SAVILLS RESEARCH MARKET IN MINUTES | APRIL 2018 Arable sector weakest Since the EU referendum arable margins have remained under pressure, average combinable crop prices have improved (cereals 26%, OSR 13%), but average input prices have risen too (fertilisers 21%, pesticides 14%). This has affected arable farmers’ optimism, and in our assessment has led to ‘expansion at all costs’ becoming a less common business objective. More prudent decision making, with careful scrutiny of the viability of additional land, and the realistic impact it will have on the farm’s fixed costs, has become more common. The rent review results show reviews for arable land have increased less than average. Arable FBT rents increased by an average of 7% at review, compared to 12% for livestock lettings. The same is true for new lettings, if rents are compared to the previous agreements. When the new letting was agreed at a lower rent than the previous tenancy, the majority of these cases involved arable land. Whilst the average percentage change remains in positive territory, the data suggests some previously high tender rents are falling back toward the average when agreements are renewed or re-tendered. Figure 1 shows the average rent agreed for bare FBT reviews and lettings; for arable land the average rent agreed in more recent years has been below the historic peak. The chart however, is not reflective of overall movement in passing rents, because only a small proportion of rents are presently being reviewed. Source: Savills Research FIGURE 1 Average arable settlements have eased 2011 £0 £20 £40 2012 2013 2014 2015 2016 £60 £80 £100 £120 £140 (£/acre) 2017 Arable FBT Livestock FBT BPS (One year in arrears) RURAL Uncertainty linked to Brexit has limited rent review activity – last year there were 84% fewer than four years ago Agricultural rents Market overview Agricultural rent review activity remains low as landlords and tenants exercise caution in the uncertain conditions created by the Brexit negotiations and domestic policy proposals. We estimate the number of reviews being conducted is just 16% of that recorded four years ago. Part of the explanation for this is the more subdued rural economic environment; a further significant factor is uncertainty associated with Brexit, because most reviews agreed in the year to 31 October 2017 would fix the rent for a three year period, and therefore past Brexit. It would be understandable for landlords and tenants to be reluctant to fix a rent for a period in which they are uncertain what the economics of agriculture will be; both future trade and farm support arrangements will affect profitability and these aspects are as yet unknown. However, there have been some positive developments recently in the agricultural sector; many output prices and the Basic Payment Scheme subsidy remain boosted by the Pound’s weakness relative to the Euro and Dollar. Prospects in the dairy sector improved in 2017 too, although farmgate milk prices have come under pressure so far this year. e reviews which were completed in 2017 resulted in an average increase of 7% for Agricultural Holding’s Act (AHA) tenancies and 12% for Farm Business Tenancies (FBT). Most of the holdings were last reviewed three or four years ago and, if we restrict analysis to those with a three year gap, the average results are not materially different. Compared to the market peak, average rent review outcomes were considerably lower and were consistent with the average results for 2016 when the AHA average was also 7% and the FBT average was 13%. We have therefore seen a significant reduction in both the number of rent reviews and the average outcome of the reviews conducted. Leaving rental growth at portfolio level low as the majority of holdings were not being reviewed. However, when reviews were conducted, on balance the result was an increase in rent.
Transcript
S A V I L L S R E S E A R C H
M A R K E T I N M I N U T E S | A P R I L 2 0 1 8
Arable sector weakestSince the EU referendum arable margins have
remained under pressure, average combinable
crop prices have improved (cereals 26%, OSR
13%), but average input prices have risen too
(fertilisers 21%, pesticides 14%).
This has affected arable farmers’ optimism,
and in our assessment has led to ‘expansion
at all costs’ becoming a less common business
objective. More prudent decision making, with
careful scrutiny of the viability of additional
land, and the realistic impact it will have on the
farm’s fixed costs, has become more common.
The rent review results show reviews for arable
land have increased less than average. Arable
FBT rents increased by an average of 7% at
review, compared to 12% for livestock lettings.
The same is true for new lettings, if rents
are compared to the previous agreements.
When the new letting was agreed at a lower
rent than the previous tenancy, the majority of
these cases involved arable land. Whilst
the average percentage change remains in
positive territory, the data suggests some
previously high tender rents are falling back
toward the average when agreements are
renewed or re-tendered.
Figure 1 shows the average rent agreed for
bare FBT reviews and lettings; for arable land
the average rent agreed in more recent years
has been below the historic peak. The chart
however, is not reflective of overall movement in
passing rents, because only a small proportion
of rents are presently being reviewed.
Source: Savills Research
FIGURE 1 Average arable settlements have eased
2011£0
£20
£40
2012 2013 2014 2015 2016
£60
£80
£100
£120
£140
(£/a
cre)
2017
Arable FBT Livestock FBT BPS (One year in arrears)
R U R A L
Uncertainty linked to
Brexit has limited rent
review activity – last year
there were 84% fewer
than four years ago
Agricultural rentsMarket overviewAgricultural rent review activity remains low as landlords and tenants exercise caution in the uncertain conditions created by the Brexit negotiations and domestic policy proposals. We estimate the number of reviews being conducted is just 16% of that recorded four years ago. Part of the explanation for this is the more subdued rural economic environment; a further significant factor is uncertainty associated with Brexit, because most reviews agreed in the year to 31 October 2017 would fix the rent for a three year period, and therefore past Brexit. It would be understandable for landlords and tenants to be reluctant to fix a rent for a period in which they are uncertain what the economics of agriculture will be; both future trade and farm support arrangements will affect profitability and these aspects are as yet unknown. However, there have been some positive developments recently in the agricultural sector; many output prices and the Basic Payment Scheme subsidy remain boosted by the Pound’s weakness relative to the Euro
and Dollar. Prospects in the dairy sector improved in 2017 too, although farmgate milk prices have come under pressure so far this year. The reviews which were completed in 2017 resulted in an average increase of 7% for Agricultural Holding’s Act (AHA) tenancies and 12% for Farm Business Tenancies (FBT). Most of the holdings were last reviewed three or four years ago and, if we restrict analysis to those with a three year gap, the average results are not materially different. Compared to the market peak, average rent review outcomes were considerably lower and were consistent with the average results for 2016 when the AHA average was also 7% and the FBT average was 13%. We have therefore seen a significant reduction in both the number of rent reviews and the average outcome of the reviews conducted. Leaving rental growth at portfolio level low as the majority of holdings were not being reviewed. However, when reviews were conducted, on balance the result was an increase in rent.
A G R I C U LT U R A L R E N T S
Since the beginning of 2018 the Government’s policy intentions have become clearer, and a consultation is now open. The overall vision is to move from direct support payments to paying “public money for public goods”, rewarding occupiers who deliver benefits to society with a particular emphasis on encouraging environmental enhancements. There will also be support for farmers in challenging areas such as the uplands, but there is no information at this stage to assess the potential economic impact. The new environmental land management system will be funded by phasing out current direct payments using a capping system.
The impact of this on rents will vary according to the mechanism selected, its thresholds and rate of implementation.Michael Gove, Defra Secretary of State,
introduced the concept using social justice arguments linked to the largest Basic Payment Scheme recipients.
However the consultation paper includes both a capping model which would target the largest 2% of recipients and a model which would spread the burden of payment reductions more widely, affecting 22% of recipients in the first year.
Gove has been keen to emphasise the consultation is “the beginning of a conversation, not a conclusion”, so it is debatable how much weight should be given to his earlier capping comments. Proposals for the new environmental land management scheme are less defined, but should provide an opportunity for farmers to recoup some of the lost support income.
Another aspect which would affect rents is a proposal for direct payments during the phase-out period to be based on a
reference year and paid out irrespective of the area subsequently farmed.
This could trigger increased retirement within the industry, and if adopted the detachment would be likely to weaken rents. However, the impact would vary according to how detached the payment is truly judged to be.
We do know however that in future public money will be targeted at the provision of public goods, and there will be opportunities for landowners and farmers to increase the productivity of their businesses and to be supported in providing the desired environmental management or improvements.
In broad terms the destination is known, but the way we transition towards it will have a significant influence on businesses too. Those who keep the situation under review and respond proactively, will be best prepared for the future.
Savills plc: Savills plc is a global real estate services provider listed on the London Stock Exchange. We have an international network of more than 600 offices and associates throughout the Americas,the UK, continental Europe, Asia Pacific, Africa and the Middle East, offering a broad range of specialist advisory, management and transactional services to clients all over the world. This report is for general informative purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. Whilst every effort has been made to ensure its accuracy, Savills accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Savills Research.
Savills team
Glossary: AHA – Tenancies originally created before 1 September 1995, they have security of tenure and often have succession rights allowing the tenancy to pass to relatives, and due to the rent formula rents are lower than for FBTs. FBT – Tenancies agreed on or after 1 September 1995. Parties have greater freedom to negotiate terms, and the rent is normally open market.
For brevity the “Year to 31 October 2017” is referred to as “2017” in this document, and “2016” refers to the “Year to 31 October 2016”.
