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Farmland values are predicted to rise by up to a further 12% in 2011

After an increase of 10% in farmland values in the first three quarters of 2010, Savills are forecasting up to a further 12% rise in value in 2011.

(Source: Savills, 18 Oct 2010)

The market for farmland across Great Britain is diverse with the results of our latest surveys showing an east-west divide. So far this year good quality, predominantly arable commercial farms have been most in demand.

Farmland values continued to rise during the third quarter of this year with, according to the results of our Farmland Value Survey, the strongest growth concentrated down the eastern side of England, where farmers and investors have competed for good quality units.

Since the Cereals event in June, commodity and fertiliser prices have significantly increased. The Farmers Weekly/ Savills Virtual Arable Farm Model shows that the recent hike in wheat prices, despite a nitrogen fertiliser price increase to £250 per tonne, has the potential to increase the profit (before Single Farm Payment, rent and finance) on a 2,000 acre combinable cropping farm by over 125% equating to an additional £175,000 of cash.

Taking into account projected capital growth for good arable land of well in excess of 10% and a potential net income return of at least 3.5%, providing a total return of around 15%, farmland is a very attractive investment.

Farmland Values

In England, the average value of Grade 3 arable land increased by 3.6% during the third quarter of 2010 giving a total growth of 10.4% during the first three quarters of 2010.

Our research shows there is a clear pattern of stronger growth for farmland down the eastern side of England than anywhere else, reflecting the strength of the commercial arable farm market.

The North of England, the East Midlands and the East of England all recorded average growth for all land types of around 13% during the first three quarters of this year. Average growth for all land types was more muted down the western side and in the southern regions of England. While the West Midlands, the South West and South East of England recorded growth of 4.5%, 6.2% and 3.4% respectively.

Farmland Supply 2010

In England supply fell by -1% to just below 100,000 acres. This fall was not across the board, it was the eastern regions of the East Midlands, the East of England and the South East where supply reduced.

In spite of this reduction, activity across England during 2010 has been concentrated across the North and down the eastern regions, accounting for 55% of all English supply, which is below 2009 levels.

Farmland Demand

Demand remains strong with a 56% increase in new buyers registering on our database during the first three quarters of 2010 compared with the same period of 2009. A flurry of activity was recorded in July when a quarter of this year’s new applicants registered suggesting a renewed interest in farmland as a safe investment after the Coalition Government’s austerity budget in June.

Our research shows that the proportion of buyers with funds between £2 million and £10 million has increased this year compared with the previous three years. Three quarters of all our applicants have funds in this range to spend on farms and estates.

Farmland Outlook

The baseline forecasts generated by our Farmland Value Model at the beginning of the year have proved to be a good indication of the market. Average values for all types of farmland across England increased 10% during the first three quarters of this year compared with our forecast for the year of around 7%.

2011 will be an interesting year. Whilst demand is not expected to falter it will remain price sensitive especially where future income generating opportunities are limited. Our main baseline forecast for the short to medium term remains unchanged at around 6% per annum, although, we expect growth in values to be diverse and largely related to quality.

We believe a fall in values is highly unlikely given the fundamentals of growing populations, food security, increased wealth, renewable energy and land being a finite resource.

Our 2011 forecasts are set out below:

Lower range: Growth is likely to be weak and to be well below 5%. This scenario could play out where the market is dominated by grassland farms, which have no real residential or amenity appeal or where small blocks of land are not in prime locations. The former may reflect a reasonable proportion of the market in Scotland.

Average: Our baseline forecast which we believe to be a realistic base forecast for average values across Great Britain, stands at 6%.

Upper range: Strong demand for good quality commercial farms, predominantly arable, may give value growth in excess of 12%. This likelihood strengthens if the current uplift in commodity prices remains robust. We expect the value of top quality estates to also show growth in this range.

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