A Generation of Growth in Agricultural Land Values

Introduction

In periods of inflation, real estate, particularly agricultural land, is considered to be one of safest stores of real value compared to other investment types.

The rate of inflation has rocketed over the last year, triggered predominantly by shocks to the energy market and global supply shortages. Measured using the Consumer Prices Index (CPI), inflation reached a 40-year high, rising 10.1% in the 12 months to July 2022 and dropping only slightly since. This has impacted various aspects of the UK economy, such as transport costs, household energy bills and food production costs.

Sophie Davidson Senior Research Analyst, Carter Jonas

Carter Jonas has explored the performance of land values in England and Wales against inflation to determine the historical e ectiveness of farmland as a means to protect wealth.

Long-Term Growth in Farmland Capital Values

Whilst farmland is sometimes thought of by investors as an ‘inflation hedge’, periods of strong land value growth and high inflation do not directly correlate, and many other factors are at play that influence values in the short-term. Nonetheless, land values have historically outperformed inflation over the longterm, and so have the potential to protect investors against a loss of value in real terms (adjusted for inflation).

Although average land values in England and Wales have taken a slight dip over the last five years, the longer-term trend has been strong. Over a 30-year period, land values have grown in nominal terms by a robust 369%, or 5.3% when annualised over that period. Annualised growth over 50 years is even more impressive at 6.2%.

When CPI inflation is accounted for, land values have seen significant growth in real terms (figure 1), at an annualised rate of 3.1% from 1991 to 2021 (a total of 152.3%), demonstrating a substantial increase for those who have invested over a generation. Against rising inflation, pragmatic investors have been able to use farmland in order to diversify their portfolio and protect wealth, safe in the knowledge that the long-term performance o ers a strong value uplift plus a rental income stream.

Undoubtedly, farmland values have experienced periods of growth and decline at varying rates, and the market has been through notable periods of change. For instance, The Financial Times cites legal changes to agricultural tenancies in the 1990s as a reason for the increase in values in that period, with new farm business tenancies (FBTs) making land more attractive to investors.

In times of economy volatility, land values have proven resilient. Other than a slight dip in 2009, rising inflation and a steep fall in economic growth during the Global Financial Crisis drove demand for farmland by investors looking for relative safe haven assets. Even when the housing market crashed, the farmland market held strong.

Prices fell between 2016 and 2020, with Brexit and subsidy uncertainties creating more hesitancy amongst buyers. Considering the tough market conditions, values held up remarkably well and only su ered modest falls. Since then, there has been more confidence in the market and increased demand coming from new types of buyers. It is evident that real farmland values have trended upwards over a longer timeframe and weathered the variability in inflation rates. The resilience and ability to rebound quickly is promising for land values in the face of the current high inflation rates and low economic growth.

Alternative Investments

Exploring the change in farmland values compared to other common, tangible assets helps us to understand how di erent investment types perform. Over a 30-year period, equities (using the FTSE All Share index), gold, residential property and average land values have all grown at a faster rate than CPI Inflation. MSCI All Property capital growth, which is an accumulation of retail, o ce, industrial and hotel indices and 10-year UK Government Bonds were the only asset types researched that had grown at a slower rate than inflation.

Agricultural land, when held in whole or in part as an investment, can yield steady rental income on an array of tenancies, such as leases for agricultural purposes, energy schemes or sporting. Particularly, agricultural landowners are increasingly exploring means to diversify their income by introducing complementary income streams. Even when income-producing elements of farmland are ignored, it is evident that the increase in capital value over time significantly outruns that of inflation.

On a shorter-term basis, farmland values have not performed as strongly, with the 10-year annualised growth at 0.5%. In contrast, the 10-year annualised growth of MSCI All Property was 2.6% in that period, and the FTSE All Share saw a 3.94% annualised increase. In order to generate wealth preservation benefits, farmland does experience some level of volatility but, when held over a longer period, o ers greater capital growth than many other investment types.

The Outlook for Land Values

Over the last 30 years, farmland values have outperformed inflation and grown at a rate that exceeds many other common investments, delivering wealth preservation benefits.

In the short-term we are seeing a huge increase in input costs which is outstripping what farms can earn from their land. But, despite profitability concerns, the outlook for land values is positive. With limited supply of land coming to the market, growing demand from alternative investors and new income stream opportunities, we believe that land prices will, at the least, hold firm with potential to rise in the shortto medium- term. In the longer-term, it will continue its positive trajectory.

Encouragingly, new opportunities and income streams for landowners, both farming and non-farming, are helping to create optimism and drive prices. In particular, a new era of structural change has sparked the upsurge of environmental buyers who bring ‘green money’ to the market for carbon o setting and biodiversity purposes. Equally, emerging natural capital-based income streams will serve to benefit the market and create demand for land and the environmental solutions it can provide. History has shown that land is a safe store of value for investors in uncertain times. The costs of fixed rate borrowing have increased significantly in the last year and, whilst the tax status of agricultural land is constantly in question, demand still exists from investors, farmers and lifestyle buyers. They are all still likely to find themselves competing for farms and estate properties.

Over time, the alternative land use markets are likely to flourish. Yet, with food security moving higher up the agenda, the demand for productive arable and pasture land is also unlikely to diminish. As such, land will continue to be an attractive, long-term investment.