The UK agriculture sector has a key role in the UK economy and the rural environment. Roughly 70% of the total UK area is utilised for agriculture.1 Around 19% of UK land is used for arable crops such as wheat and barley, and 1% for horticultural crops.2 Roughly 466,000 people were working in the UK agricultural sector in 2016 and 218,000 agricultural holdings. When the broader agriculture food sector is taken into account, (including the manufacture, distribution and preparation of food in catering establishments) the workforce exceeds 3.5 million people – around 13% of the UK total workforce.3 The average size for holdings larger than 20 hectares, 276 hectares in Scotland, 132 hectares in England, 98 hectares in Wales and 62 hectares in Northern Ireland.4 Farm Business Income (FBI) varies greatly with over a quarter of UK farms failing to make a positive FBI whilst 16% of UK farms had a FBI of over £50,0005. In 2015, the agriculture food sector contributed £109 billion to the UK economy, around 6.6% of the national Gross Value Added (GVA). Within this, manufacturing, retailing and non-residential catering accounted for over one quarter each. Food wholesaling covers 9% of the sector and agriculture made the smallest contribution at 8%.6
Brexit simply means Britain exiting the European union. Britain is leaving the European union due to a referendum vote taken on “Thursday 23rd June, 2016” (BBC.co.uk, 2018) where the results were 51.9% to 48.1% respectively. Over 30 million people voted which totalled 71.8% of the total people legally allowed to vote. There are three main scenarios from the outcome of Brexit, no Brexit which could lead to continued uncertainty in the market from before the referendum but after a final decision the markets should return to usual. A good Brexit would be when Britain votes to leave but negotiates a beneficial agreement allowing full access to the single market. A post-referendum impact could be uncertainty while a deal is negotiated, which will probably take around two years. A bad Brexit is when Britain votes to leave but fails to negotiate a beneficial agreement, which could lead to uncertainty while businesses and investors realign themselves with the new economic and trading realities. Agricultural land can be split into 5 categories, Graving Land, Tillable Irrigated Land, Non-Irrigated Continuously Cropped Hay Land, Non-Irrigated Summer Fallow Farm Land, Non-Irrigated Continuously Cropped Farm Land. In agriculture short term uncertainty lingers because of the current negotiating going on between the EU and Britain however even with uncertainty markets are likely to strengthen over the next five years. Holdings with a range of income streams will be sought after and commercial units with little scope to diversify could encounter further downside risk due to lack of reach within the market.
The initial short term impacts of Brexit on the UK were a weaker exchange rate. Sterling fell sharply against US dollar and Euro in wake of Brexit vote which lead to higher prices for imports. With over 50% of UK imports coming from the European union, about half of which are intermediate goods such as component parts this lead to increased spending on imports. This has an impact on the UK property market because it could a cause a downfall in exports for the agriculture sector. It also lead to a high current account deficit. External deficit of more than 5% of GDP requires strong net inflows of capital on the financial account. This effects the UK property market because it means there is less spending on subsidies and other schemes in this sector which increase debt for some farmlands which increases uncertainty in the market. The initial vote also lead to a decrease in short run real GDP growth. The UK is expected to take possibly two years to negotiate EU exit terms. Which lead to a steep fall in business and consumer confidence, which lead to weak demand in supply chains further showing that there is uncertainty in the market.
Diversification in the market is beneficial because diets are changing, due to red meat consumption under pressure and substitute foods on the rise farmlands have to look into newer food trends or be more involved in export markets. Being able to provide the right supply to a demanding market is essential because it allows the farmlands to make money as show in the diagram below. This could lead to an increase in property size due to higher income which could be used for investment. The diversity also allows the markets to be more spread out so that they do not just rely on the European Union as their main exporter. Therefore if agriculture was more diversified it would mean that Brexit would have less of an impact on the Uk property market because the European Union would not be the main exporter for this asset class.
Figure 1: A diagram showing an increase in demand
The shift in demand is caused by an increase in demand from D1 to D2 for substitute foods. This caused an increase in the quantity demanded from Q1 to Q2 and which caused a price increase from P1 to P2.
Figure 2: A diagram showing the market for farmlands in Britain.
In Britain there were just over 151,000 acres publicly marketed in 2017, as shown in figure 2 above. This is down 16% from 2016 which also happens to be 8% lower than the 10 year average of 164,000 acres. The greatest fall in volume was in wales, down a total of 40% year on year. This has lead to Wales having one of the weakest resiliencies against the changing market. Markets from England and Scotland are more resilient with England only being down 16% to 102,900 acres and Scotland only down 11% to 39,000 acres. The number of holdings marketed fell by 20% year on year to 725 in 2017, which was 5% below the 10 year long run average. Falling supply levels suggest some caution among sellers following the decision to leave the European Union.
The trends from 2007/08 as shown in figure 2 are figures from the global financial crisis and the trend shown in 2016 is from the European Union referendum, both of these big trends promoted an initial uptick in activity as some chose to leave the asset class. 197000 acres in 2008 and 181,000 acres in 2016.
Figure 3: Regional supply over the last four years taken at the end of June
The reduction in farmland values shown in figure 3 over the past few years is well documented and shows clear signs that price fluctuations for most regions and land types are begging to settle with only minor price adjustments. “values across GB are relatively stable, falling by just -0.6% during the past six months. The exception to this pattern is Wales where average values continue to soften falling just over -2% over the past six months.” (savills.co.uk, 11 July 2018)
Supply in Scotland is down 11% on last year as farmers took until June to catch up with one of the longest winters for 10 years. The wide range of prices offered for farmland continues with some arable farms making over £10,000 per acre but it can depend on location and size. We are currently seeing three scenarios in the market place. Around 30% of farmers, especially those with the next generation wanting to farm, are pushing to buy or occupy more land, 30% are prepared to move to a similar sized farm which has more flexibility for diversification and other income streams especially opportunities for renewables, supplying anaerobic digester plants or leisure. The remaining 40%, possibly more in some areas, are still showing uncertainty so are not acting in the market.
The European union is the main market for the export of Welsh agriculture products, “providing the market for over 80% of food and animal exports” (parliment.uk, 2018) Unlike the trends that were mentioned before the Welsh agricultural market is unlikely to be able to bounce back from Britain leaving the European Union because the barrier free access to the European Unions market due to a large amount of Wales products being exported to this market. This would impact the Uk property market because the lack of free trade would increase the price of exports which would lead to a decrease in demand causing a fall in real GDP.
A large portion Scotland’s land mass is under agricultural production, making the industry the single biggest in this region. Scotland’s farmers, crofters and growers produce output worth around £2.9 billion a year, and are responsible for much of Scotland’s £5 billion food and drink exports. The export target for 2017 is £7.1 billion. Roughly 67,000 people are directly employed in agriculture in Scotland, this works out to be around 8% of the rural workforce and means that agriculture is the third largest employer in rural Scotland after the service and public sectors. It is estimated that a further 360,000 jobs, 1 in 10 of all Scottish jobs, are dependent on agriculture. The agri-food sector is now the UKs largest manufacturing sector. Around 85% of Scotland is classified as Less Favoured Area. This is an EU classification which recognises natural and geographic disadvantage. Scotland is also very diversified because there are large numbers of farms in north west Scotland, but these are significantly smaller in terms of the numbers of livestock/area of crops grown than farms elsewhere. Sheep farming is the predominant type of farming in the North west and there are also many sheep farms in the south of the country. Larger cereal farms are concentrated in the East. Beef farming takes place throughout Scotland, but is particularly common in the South west. This area also has the bulk of the dairy industry. The diversity allows for lots of revenue streams which help to boost income leading to further investment and growth in real GDP
Looking at the property types from the assets classes of retail, office, logistics, industrial or agricultural I decided to look into agriculture because it is a huge industry throughout the UK, this being said it is more common in different areas such as Scotland or wales, hence why I have chosen to talk about these regions in more detail.
To conclude Brexit should impact agriculture negatively because the potential for the loss of a free trade area this would make it more expensive for farms to export there goods and services. However the impact would be different for Scotland compared to wales because Scotland is mode dependant on farming providing jobs because it employs such a large group of Scotland’s population therefore the government would be more likely to increase spending in this region to help keep the unemployment level low. Wales is less dependant on agriculture as it does not employ as many people in the region therefore the government are less likely to provide subsidies leading to the sale of properties in this region due to increasing debt and being unable to pay.