In the short term the effect could be muted, according to the initial analysis from real estate firm Savills. It says that a weak Pound creates export opportunities and if this continues into September there will be a significant increase in farm subsidies to British farmers in 2017.
It also points out that a weak Pound creates a favourable buying environment for overseas investors and this, along with the potential of reduced supply due to uncertainty may help to support farmland values.
However, according to Ian Bailey, head of rural research at Savills, in the event of a significant reduction in farm subsidies, and therefore incomes, the negative effect is likely to be greater on rents than land values.
‘The full impact of Brexit on all of the UK's property markets will be very dependent on the macroeconomic background and the evolution of the story over the next two to three years.
We must stress it is early days and there are many unknowns,’ said Bailey.
‘Uncertainty has to be the key factor and this will principally be around those factors that have direct impact on farm incomes. It is likely that farmland market activity in the remainder of this year will be more subdued as potential sellers wait and see,’ he explained.
The report is Savills’s first analysis of how the change might affect rural markets in the UK and this is likely to be updated on a regular basis over the following months as hard data, anecdotal news and forecasts evolve.
‘Uncertainty is the key factor and it is very likely that farmland market activity in the second half of this year will be more subdued as potential sellers wait and see. Our research shows just over 100,000 acres were publicly marketed across Great Britain in the first half of 2016, which was on a par with activity for the same period of 2015,’ Bailey said.
‘Historic trends suggest uncertainty creates a lull in market activity and this appears to be the case across England, where supply in the first half of this year, at 68,000 acres, was 10% lower than the same period last year,’ he pointed out.
However, in Scotland and Wales the opposite pattern was recorded. ‘Anecdotal evidence suggests that, in Scotland at least, there has been a degree of referendum fatigue which has not hindered activity. In Wales the market is very small and a few farms can make a difference either way,’ Bailey added.
Savills also suggests that the uncertainty will principally be around those factors that have direct impact on farm incomes. These will include the UK’s international trade relationships and the level of farm support that will replace the Common Agricultural Policy (CAP).
Currently subsidy represents about 67% of the average UK farm income. However, farming subsidies under the CAP are already falling and are playing a reducing role as a driver of land values. This is especially so for diversified businesses where direct agricultural income is only a part of the total income stream.
Bailey believes that the impact will be felt most on purely farming businesses and especially so for tenants who will not have the flexibility or the assets to generate additional income streams.
Savills research shows that during the first half of 2016 the average value of farmland across Great Britain fell by just under 2%. The average downward trend continues to be led by arable values which are more exposed to pressure from low commodity prices. With the exception of Scotland, where average values have remained stable since 2013, all regions across England and Wales have, on average, recorded negative value growth this year.
However, Bailey pointed out that the market remains diverse and a wide range of prices are being achieved depending on local demand. Anecdotal evidence suggests that deals agreed prior to the referendum are largely being honoured and a number of new deals have been struck since 24 June at levels anticipated beforehand.
‘The fundamental factors driving the value of UK farmland remain. Supply is historically low, the product is finite, there are competing land uses and a variety of ownership motives will all support farmland value growth in the long term,’ Bailey said.
‘In the event of a significant reduction in farm subsidies and therefore incomes, the negative effect is likely to be greater on rents than land values, as the relationship between rents and agricultural profitability is stronger than for land values, where ownership motives extend beyond farm income generation,’ he pointed out.
‘However, we expect the scarcity of land to rent will moderate any downward pressure on Farm Business Tenancy rents. We are constantly monitoring the situation and will update our analysis as more information becomes available,’ he added.
