Why has the rise arable land cost in Scotland outstripped pasture since 2000. Rob McCulloch, from Strutt & Parker’s Edinburgh office, finds out…
The average price of Scottish arable land has risen from under £2,000 per acre in 2000 to around £7,000 per acre, according to Strutt & Parker figures. At the same time, average pasture land values have only risen from around £1,000 to circa £2,500.
Recent figures from Strutt & Parker show that prime arable and mixed cropping and livestock farms over 300 acres are still buoyant, with prices remaining reasonably firm. Just over 100 commercial farms in excess of 100 acres – a total of 36,000 acres - came to the market in 2016 with an average asking price of £1.45 million.
In the past year, meanwhile, average pasture values have dropped by around 9%. This has been caused by the lower profitability of livestock farms, together with an over-supply.
But why is there such a demand for arable land?
Lack of supply
A very small proportion of Scotland’s total land mass is classified as arable – circa 10% based on Scottish Government figures. In addition, and according to the James Hutton Institute, the area of arable land in Scotland has declined by between 12% and 15% since 1980.
Only a small proportion of the current arable area in Scotland (and a minute area in relation to the country’s total land mass) is classed as grades 1 & 2 – land which is capable of growing a wide range of crops.
Also, owners of farms which are made up of prime arable land have a tendency to retain them for a long period of time (there is little reason to sell the farm as it cannot be bettered), resulting in sales of these types of farms being few and far between. Therefore, when they do come up for sale, there is strong demand, resulting in values of prime arable land remaining firm throughout the country.
Bigger, more profitable areas
During 2016 there was a clear demand for larger farms of all types, with 70% of those over 300 acres sold in comparison to 43% of those under 300 acres. The greatest success lay in 300- to 400-acre farms with 84% finding buyers – indicating that this size bracket offers appropriate balance of viability and affordability.
Despite only 10% of the country’s land mass being recognised as arable, this sector accounts for about 30% of the total output from farming in Scotland, based on the Scottish Government’s Total Income From Farming (TIFF) figures. In addition to prime arable land having the ability to be more profitable than pasture land, it is also more flexible, giving those farming it the opportunity to spread risk by undertaking a variety of different enterprises.
The right price
Pricing the land offer for sale in 2016 has also been important. The principal reason that many farms remained unsold (circa 35% of the market in 2016 was carried over in to 2017) was an over-inflated asking price set at the start of the sale process.
An emerging trend in 2016 was the growing emphasis that buyers put on the combination of the farm’s attributes, where previously, they tended to just focus on the quality of its land. Factors such as the age and condition of fixed equipment, properties situated within the boundaries but excluded from the sale, access, the exclusion of Basic Payment Entitlements, and the standard of the farmhouse, all played a part in a buyer’s final bid price. This means that more detailed consideration and expertise is required than ever, when it comes to valuing a farm.
In terms of price, the Scottish market is dominated by a number of lower priced farms in the £750,000 to £1,500,000 range. However, the more expensive farms (£1.5m and above) have a higher success rate of finding a buyer thanks to their increased profitability and a more restricted supply.
With so little prime arable land to choose from, buyers in this sector tend to be less price sensitive. Conversely, buyers of grass farms are unlikely to even get to the first stage – arranging a viewing – if the asking price is over-inflated.
Diverse range of buyers
Land has traditionally been cheaper in Scotland than in its neighbouring countries, which has attracted interest from out with the country. This continues to be the case. However, average arable values in Scotland have risen at a faster rate than its neighbouring countries and the gap has become less pronounced, resulting in demand from England, Wales and Ireland softening. The same does not apply to Scottish pasture, where the average value is still sufficiently lower than its neighbours to ensure that the viable, well-equipped stock farms remain appealing to non-Scottish buyers.
While all types of farmland are attractive to investors due to the tax benefits of farm ownership, this buyer-type tends to focus on allocating funds to arable rather than pasture land. As the figures show, arable land has, over many years, shown a very robust history in relation to its price trend and is seen as a safe and secure asset. In addition, contract farming an arable unit is much more simplistic than a livestock farm.
In 2016, Strutt & Parker figures show that while retirement was behind the majority of farm sales, the most active buyers were farmers (from Scotland and the rest of the UK) wishing to expand their business, with an emphasis on better quality land in a more favourable climate.
The future for every farmer is up in the air at the moment, with UK farm debt hitting a record high level and little improvement for most commodity prices on the horizon. This will cause some farmers who are presently considering selling to sit tight and watch how the market plays out before committing to a sale. On the other hand, it will encourage others to sell up and leave the industry without delay. There is at the moment no sign of a rise in supply; however, any increase will affect land values. There is also no indication of the number of buyers growing – instead, they are becoming more cautious and price sensitive, especially those who are relying on bank funding.
During 2016 the Scottish farmland market was affected by a variety of events including the decision to leave the EU, the delay in government subsidy payments, a fall in commodity prices, the potential for a second Scottish referendum, and tighter lending criteria. However, prices remained reasonably resilient to these economic shocks as farmers on the whole chose to sit tight rather than all rushing to the market to buy or sell.
These factors are all likely to continue to influence the market. However, last year has shown that it will take more than the above list to cause a substantial change in land values. This is particularly the case for Scotland’s best-in-class farms, of which the number offered for sale each year can be counted on one hand.