Q4 2009 Market Report

UK Country Estates & farm property markets set to outperform in 2010

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COUNTRY HOUSE REVIVAL
If you watch them carefully Knight Frank’s country house negotiators can often be seen pinching themselves, to make sure they are not dreaming. Following a period of total stagnation, things are now going rather better in the refined world of country house sales.

Prices may not have bounced back to the same extent as in London, but the market has bottomed out and values increased by almost 1% in the third quarter of the year. Most importantly, however, demand has returned and good houses correctly
priced are selling quickly and often under competitive bidding (figure 8). Last month, our country business as a whole sold
almost 40% more houses than it did in September 2008. The recovery has been strongest in the Home Counties, which benefit from the same factors that have aided London’s resurgence, but it can clearly be seen in the South West and central England, too.

The trend, however, does start to stutter further north and into Scotland, where buyer activity has yet to pick up to the same extent. The same pattern is repeated in terms of prices. By the end of quarter three, UK country house prices were down an average of 13% on an annual basis, but this covers a fall of just 12% in the Home Counties to a 21% decline in rural Scotland.

While demand has increased, supply has remained stubbornly low, and it is this imbalance that has helped drive the recovery. Agents know they cannot afford to be complacent. A sudden increase in availability could shift the balance back the other
way, which would undoubtedly put pressure on prices again. Buyers, while much keener than they were, remain price sensitive. Even some of the most exuberant overseas purchasers now get more kudos from their compatriots for negotiating a good price than for setting a new pricing record.

For the remainder of the year pent up demand will ensure prices remain firm and possibly increase slightly further. Come spring and the market will start to flatten out again as more of this demand is sated. The country markets closest to London, which benefit from greater overseas interest, will probably remain flat for the rest of the year. Those further from the capital may see prices drop back slightly, but not to the same extent that we saw in quarter four 2008 (-9%) or even the first three months of this year (-5.0%).

FARMLAND BOOM
The farmland market has surprised most commentators by recovering from last year’s second-half malaise far quicker than expected.  It now appears that the fall in values (-5.5% in the 12 months to the end of June 2009) was a temporary
blip during a period of general economic turmoil, rather than a reflection of a fundamental weakening
of the farmland market.

Average values rose by just over 3% in the second quarter of 2009, with similar growth in the third quarter, taking prices to £4,970/acre according to the Knight Frank Farmland Index. Despite uncertain commodity markets, we believe prices could gain further to comfortably exceed £5,000/acre again by the end of the year as demand exceeds supply and interest rates remain low. The ongoing weakness of Sterling will also help UK farmers because it boosts the value of their subsidy cheques, which are initially calculated in Euros.

Next year will be interesting with a number of factors coming into play. The upwards trend begun in 2009 will carry on during the first three months of 2010 as farmers compete for large blocks of productive land. By this time mortgage lending will have started to flow more freely and there could also be more residential buyers to support prices for smaller farms.

The next quarter will be quieter as the farmland market always stagnates slightly in the run-up to a likely May General Election. Once the market has adjusted to a new government or got to grips with the implications of another instalment of the existing team, an increase in the amount of farmland for sale is likely as owners take advantage of rising prices.

An increase in supply might herald some downwards pressure on prices, but we expect the market to remain resilient as the hike in availability coincides with a return of investors and overseas buyers to the market. At the moment much of the focus on farmland investment is abroad, but interest will start, in time, to swing back to more transparent markets like the UK.

Further significant growth of about 15% likely in 2011 as the global economy starts to make a full blown recovery and commodity prices are predicted to recover from their short-term downturn. Agricultural commodity prices always move in cycles and lower prices invariably lead to a drop in production and a subsequent fall in global stocks.

The picture becomes hazier in 2012 as the EU’s Common Agricultural Policy gets a major overhaul, but the most productive land will remain in demand and prices will carry on increasing and could possibly break the £10,000/acre barrier by 2015.

Source: Knight Frank / Sands Home Search


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