be used for new homes too – giving a sharp increase in value, should it happen. There are strong alternative investment prospects, too, thanks to the likely expansion of the use of bio-fuel; industry experts predict this will create a constant demand for crops, either for consumers to eat or as components for bio-fuel. This gives a level of certainty for investors that has occasionally been lacking in farm production.
Like every other asset, farmland faces challenges and worries in times of recession. But history suggests it is well-placed to cushion current and future investors from the deepest troughs or most unsustainable peaks. As the old cliché goes, when it comes to land, they aren't making any more of it.
- The writer is a property correspondent with The Observer