How does the agricultural land rental market compare in the UK?

“Leasing is financially very attractive for the land-owners given the tax benefits.” This is according to Clive Kavanagh, director of Jordan Auctioneers, who gave his opinion on land leasing prices in Ireland.

Jordan Auctioneers’ most recent lease was a 70ac tillage holding outside Monasterevin, Co. Kildare, on a five-year lease for €210/ac.

Also Read: ‘Leasing is financially very attractive for the owners given the tax benefits’ – Jordan Auctioneers

So, how does this compare to the UK land rental market?

“Grade three land is the most common land type in England and Wales, so we focus our analysis upon it,” said Andrew Teanby, of Savills UK.

For modern Farm Business Tenancies (FBT) with open market rents, average bare land rents were £83/ac in the year to April 30, 2019, whilst average rents for arable land were £120/ac.

Agricultural Holdings Act (AHA) tenancies are those which were originally created before September 1, 1995; they have security of tenure and often have succession rights allowing the tenancy to pass to relatives.

Their rents are reviewed using a statutory process rather than to open market levels so are lower than for FBTs. Bare pasture rents for AHAs averaged £61/ac in the year to April 30, 2019, whilst average rents for arable land were £80/ac.

Pros and cons of leasing

For landlords, leasing farmland offers a relatively hands-off way to receive income from their ownership of agricultural land.

Their income is exposed to less risk than if they were farming the land in-hand themselves, but whilst rents will follow the general trend of agricultural profitability their overall returns may be lower than if they were farming in hand.

Leases can be attractive to those who are retiring from farming but wish to retain their land or owners who lack agricultural expertise. For tenants, renting land can provide an opportunity to enter the agricultural industry avoiding the high capital cost of purchasing land.

For an established business, access to additional land can allow them to spread their fixed costs and benefit from the economies of scale to increase their overall profitability.

When creating an FBT, the act allows a large degree of freedom of contract so the parties can also tailor the agreement to their wishes.

Changes in leasing length

Lease lengths are longer for properties which include a house and/or buildings, compared to bare land.

For bare land, the average length of letting agreed in the year to April 30, 2019, was 3.1 years; for equipped it was 5.4 years. Properties which are larger or better equipped are usually let for longer terms.

These averages are not significantly different to recent years; however, it is likely that more focus will be being placed on term length due to the plans in England to withdraw direct farm subsidies between 2021 and 2027.

This could lead some parties to favour shorter agreements whilst the detail of the government plans is finalised; on the other hand, some may opt for a longer term length than they otherwise might have done in order to include the entirety of this period.

Overall thoughts on leasing

“Our analysis of land advertised for let by all agents shows that in the year to April 30, 2019, 18,300ac were publicly marketed for let by FBT in England and Wales, a 20% drop compared with the previous 12 months,” said Andrew.

The reduction in supply suggests that due to the uncertainty surrounding future trading arrangements and new domestic policy including the prospect of capitalised direct payments, owner-occupiers or tenants who are considering retiring are deferring their decision until their options become clearer.

However, open market tenders show that when land is offered for let, there is a strong field of applicants who are keen to expand, and their tenders reflect their ambition and the level of competition.

A similar pattern of supply and demand is being seen in the farmland sales market.

Whilst generalisation is difficult, those tendering higher rents tend to be either growing high-value crops, or are larger farms or businesses supported by a diversity of income streams.

From a landlord’s perspective, the latter group are perhaps most attractive as a diverse business is likely to be more resilient during challenging times.