Rural Land Market Insights 2022
This is the first report in the Rural Land Market Insights series covering the 2021 calendar year. The aim is to improve reporting of land market transactions in Scotland. We interviewed 18 land agents operating in Scotland's land market to assess current land market activity and trends and motivations for transacting rural land, with a specific focus on understanding how increased demand for natural capital investment is driving activity in the land market.
Overall impressions of the market
Constrained supply represented a defining characteristic of Scottish farmland markets, influenced by favourable capital taxation, low interest rates and the strong long term investment performance of farmland. Marked growth in land values was recognised at either end of the land market since 2020, although values growth varied by region, with forestry and natural capital drivers less influential in strong agricultural regions. A reducing emphasis on farm profitability in relation to land values and an increasing emphasis on the importance of capital growth potential is evident across the land market. This is reflected in the emergence of several new investment vehicles for forestry and plantable land in Scotland.
Off-market activity was generally recognised as having increased across all land categories in Scotland in the last two years, driven by high demand and low supply (and reduced viewings during lockdowns), with some forestry agents in particular pursuing a proactive strategy to approach landowners to negotiate sales. This approach was seen as more suited to the forestry and plantable land market due to the smaller number of transactions and limited pool of buyers. A further driver of off-market farm sales related to farmer corcerns around their neighbours' perceptions of their decision to "sell out" to the forestry sector. While off-market sales are often relatively high value, sellers using an off-market route may risk achieving a lower price, due to the reduced potential for buyer competition.
Motivations for selling rural land
Retirement (or death) was generally identified as the most frequent driver for rural land sales, with other factors including relocation, divorce, a farming partnership split, and releasing capital. Current high values for plantable land offered and the marginal position of some farms offered opportunities for farmers to secure their retirement through selling their holding. But this was offset by a cultural resistance to forestry and retirement in the farming sector, current high prices for farming outputs and the long term investment potential of land encouraging the retention of farm holdings.
A further factor driving long term retention of farms (and low supply) related to the potential for retiring farmers to lease their land or engage in contract farming. Nevertheless, high land values were also noted as influencing land sales for re-investment purposes, with some farms able to release capital, to re-invest in diversifying their business. Some interviewees also identified an increasingly prevalence of farmers selling their hill farms to re-invest in a smaller, more productive low ground unit, due to the gap closing between hill ground and arable land values.
Motivations for purchasing rural land
- Farmland and amenity holdings
Increasing demand for smaller farm holdings was evident in the farmland sector due to lifestyle factors (influenced by the pandemic and working from home opportunities) and the investment potential of residential holdings. While forestry buyers represented a key buyer group for lower quality (plantable) farmland, local farm businesses represented the key buyer group for productive higher quality farms.
Farming buyers relocating from England following a high value land sale (to benefit from lower land values and rollover tax relief) also represented a component of the market for productive farm units.
Farmland demand was also influenced by macroeconomic factors including low interest rates and commodity prices.
- Estates
Some Scottish estate purchasers' motivations were reported to have shifted in recent years, with an increasing emphasis on environmental or landscape scale rewilding motivations and a younger buyer profile. In parallel, a decline in sporting motivations among new (and some existing) estates owners occurred, linked to the legislative changes and declining social acceptability of driven grouse shooting.
This changing pattern of buyer motivations coincided with a period of exceptionally high levels of investment in Scottish estates driven by three factors: i) the impact of the pandemic on societal perceptions of the future way of working and a revaluing of rural lifestyles; ii) wider ecosystem restoration; and iii) increasing demand on global timber markets, combined with government and organisational commitments to achieving Net Zero within fixed timescales.
A marked shift in buyer types also emerged. Nearly half of all estates purchased in Scotland in 2021 sold to corporate bodies, investment funds or charitable trusts. Recent corporate interest was viewed as driven by increasing interest in restoring peatlands and the potential for carbon offsetting and developing carbon credits at large scales.
- Forestry and plantable land
High levels of demand for forestry and plantable land was seen as driven by: i) global timber shortages and an increasing emphasis on domestic timber production; ii) global policy drivers to achieve Net Zero; and iii) strong long term drivers for afforestation and related planting grants availability. These factors had driven increasing investor interest in forestry in recent years, with several new forestry investment vehicles emerging in Scotland since 2020.
High levels of demand for plantable land in particular were seen as a critical change in the Scottish land market, with investors regularly acquiring land without planting consent in place and forestry investors outbidding farm buyers for plantable land. More recently, this appears to have resulted in an increasing shift towards acquiring better quality farmland for afforestation, including lowland farm holdings (although this was regionally specific, with productive farm units more commonly sold to farming buyers).
Valuation and determinants of land values
Undertaking valuations of rural properties was recognised as becoming increasingly complex due to: i) rapid recent growth in values and limited availability of comparable sales; ii) an increasing emphasis on acquisitions relating to a land use change (with related uncertainties) and; iii) the potential for different buyer types to value land differently related to speculation on nautral capital and timber markets. The basis for valuing estates and hill ground was seen as having changed rapidly from a previous focus on sporting values towards a more complex consideration of natural capital values and afforestation potential. Comparable sales evidence to support these valuations remains limited, creating greater uncertainty in valuations, particularly for holdings with peatland and plantable land.
The influence of carbon markets on rural land markets
The importance of natural capital, and specifically carbon as an influence on land values, is generally of greater importance in upland regions and areas with larger extents of peatland, lower quality agricultural land and smaller less productive farm holdings. In addition to generating income from natural capital markets, investment in natural capital assets was seen as influenced by the potential for obtaining future environmental payments for ecosystem services provision. This combination of carbon markets and future environmental payments also represented a potential opportunity for longer term retention of farms and estates, due to the potential for lower inputs.
Nevertheless, despite recent increasing investment interest in woodland carbon, interviewees generally agreed that the overriding driver for investment in both forestry and plantable land remained the high levels of demand and high current prices for timber as a tangible and sustainable asset.
Several risks were identified as disincentives for landowners to engage with natural capital markets, including: i) the emergent (and underregulated) status of carbon markets; ii) concern in relation to future requirements for offsetting their own emissions; iii) concern relating to natural hazards (and tree losses); iv) uncertainty around carbon prices over the long term; and v) concerns relating to the liabailities associated with carbon schemes and the implications for future owners in terms of commitments and underlying land values.
Future land market trends
Despite recognition of considerable uncertainty, there was a general consensus that the land market was likely to continue to experience strong growth due to: i) continued low supply and high demand for land; ii) high levels of private wealth and low interest rates; iii) long term climate change mitigation drivers including Net Zero commitments; and iv) increasing pressure on global timber markets and food supply chains. Factors identified as having the potential to reduce values growth included increased future land supply due to farmers exiting the industry, macroeconomic factors (rising interest rates, or changes in capital taxation) and changes in the regulatory framework relating to landownership.
Implications of land markets for land use transitions and communities
The financial capacity of new corporate and wealthy private estate owners was recognised as offering considerable potential for large scale habitat restoration and woodland expansion alongside related delivery of public benefits, due to increasing focus on environmental agendas linked to ESG commitments and natural capital markets. However, these shifts may also result in social and cultural impacts at local levels, due to the potential for relatively rapid and large scale land use transitions, with related effects for rural community members dependent on the land use status quo.
Nevertheless, corporate estate owners were also recognised as offering potential for bringing new approaches and resources to community development, due to their ESG commitments and need to ensure social acceptability. This included the potential for: i) developing corporate-community partnerships, including in relation to delivering co-benefits relating to community natural capital funds; ii) taking a proactive approach to developing joint ventures, both on the part of new owners and communities and other local stakeholders; and iii) identifying opportunities for learning from established approaches for empowering communities.
The potential effects of current land market activity on landownership diversification were perceived as uncertain, with the longer term effects of land acquisitions by forestry and corporate investors requiring more detailed long term assessment of ownership structures and relative re-concentration (as opposed to the breaking up) of purchased holdings.
Several interviewees were broadly in favour of measures to enhance the transparency of land markets, while others argued that the need for greater transparency was overstated and further measures unnecessary. Specific proposals to enhance land market transparency included development of an open-access online land sales register, which recorded key information (including sales price) at the point of paying the land transaction tax. Other specific proposals included the development of long term management plans and annual impact reports (based on environmental and community benefit indicators) for holdings above a certain size threshold, to increase transparency and provide a mechanism for communities to be involved in land use decision making processes.
Read the report in full below.
Report authors: Rob McMorran (formerly SRUC), James Glendinning (SRUC) and Jayne Glass (formerly SRUC).
Commissioned by the Scottish Land Commission.
With thanks to participants and Agencies who voluntarily provided their time and expertise to the report.
