The current situation in the market for farms is that the value of agricultural land is often perceived to be higher than would be supported by the level of return which can be achieved from it.
There are a number of reasons for this. Firstly, it is evidence of a thin market and a history of spreading costs by expanding farmers. Secondly, there is a demand from those who want to buy in a very specific area but land in this area only becomes available once in a generation. Other reasons for the sustained demand for agricultural land include an absence of other investment alternatives in the current climate and the security that this class of investment has to offer.
The value of the land is affected by a number of factors, including its usefulness, flexibility for agricultural production and proximity to a buyer's existing land holdings. It may also be affected by the political and economic situation at any given period and the level of risk this poses for the buyer and the seller.
Many farmers have taken advantage of sustained low interest rates and rising collateral values over the past decade, but they are still seeking further agricultural projects despite the low returns at current farm-gate prices. This is still a strong demand for good quality land and many buyers are happy to increase their gearing if the right property comes to the market.
Area by area
There has been a fall in values within some areas of Ayrshire and in parts of Aberdeenshire. On the other hand we have seen a premium being paid in these two regions for some parcels of land depending on local interest. There is no one-size-fits-all approach.
Within the same parish, we have seen multiple offers at very strong levels for some parcels of land, whilst other similar blocks of land have not sold for the target price or have even been withdrawn from sale. We understand this is also happening south of the border, where there has been an easing in prices and the market is patchy with some land not selling at all, depending on the articular buyers who are looking at that specific time.
Type of farms
In general, some of the more marginal units have taken longer to sell due to the lack of finance and also because livestock farmers have a requirement to sell their existing holding before buying another, due to the constraints of housing their stock. This can cause a delay in transactions.
However, as the cost of borrowing money is comparatively very low, some livestock or dairy farmers have taken the view they can buy and repay interest - and capital if accounts allow - cheaper than the cost of renting a similar type and quality of land on a fairly unsecured seasonal basis.
Values for upland Less Favoured Areas/sheep holdings have been underpinned by forestry interests, providing the land is plantable.
Arable land continues to be flexible as an investment with respect to contact farming agreements, but there remains a west-east shift of buyers looking for a much more forgiving type of holding.
How much of the market is outside investor-driven rather than driven existing landowners and farmers? The farmland market is underpinned by existing landowners and farmers. The number of investors entering the market in the past 12 months has been limited.