2016: a year of two halves

For the majority of agents around the country, 2016 was a year of two halves. For some, the first six months of the year were buoyant while the backend was sticky; for others, the first half was sluggish while the second half saw more activity. Clearly, the market was not as fluent as the previous two years.

However, despite the slow start to the 2016 spring season, the momentum picked up as the year progressed, with more and more farms arriving on the market, and yet many agents reported a severe shortage of stock.

What might surprise a lot of people is that the amount of land offered for sale was only down by 1.1% on the previous year. A total of 73,778 acres arrived on the market in 2016, only marginally down from the 74,629 acres that were offered for sale in 2015. Almost three-quarters of these farms (74.7%) were offered for sale by private treaty, which is up 5.3% on the previous year.

During the course of the year, a significant number of agents expressed concern about the auction room, citing the relatively short time frame to allow potential buyers to get their finances in order as a barrier to bidding at auction. Anecdotal evidence suggests that while many farmers were eager to buy at auction, they either hadn’t got the clearance from the bank to go ahead or they only had permission to bid up to a certain threshold, both of which limited their chances of securing a sale.

It was clear though that there was still a steady appetite (but a slightly more cautious one) from farmers to buy land in most parts of the country. However, for some, the goalposts had moved when it came to price – the amount of money that farmers could offer, or were willing to spend, had notably tightened. That extra mile could not be met. The gap had widened between what the seller wanted and what the buyer was willing to pay. Consequently, prices remained static or fell in these regions.

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Strong appetite

In other parts of the country though, most notably in Offaly, Louth and Waterford, a strong appetite for choice lots saw a significant rise in average values, particularly for small top-quality parcels.

In the main, once it’s priced correctly, good-quality land will sell and can buck the trend. But there is a general consensus in many parts of the country that the cash has dried up – cash buyers were much more active two to three years ago. Current reports suggest that an increasing number of part time farmers, who have disposable income, are buying up small parcels here and there. To a lesser extent, the equestrian buyer still has their hand in, as does the businessman.

In the main, the 2016 market generally boiled down to the critical need for local buyers and, more importantly, who had the most purchasing power. If there were no local takers, then the sale could prove long and painful. And in some cases, price did not reflect quality, simply because there was no competition. Certain sales took longer to get across the line – negotiations were drawn out, there was a delay in organising finance and in some instances, solicitors were notably slow getting the paperwork in order. In terms of supply, it wouldn’t be amiss to suggest that a number of sellers who were thinking of going to the market last year postponed their decision on the back of a difficult farming climate and falling commodity prices. Agents were ready to go to the market with these farms but the vendors pulled the plug at the last minute. Some of these property owners might go to the market this year instead. Others took the attractive option and entered a long-term lease arrangement.

Consequently, the supply of land to the market – while similar to 2015 at almost 74,000 acres – is well back from the record high of 86,408 acres in 2014.

While there was a general consensus that land values took a tumble last year, the 2016 Irish Farmers Journal Land Price Report can exclusively reveal that the average price paid for land in 2016 was €8,771/acre. This represents a 1.6% decrease on 2015, when the average was €8,914/acre.

While not enormous, this is the second year in a row that national land values have decreased – they fell by 9.9% in 2015. When combined, the average price paid for land has fallen by 11.5% over the past two years.

However, despite a national drop of 1.6%, the market for land remained stable throughout 2016. Ten counties experienced either no change or a slight increase/decrease. Four counties, namely Louth, Offaly, Waterford and Wicklow, recorded major price increases, while Dublin, Kerry, Kildare and Roscommon recorded notable price decreases.

Regional price fluctuations have become a prominent feature of the agricultural land market since the recession hit in 2008.

The regional market is clearly influenced by the quality of land that is offered for sale, the number of local buyers or interested parties, and the availability of cash or access to funding.

For the past seven years, the land market has displayed small waves of peaks and troughs whereby the average price shows a slight increase one year and takes a nosedive the following year. This can be attributed to regional price variation.

New level

The market has been desperately trying to find a new pricing level since the record heights of €23,000/acre in 2006. At this stage, it would be safe to say that the market has corrected itself and the new pricing regime lies somewhere between €8,700/acre to €9,900/acre.

The average price for land has never surmounted the €10,000/acre benchmark since land values halved in 2009 to average €10,200/acre. That’s seven years ago and there is nothing to suggest that it will hit €10,000/acre going forward.

Falling milk prices had major impact

Falling milk prices in the early part of last year had a major impact on the land market right across the country. Dairy farmers were regular, strong contenders for land throughout 2014 and 2015 in the build-up to the abolition of milk quotas. This demand significantly weaned as the price of milk began to fall sharply in the back end of 2015 and into the spring of 2016.

Confidence was instantly rattled as many farmers had already spent substantial sums of money on infrastructure, milking parlours and cubicle sheds. At the same time, their cashflow was severely diminishing. Buying land took a back seat. On top of this, a significant number of farmers had secured long-term lease agreements in the preceding years and were no longer on the lookout to acquire more land.

But the price of milk began to rise again in the second half of last year. Many agents began to notice a pickup in the level of inquiries, particularly throughout October and November. Some farms that couldn’t be shifted earlier in the season, all of sudden found a new owner. This was probably helped by the partial release of the Basic Payment Scheme in October.

Access to funding still a major impediment

It is no exaggeration to say that almost every agent I spoke to over the past two months cited access to funding as a major obstacle to land purchase. Bearing in mind that every case is different, one auctioneer told of a man looking to buy a parcel of land that was worth €100,000. He had about €40,000 of capital himself and was looking to borrow the remaning €60,000. But because of all the hoops and loops that he was asked to go through by his lending institution, he decided to cash in his pension to raise the remaining €60,000 and chose not to proceed with his lender.

On page 16, Irish Farmers Journal agribusiness editor Eoin Lowry reports that there was a significant reduction in the number of applications and drawdowns to fund land purchases in 2016, suggesting that “it may be down by as much as 30% on 2015 levels”.

This would indicate that fewer farmers (and buyers of land) approached their lending institutions to borrow money to fund land purchase last year. Confidence levels plummeted on the back of falling milk prices for dairy farmers in the earlier part of the year. To a lesser extent, the confidence among beef farmers and buyers from Northern Ireland was also rattled, on the back of the Brexit vote.

There was an appetite to buy but no confidence to move. But farmers weren’t the only ones to lose confidence – the lending institutions also tightened the shackles and started to lend cautiously across all sectors, not just in dairying.

One agent summed it up by saying that “it was easier to get a mortgage for a house than to get a loan for land”.

Impact of Brexit

While the majority of the country saw no immediate impact of the Brexit referendum on the land market, a number of counties in the north Leinster and Connacht regions did experience an instant blow. The whole uncertainty that surrounded Brexit coupled with the immediate fall in sterling saw the number of Northern Irish buyers for land almost collapse overnight.

For many years, the favourable euro/sterling exchange rate was their ace card, with bidders from the North either becoming the successful buyer or the highest underbidder at a number of auctions in the Leitrim, Cavan, Westmeath, Meath and north Kildare regions. This level of activity took a major nosedive after the June referendum into July, August and September. Northern inquiries, however, have started to flow again since the autumn, but not to the same extent. Consequently, land prices showed signs of softening in some of these regions.

But the Brexit result also had an indirect impact, in the form of falling beef factory prices. In the weeks following the Brexit vote, factory quotes for beef fell instantly by 15-20c/kg, which triggered a downward price trend over the course of a number of months. The drop in beef prices affected farmers’ cashflow and ultimately their ability to buy land including the small 10- to 20-acre parcel beside them.

UK buyers are also regular buyers of the rural house on an acre, particularly in the west of Ireland. While many agents reported that the level of inquiries abated after the Brexit referendum, it didn’t completely collapse – the phone calls continued. However, it quickly became apparent that the spending strings had clearly tightened.

One agent explained that many of these UK buyers are retired couples looking for a rural pad in the Irish countryside for a 10- to 15-year period, after which they return home again. He made the point that these retired couples are not going to put their plans on hold until the details of Brexit emerge. They are still willing to proceed with their plans but have less of a budget to play around with. These buyers still perceive Ireland as offering value for money.

Country houses market take a hit

In my view, the sale of country houses and estates took a hit last year. A significant number of these types of properties failed to secure a buyer and are still available. The reason for this could be partly attributed to the Brexit referendum, with buyers from the UK, who are generally quite active in this category, taking a back seat. I notice that the asking prices on a number of these properties have been reduced to lure in potential purchasers.

In the main, the customers for these multi-million-euro properties tend to be cash buyers. They don’t rely on borrowing to fund their purchase. US buyers are still prominent but can be quite selective in their choices and are looking for a bargain. Irish buyers made a return to this market in recent years but apparently are willing to sit and wait for further price cuts, knowing that the sterling customer is not as active, nor is as heavily armed with cash, as he used to be.

Growing interest in forestry

While the market for agricultural land stayed relatively stable last year, the demand for forestry plantations and land suitable for forestry increased. Such is the demand that agents can’t get enough suitable blocks to meet the growing interest. One agent summed it up by saying “that it was easier to sell marginal-quality land than top-quality land”.

On pages 18 to 23, forestry editor Donal Magner explores the return on investment in a forestry plantation and outlines the associated costs and revenues. Prominent forestry companies estimate the return at 5% to 10% which, when compared to leaving money on deposit in a bank, is very attractive.

The attraction to forestry has been further endorsed in recent years by the removal of the differentiation between farmer and non-farmer premium payments. In essence, a non-farmer can receive the same premium as a farmer, which has generated growing interest from pension fund companies, private individuals and investors.

The increasing demand has seen an upward trend in price, especially for bare land. Eighteen months ago, the top quotes for bare land would have hovered around €4,200 to €4,500/acre. At the moment, €4,700 to €5,000/acre is quite common with the best prices given for the bigger blocks (excess 30 acres) that have good access.

Many forestry companies are scouring the country to source land as part of private investor portfolios. These companies are willing to pay up to €5,000/acre (and a bit more as in the case of 100 acres in Leitrim which averaged €5,200/acre) and are outbidding local farmers for land. It’s clear this heightened demand is keeping a price floor on marginal type ground which is underpinning the price of good agricultural land.

Big blocks are hard to source and as a result, the forestry companies have to resort to buying a range of smaller lots within a particular location.

Average farm size offered for sale is only 46 acres

With 62.3% of land parcels offered for sale comprising less than 40 acres, it’s clear that the pace of arriving at some level of scale in this country is extremely slow. The average farm size offered for sale last year was only 46 acres.

Only those who have the funds to secure 100- or 200-acre blocks at a time will be successful at achieving scale in their farming business. Just 121 farms, or 7.5% of farms brought to the market last year, comprised 100 acres or more. This represents an average of just four farms per county (in the Republic) – which clearly doesn’t offer a huge amount of choice for farmers, even if they had all the funds in the world to buy.

At 73,778 acres, less than 0.5% of the total land area of the country came to the market last year.

We give a comprehensive insight into the performance of the 2016 agricultural land market

The 2016 Irish Farmers Journal Land Price Report reveals that the average price paid for agricultural land across the 26 counties was €8,771/acre, representing a 1.6% drop on the 2015 average of €8,914/acre. Despite a difficult farming environment, land values remained relatively steady in the majority of counties, with the exception of eight counties that recorded significant price fluctuations.

This is the seventh year in a row that land prices have hovered below €10,000/acre, which clearly suggests that we have reached a new pricing level.

This year’s report is based on 1,606 farms/land parcels that were brought to the market in 2016, representing a total of 73,778 acres offered for sale by private treaty, public auction and tender. The national average of €8,771/acre is based on 804 completed sales across the 26 counties.

In the following pages we outline the amount of land that arrived on the market in 2016, we take a look at the national average and reveal the total value of land sales for last year.

National average €8,771/acre

Residential farms more expensive

Private treaty option more popular

Over 1,000 farms less than 40 acres in size

Over 800 completed sales

Value of sales amounts to €279m

The total value of agricultural land sales in 2016 was almost €297.5 million with almost 34,000 acres recorded as sold.

Bearing in mind that a significant amount of land was unsold at the time of compilation, the value of land sales is back from €316 million in 2015 when almost 36,000 acres were recorded as sold.