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It’s long been a matter of common knowledge that the value of farmland far outweighs its productive capacity. However, certain commentators have been suggesting for some time now that the inflation seen in recent years in respect of the value of agricultural land is slackening.

In these uncertain times, more evidence is emerging post BREXIT strongly suggesting not only that inflation is at an end but in fact that land values are expected to drop over the next year.

That was the headline news contained in the recent Royal Institute of Chartered Surveyors’ Land Market Survey for the first six months of 2016. The Survey also revealed that although the supply of land is slightly increasing, there has been a very sharp drop in demand.

The reasons why this is happening are not difficult to work out. Existing financial pressures mean that some farming businesses are taking the decision to sell up, leading to an increase in the amount of land coming to the market. Poor commodity prices and previous worries about reducing agricultural subsidy income as a result of CAP reform have been exacerbated by the uncertainty about the agricultural economy post BREXIT and there is a longer term question mark over the future of subsidies all together. Phillip Hammond’s assurances as Chancellor about continuing to fund agricultural subsidies take us as far as 2020 but what then? There are many conservation voices who are arguing for an increased focus on environmental goods in any future subsidy regime. Farmers are worried that not only will there be less money in due course available from subsidies but it will be increasingly linked to environmental conditions which will have a direct impact on productivity and profitability. Concerns about access to international markets add to the nervousness which farmers are feeling at the moment, all of which materially dents the confidence of potential purchasers.

Against that background and in a world where regulatory pressure means that banks are applying increasingly stringent financial criteria to their lending decisions, it is likely that prospective buyers of farm land who need to borrow funds to help with the purchase will have to provide greater amounts of their own capital towards the price and will face stricter demands from lenders about the serviceability of those borrowings, putting some purchases beyond reach and so reducing demand even from those farmers who are keen to expand.

Reductions in the value of agricultural land will also impact on secure agricultural tenants. Those tenants who have an opportunity to buy their farms at a discount on the open market vacant possession price may have to pay less. However, those tenants negotiating golden handshake payments to give up their tenancies may receive less if the value of the farm has gone down.

From a historical perspective however, land values remain high and not even the most pessimistic of observers are predicting a collapse in land prices. The bubble maybe deflating but it hasn’t burst, at least not yet. Also, of course, as long as agricultural land attracts relief from Inheritance Tax at 100% of its value, it will continue to be regarded as a good investment for tax planning purposes. Buying a farm is an excellent means of converting assets which are liable for IHT at 40% into tax free property. Purchasers looking to obtain rollover relief against CGT liabilities will also continue to play a part in the market. The recent drop in interest rates will also help.

Whether the predicted drop in price becomes a consistent trend or the market will revert to what we’ve been used to recently is difficult to predict. However, it does seem to be the case that for those who are able to take ae of current market conditions, opportunities to acquire land at better value than might have been the case in recent years may begin to present themselves. Interesting times indeed!

Chambers UK 2106

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