Rural Land Market Insights 2023
This is the second report in the Rural Land Market Insights series covering the 2022 calendar year. It sets out existing and emerging trends in the Scottish land market from in-depth interviews with land agents combined with review of land agency market update reports.
Overall impressions of the market
The rural land market in Scotland is relatively small, with very little land transacted every year. Strutt and Parker estimated that only 1.12% of Scotland's total farmland and estates (excluding forestry) was transacted in 2022. Despite regular reports of natural capital payments being a significant purchase motivation, these new types of buyers are a sub-set of the market who are competing with more traditional buyers. This demand for the small amount of available land underpins land values achieved.
Land agents reported that the land market had slowed in 2022 with more "caution" observed by some buyers, especially in relation to natural capital investments. The changing macroeconomic climate following war in Ukraine, increased commodity prices, rising interest rates, inflation, and the cost-of-living crisis resulted in an increased sense of uncertainty and re-evaluation among potential purchasers. Greater uncertainty and changing risk perceptions were accompanied by an increased emphasis on due diligence being required for some types of land purchase - particularly relating to changes in Woodland Carbon Code eligibility criteria that affected investment return estimates from woodland carbon sequestration.
Off-market transactions remained an important feature of the Scottish rural land market. However, it was overall inconclusive whether the proportion of off-market (non-advertised) transactions had increased or decreased during 2022. A variety of reasons for engaging in off-market transactions were stated, including: the strength of the market, privacy, debt, and unwillingness to be seen to sell out to forestry.
Forestry
Commercial forestry buyers remained active in the market throughout 2022, seeking suitable plantable land meaning the forestry sector continued to have significant influence on part of the land market. Commercial forestry companies were seen to be able to outcompete upland and livestock farmers in acquiring appropriate land for planting, both on the open market and off-market. A noted feature of the 2022 market was that demand from the commercial forestry had "come down the hill" to better quality farmland because of competition for more marginal land from natural capital buyers. It was notable that commercial forestry investors became more selective in their purchases - seeking more fertile soils and flatter topography in more accessible locations.
It was notable that demand for plantable land fell during the final quarter of 2022 where land agents reported a decline in forestry buyers' confidence and land values. Factors influencing the change included: a drop in the price of timber; delays and uncertainty in the planting permission process; changes to the additionality rules of the Woodland Carbon Code; and companies fulfilling their quotas or exhausting annual purchasing budgets.
Estates
Agents referred to institutional 'players' with significant capital backing that were seeking land for investment, both due to high long-term yields, but also a perception that there are increasing means to monetise land beyond rental payments, including carbon credits and ecosystem service payments.
Whilst the 2021 estate market was characterised by excess demand, it was reported that supply and demand were beginning to level out during 2022. Overall, the market for estates remained strong in 2022 from a sellers' perspective, with some signs that demand was weakening at the end of the year.
Agents highlighted a variety of estate buyer motives during 2022. The most noted theme was that environmental, social, and governance (ESG) motivations had become drivers for estate acquisition. Whilst amenity purchases continued to be a motivator for smaller estates, it was suggested that demand from lifestyle buyers was less significant through 2022 compared to previous years. Sporting potential was perceived to be a weakening motive for estate buyers in 2022, although many estates continued to be heavily managed for sporting interests.
Farmland
Farmers remained the most active actors in Scotland's farmland market and more widely in the rural land market during 2022. However, many other types of buyers were active in the farmland market that caused increased competition, particularly for more marginal (plantable) land. The upward trend of the value of prime arable and upland farms continued in 2022 driven by competing demands from existing farmers, the commercial forestry sector, and natural capital driven investors.
For prime arable land, demand typically arose from neighbouring farms or large "commercial farmers" with money to reinvest from farming profits, or development monies. The most common purchase motive for upland agricultural land in 2022 was tree planting potential. There was comparatively less demand for mixed farms. A clear theme that emerged during 2022 was the upland farmers that had previously sold hill ground for forestry, natural capital or renewable energy buyers had started to reinvest that money in better quality land "down the hill". Due to the high milk price in 2022, it was reported that some dairy farmers had started to expand their business, and, ins some instances, this was leading to the reconversion of historic dairy units.
Future trends
One of the most common discussion points regarding the future of land markets related to the role of natural capital - in particular carbon - as a driver of the market. Further, most land agents suggested that the end of the current agricultural support system was a threat to farmers, and thought "a flush of smaller, less viable units" might come onto the market in the subsequent years - particularly of farm types more reliant on support payments.
It was also highlighted that due to the very limited supply of good farmland, some farmers with Capital Gains Tax relief monies had not yet had the opportunity to reinvest development funds. With rollover relief being timed-bound it was explained that 2023 may see considerable competition for farmland as buyers race to avoid taxation.
Uncertainties arose over the continuation of volatile and downward global macroeconomic conditions. If commodity prices and interest rates continue to rise, land agents suggest this may cause some farmers to sell their land. Some land agents also suggested that future political events could be seen as a threat to the land market, particularly an independence referendum or a general election which may suddenly change the political landscape.
Natural capital
Natural capital payments were considered one of the key drivers in the estates and upland farmland markets in 2022. It was reported that large institutional or corporate 'carbon offset/inset' buyers become more obviously differentiated from commercial foresters during 2022. Changes to Woodland Carbon Code rules, particularly to the additionality test, were reported to have had a "cooling effect" on institutional demand for land for planting in 2022. Overall, peatland restoration was not as prominent as a main driver in the 2022 market compared to afforestation. Whilst biodiversity potential was considered an important factor for buyers, rewilding type projects were not reported as a strong driver of land prices in 2022. Although reported as an important driver of land sales and land value in previous years, demand for renewable energy infrastructure projects remained relatively consistent (or slightly slowed) throughout 2022.
Read the report in full below.
Report authors: Ian Merrell (SRUC), Lorna Pate (SRUC), James Glendinning (SRUC) and Steven Thomson (SRUC).
Commissioned by the Scottish Land Commission.
With thanks to participants and Agencies who voluntarily provided their time and expertise to the report.
