This year we have watched UK property, especially in London, climb. Many investors have flocked to UK property because it is seen as a safe haven asset but they have really been missing out on the real top performer, farmland.

Savills World Research indicates that the average capital growth for prime arable land across Great Britain at 9.8% during the first half of this year compared to prime central London residential property at 2.5% during the same period. The Knight Frank Farmland Index also tracked an impressive 17% average increase over the previous 12 months.

Despite the impressive growth this year, Savills forecasts the annual growth of farmland value to stay around 7% till 2018.

Supply

Land is in fixed supply, “…they’re not making any more of it”. The other issue is that land in the UK is in competition for housing and infrastructure, along with other uses and only so much of land is viable farmland.

The research shows that the overall supply of farmland in the UK has increased very little in since 2000, but values in the second quarter of this year rose by 8.2%. Some regions in the UK varied, such as East of England growing 87% and the South West increasing 43%, but other regions saw decreases in supply of 45% on the North of England and 17% in the South East.

Demand

There has been a trend of more institutional investors flocking to farmland in search of regular returns and diversification away from traditional markets. Savills’ analysis of farm transactions shows that there has been a reduction in selling activity from corporate and institutional land owners and in increase of buying.

Threats

Commodity prices have been low and are not forecasted to increase in the near future.  Savills predicts that due to weakening commodity prices and the prospect of interest rates increasing will cause a higher proportion of debt farmland related sales by the end of this year.

The Common Agriculture Policy (CAP) Reform on greening requirements may create issues for farms to remain compliant with crop diversification rules.

The General Election coming up will likely have an effect on the tax policy of agricultural land as well.

Conclusions

Over the previous 10 years, English farmland capital growth has kept pace (208%), if not outperformed other asset classes, such as the FTSE 100 (51%), UK house prices (25%) and prime central London residential property (51%).

Despite the threat of weakening commodity price and the impending rise in interest rates, bringing more farmland to the market, values are not expected to fall.