Poor livestock land values predicted to increase by 6% per year over the next five years

That’s according to Savills in its 2023 cross-sector forecasts.

But, while poor livestock land is set to see significant growth in its capital value, retail warehouse performance will be driven by income returns over the next four years, as will the vast majority of UK property sub-sectors (excluding rural assets) says Savills, as the economy enters a new era, where capital returns slow, and income becomes the main drivers of investment performance.

In the rural markets, Savills predicts that farmland will continue to be a counter-cyclical play. Macro-political events have highlighted the regenerative power of food, fibre and fuel from land; it has weak negative correlation with interest rates, and has consistently outperformed inflation across the last 30 years.

Savills predicts that prime arable land values will increase in real terms by 2.5 per cent per year and poor livestock land to increase by six per cent per year over the next five years, reflecting increased emphasis on both food security and climate targets.

Meanwhile, commercial forestry land, having seen record capital value growth in the last 20 years, will now see slower growth, having matured, but will still be supported by the demand for timber and lack of supply. Across the sector high energy prices mean that returns on investment in rural renewable energy projects could be greater and the payback period shorter for landholders.

Inflationary pressures will be more influential than interest rates on farmland as supply remains at historic lows and interest rates are still comparatively low. Any negative impact of rising interest rates will be tempered by the ongoing constrained land supply/demand imbalance.

Consumer price inflation has seen output prices in commodity sectors rise (even if margins haven’t necessarily improved), and competitive interest for nature-based solutions remain keen. With traditional purchasers of land facing stiff competition from a new era of deep-pocketed nature-positive and impact-motivated buyers, land values are likely to continue to outpace target inflation.

The very limited supply of commercial forestry land will continue to drive values upwards, although not to the extent previously seen. Given forest acquisitions are very rarely borrowed against, interest rates have minimal impact on debt related sales. The forestry market is now maturing: prospects for capital growth are more closely linked to timber prices, and we are unlikely to see negative growth over the next five years. The monetisation of natural capital in response to the climate crisis remains the unknown factor. Converting the theoretical value of woodland into financial returns is key – the government “could do more to stimulate demand-side drivers” says Savills.

Top rural investment picks for 2023:

- Poorer quality grazing land: having increased by 20 per cenr since December 2020, demand is likely to continue over the next five years as pressure to re-carbon and re-nature land intensifies

- Welsh farmland has underperformed compared to the other mainland nations and remains a pick for the future for capital growth