The Scottish Land Commission has recently published a report commenting on Scotland’s fluctuating rural land market. The Rural Land Market Insights Report 2023 provides an in-depth analysis of the landowner and buyer motivations over the 2023 period whilst also giving insight into emerging rural market trends.
Summary of trends
The market for selling rural land has “cooled” slightly over the course of 2023, however, there is still a great demand for farms, forestry and estates, and it is still very much a seller’s market with record-high prices. However, there has been more caution in the market due to economic uncertainty and greater due diligence being required for carbon offsetting projects.
There are still sales being conducted off-market for reasons of privacy, as many farmers aim to avoid a perceived ‘stigma’ of selling land for forestry, particularly in upland areas, whilst also avoiding the potential exercise of a Community Right to Buy.
Farmers are still the most active group in terms of who is buying land, but many struggle to compete with institutional buyers and commercial forestry buyers who may be active in the same market. Virtually no young farmers and community groups have been able to buy land in the current market, and the number of “lifestyle buyers” has dropped significantly since the start of the pandemic.
Pension funds and other investment funds are buying estates as long-term investments. Land has always been seen as a safe investment, but there is more appetite for it now that land can also be monetised in multiple ways beyond rental incomes through, for example, carbon credits. The interest in acquiring ”natural capital” has been a key market driver.
Forestry
During 2022, commercial forestry values increased, with the average gross value reaching £20,000 per hectare, an increase of 19% on the previous year. Central Scotland recorded the highest number of forest hectares sold during the course of 2022, with North Scotland showing a reduction on the previous year.
Whilst the outlook on commercial forestry remains positive, the market has slowed down slightly as the price of timber has fallen 25%. Many buyers have stopped buying upland farmland and are instead looking “down the hill” for better quality and more fertile land.
Investors buying land for carbon insetting or offsetting are facing increasing uncertainty with the lack of standardisation in different Conservancies for Woodland Carbon requirements and planting permission issues, and uncertainty around the levels of carbon that can be sequestered. On the other hand, existing landowners seek planting permissions on their own land to increase the value and then sell it on. Demand is there for plantable land, and it is being sold for inflated prices. However, over the course of 2022, the commercial forestry market remained active, perhaps as a result of climate change mitigation and biodiversity requirements.
Estates
Supply and demand is more level for estates, with the majority of purchasers of upland estates seeking natural capital projects such as peatland restoration. Carbon credit pricing remains speculative, so purchasing land for this purpose remains somewhat of a gamble.
Estates are still being sold for high prices and were the largest motivator for sellers. Other factors, such as there being no successor to ownership are also mentioned as reasons to sell. Environmental, social and governance (ESG) investing also remained a catalyst for estate purchases and is likely to remain a key motivator over the next few years.
Farmland
The price of arable land has risen along with demand from all buyers; small and commercial farmers, commercial forestry, and investors in natural capital projects. Upland farms have been targeted for their tree-planting potential by natural capital investors – they are now the main buyers of this land as commercial forestry buyers are looking for better quality land “down the hill”. It also seems that farmers who sold their upland farms to natural capital investors seek to reinvest their profits into better quality downhill land.
As with estates, a lot of farmland is being sold due to succession issues. Stepping away from traditional farming succession, there is an increase amongst farmers choosing to split the wealth evenly, rather than leaving the farming business to the eldest son.
Debt is another reason for the increase in availability of farmland, with growing interest rates smaller farmers were seen to be selling whole or part of their land to clear their debts and improve their business viability. This was most common in beef and sheep farms rather than dairy farms, who are more likely to expand their business due to the high milk prices.
Future trends and predictions
The Commission notes that albeit uncertain, future of carbon markets is prevalent for buyers and sellers of all types of rural land. It is not clear whether carbon will continue to drive the market like it has done this year. Carbon-credit agreements are becoming increasingly popular with the drive towards carbon neutral, but there is still a great deal of uncertainty around a) the requirements for verification of carbon credits, and b) the price gained per credit. This area would benefit from further Government Regulation to increase both certainty and security.
There is likely to be further investment in land rather than liquid assets, with such investments being seen as “recession proof”. This coupled with increasing numbers of natural capital investors means there could still be great competition between buyers, which risks pricing out farmers and local communities.
Overall, there are a number of parties who will continue to have an interest in rural land, and it appears that this is still a desirable asset with an increase in demand for most land types which coincides with the increase in the amount of land for sale over the course of the 2022 period.
This article was co-authored by, Julie Bankier, Trainee, corporate finance.