On the 4 August, the Bank of England announced a 0.25% decrease in the base interest rate, a record low level from the previous 0.5%, where it had remained for more than seven years.
On the same day, it was announced that the Bank of England also rolled out £60 billion more quantitative easing, £10 billion of corporate bond-buying and a £100 billion Funding for Lending-style scheme.
This has translated into reduced costs of borrowing, with capital never being so cheap to borrow. Correspondingly, farmers and rural businesses alike are reviewing opportunities to restructure existing loans, and invest in new ventures.
Since the announcement that the UK would be leaving the European Union, land prices have been particularly interesting to review. The RICS/RAU Rural Land Market Survey produced in 2016 has summarised a fall in demand across both commercial and mixed-use farmland, with bare land prices estimated to have fallen.
There are several different perspectives on land prices depending on the situation - some farmers and investors are continuing to proceed at higher levels, particularly where the opportunity of neighbouring land has arisen.
Jack Cook, Surveyor at Carter Jonas has recently launched a number of land offerings to the open market, including 27.5 acres of Grade 2 arable land in Mepal, near Ely. Guided at £280,000 (£10,909/acre) the land has generated a significant amount of interest from a number of agricultural partners and investors.
When analysing the relationship between land prices and interest rates, there are several key findings to consider.
Source: Bank of England and RICS
A relationship between base rates and land prices can clearly be seen, with 1975 land prices recorded at £488/acre with Bank of England base interest rates at the time being 11.25%. Significantly, the seven year period from 2009 to present saw a 78% increase in average land prices from £6,030/acre to £10,750/acre.
Jack Sharpe, Surveyor in the professional services team at Carter Jonas comments, “In terms of land prices, there are undoubtedly other factors that are significant - political decisions and commodity prices in particular – however we are currently experiencing a high level of valuation requests associated with the Bank of England’s announcement. These span a variety of sectors, including renewable energy investments - in particular straw burning boilers - with interesting payback periods, subject to renewable heat incentives, with further enquiries associated with land purchases and restructuring.”
Of the lending currently experienced by the Agricultural Mortgage Corporation, Mike Lord, Regional Agricultural Manager for East Anglia commented:
“So far this year, we have seen, and are continuing to see, strong demand for borrowing to fund land purchase - and although there are regional variations, the number of acres marketed in the UK appears to be on the rise. Indeed, so far this year in the East Anglia region approximately 58% of loan applications were for land purchase, with restructuring finance at circa 25%”.
Mike Lord comments; “The reduction in the Bank of England base rate to 0.25%, and weakening of Sterling relative to the Euro, will help profitability in the short term - although the longer term prospects for UK agriculture are inevitably uncertain, whilst new trade arrangements and subsidy regimes are negotiated and put in place. Commodity prices were volatile coming into harvest but have seen gains over recent weeks, with cereal and root crops now higher than in 2015, the livestock sector has also been boosted with recent increases in beef, lamb and milk prices over the last few weeks - whether this is due supply and demand or fluctuating exchange rates remains to be seen.
“However, we believe that the fundamentals of the sector are sound, and that the risk of default remains very low. We have supported the sector through good and difficult times, and will continue to do so, and are still keen to lend to businesses with a sound track record and realistic plans for the future.”
All in all these, are very compelling times for the agricultural sector and at Carter Jonas, we have a wealth of experience in estate management, agency, professional and renewables, which enable us to provide reliable counsel.
For further advice please contact our team based in Cambridge.