It did not take long for Brexit to have an impact on UK farmland. In fact, months before a vote was cast in the referendum, the end of a more than a decade of record growth in land values was being blamed in uncertainty over leaving the EU.
There are two things to say here. First, a Brexit-related dip in agricultural land values was to be expected, given that the UK will also be leaving the CAP and with it, £4bn worth of subsidies. Markets never respond well to uncertainty, and no one yet knows what the government has up its sleeve (if anything) to replace CAP.
Nor, for that matter, do we have much idea of what international trade relations will look like.
So we are entering a period of volatility. But on the other hand, we should be cautious about viewing a dip in land values with too much doom and gloom. UK agricultural land had, after all, been on a good run – it had to end some time.
It is not as if we are seeing prices fall off the edge of a cliff. Instead, we are seeing a slowdown in activity, with Savills noting a significant decline in land sales in Q1 2017 (down 42 per cent year on year across the UK, and down 38 per cent on the long term average). That has actually made it difficult to get an accurate picture of true land values – with small sample sizes, Savills noted a wide variation in values across land uses in its first quarter report.[perfectpullquote align=”right” cite=”” link=”” color=”” class=”” size=””]We all know the farming sector is cash rich but often cash poor, so it pays to make the most of the assets you have.[/perfectpullquote]
This all points to caution rather than pending disaster. But be that as it may, the fact remains that land prices are lower than they were and all of the indications suggest the trend will be downward for the short term at least. Financial positions will need adjusting accordingly.
The obvious impact of lower value assets is on those looking to sell or lease land. The next few years may not the best time to cash in land assets, although if you do need to sell, lower prices may encourage buyers – and hopefully lead to prices creeping up again. If you lease land, well expect some tough negotiations when contracts are next up for renewal.
But another knock on effect of falling land values will be on capital finance. The conditions for borrowing have been good in recent years, with rising land values having a positive effect on asset finance, and plenty of cheap lending options available. Brexit, however, may have a double edged impact on this. General economic uncertainty is likely to reduce the availability of cheap finance, while more specifically any fall in agricultural land values associated with the end of CAP will weaken the position of borrowers in the rural economy.
We all know the farming sector is cash rich but often cash poor, so it pays to make the most of the assets you have. If you have any capital spending plans – equipment upgrades, construction work to carry out, and investment related to diversification – you would be advised to look at asset finance now as you may not be in such a good position to borrow in two or three years’ time.