A PICTURE OF FARM LETTINGS

THE CAAV AGRICULTURAL LAND OCCUPATION SURVEYS

Jeremy MoodySecretary and Adviser

Central Association of Agricultural ValuersTFA Tenancies Conference – 1st September 2015

The CAAV Agricultural Land Occupation Survey

• Has run for 38 years• Prompted by 1970s legislation on tax and

succession• Started as the Tenanted Farms Survey• Records decisions about land occupation

• covers AHA successions separately

• Covers England and Waleso now also a separate survey for Scotland

• Only major source of data on changes

What Does It Cover?

• What land is or is not let that year• size of unit; equipped or not• what happened to land not re-let

• By whom• private owner, institution, council?

• To whom• same farmer or not? “New entrant”?

• For how long• the term agreed

• Does not cover rent

All Units, Not Just Farms

• Covers the whole market• units with house, buildings and land (“farms”)• units with buildings• bare land

• Not just farms• Everything from seasonal potato or

grazing tenancies to 40 year lettings• So headline figures report across all• More detail and texture is reported• A story of private agreements

A Story in Four Acts

• Pre-1995 – Heavy losses from let sector• AHA used only for its sub-2 year loopholes• legislatively imposed market failure?

• 1995 to 2002 – Inflow of land• after FBTs and 100% APR

• 2003 to 2005 – Balance for SPS • new land let to tenants with history • owners taking possession for SPS

• 2006 to date – Stasis for 9 years• declining activity – an equilibrium?• 2013 and 2014 suggest pre-BPS caution

Who is Letting?

• Overwhelmingly it is private landowners• >75% of number and area of lettings

• Then County Council lettings• >10% of lettings

• Traditional institutions • <10% of lettings

• Financial institutions • now very minor players• UK cannot offer large enough blocks of land

What is Being Let?

• Overwhelmingly it is land that was previously let – in 2014• 94% of FBTs ending were re-let• 76% of AHAs ending re-let as FBTs

• A little previously in-hand land • No land purchased to be let in 2014

• had peaked at 86 units (10,417 acres) in 1997

• Little movement between other arrangements and lettings

• Very little let with diversification in mind

What is Not Being Re-let?

• 1980s saw heavy losses as sitting tenants bought – now insignificant

• Of AHAs that ended in 2014• 8% sold to third party (more usually c.20%)• 6% taken in hand• 8% put to other arrangements

• Of FBTs that ended in 2014• 2% sold to third party• 2% taken in hand• 3% put to other arrangements

• Despite present land prices

An Observation• The market is divided• Owners who are comfortable with

letting continue to let• they can accept tax treatment and other issues

• Those who are not comfortable with lettings stopped years ago• they use other arrangements• for tax, practicality, psychology, etc• can some owners not see themselves as

landlords?

• How to attract such owners to let?

What are They Letting?

• 84% of units let covering 60% of land area are bare land

• 7% of units let covering 17% of land have land and buildings

• 9% of units let covering 24% of land have a house, land and buildings• these are what might often be called “farms”• how many fully equipped units are out there to

be let?• what does a restructuring industry need?

Bare Land Lettings

• 84% of units let covering 60% of land area are bare land

• 88% of units let by private owners• 57% of County Council lettings• Smaller than average units• c.70% of all lettings are bare land units

of less than 50 acres

Size of Lettings

• Average area of lettings around 70 acres• heavily influenced by bare land lettings

• 15% of lettings above 150 acres• Lettings of land with buildings average

over 150 acres, half were over 125 acres• 7% of private owners’ lettings

• Equipped “farms” average over 160 ac• 5% of private owners’ lettings• 13% of traditional institutions lettings• 32% of County Council lettings

For How Long?

• Survey records the term agreed – so not• use of break clauses• tenancies left to continue after expiry

• Probably understate actual terms• Overall average in 2014 was 3.53 years• Long run average 3.75• Has ranged between:

• 3.17 years in 2014 – uncertainty over BPS?• 4.25 years in 2005 – with 7 year lettings for SPS

• But that hides wide variations• with no particular distortions for law/tax

For How Long? Bare or Equipped?

• Bare land lettings average 3.06 years• Units with land and buildings averaged

4.10 years• 5 year average 4.8 acres

• Units with house, buildings and land (“farms”) averaged 8 years in 2014• had been 9.5 to 11.5 years, 5 year average 9.3

• Link to size of unit• under 25 acres averaged 2.62 years• over 200 acres averaged 5.56 years

For How Long? Former Status?

• FBTs of units where an AHA had ended were let for an average of 7.2 years

• Where the previous letting was an FBT the average was 3.56 years• for new FBTs over 5 years, the average term was

10.26 years

• Where the unit had been in-hand or contract farmed, the average was 3.2-3.4 years

Some Observations

• The simple 3.5 year average length does not give the full picture

• Agreed terms vary with differences in character of lettings, by such factors as • size – longer terms for larger units• fixed equipment – longer for equipped units• previous letting – longer terms for ex-AHA units

• No report suggests a difference in rent by length of term of an FBT• as interest rates see a yield curve. Why not?• is pressure to restructure more important?

Let – To Whom?

• A pattern of continuity but with opportunities for “new entrants”

• c.67% of new lettings are to the same farmer as before – re-lettings

• Where tenant changed, 17% were let to “new entrants” in 2014• down from recent figures of 26-34%• 5 year average 28%• 5.5% of all lettings• NB Few AHA successors seen as new entrants

What do New Entrants Get?

• Slightly larger average area• 91 acres in 2014• has been 66 to 147 acres

• 55% of lettings are by private owners• 28% by County Councils• 16% by traditional institutions

• 34% of lettings were fully equipped• compared with 9% of all lettings

• 34% had terms of more than 5 years • compared to 14% of all lettings

Some Observations

• More positive picture for new entrants than suggested by common anecdote

• Reviewing the pattern over the years suggests that the real problem is not the share of FBTs but the total number

• More lettings would help new entrants• How much change in occupation does

the industry need?• tension between needs of existing businesses

and new entrants

Look at Rest of the British Isles

• British Isles offer two comparables• within similar legal/tax/cultural framework

• Ireland • broke its tenancy system in 19th century• owner occupiers become seasonal lessors• often do not wish to be seen as landlords• concern over investment/management of land• would like tenancies – even five year ones

• Scotland• an imploding tenancy system

Scotland’s Implosion

• Has 1991 Act tenancies – like AHAs• a restricted reform in 2003, now politically fraught

• Accelerating decline in let sector• 42% decrease let land area 1982-2013 – annual

loss of 1.3%• 37% decrease 1991-2013 – annual loss of 1.6%• 17% decrease 2004-2013 – annual loss of 1.7%

post 2003 changes• almost no lettings at present• letting now seen as high risk, low reward

• Now down to 23% of agricultural area, one of smallest let sectors in Europe

Why Frozen since 2006?

• It may just be that the market has found an equilibrium on today’s facts• a balance between owners and farmers

• Is it a response to volatility? - unlikely• Tax? - no change fits the facts

• Concerns around 1997 more likely but no effect

• Obvious change is the area-based CAP• rewarding continued occupation of land by

existing owners and existing tenants• a friction on structural change

Market Failure? - I

• Market failure – if outcome is inefficient• Main types of market failure

• no one owns the resources (common property)• public commodities – one person having it does

not deprive another (example – defence)• externalities – positive or negative• there is no market (many environmental goods)• factor immobility – e.g. people will not move• information/assessment failure • distorted rates in/access to capital markets• excess market power (monopoly/oligopoly)• unstable markets

Market Failure? - II

• None of these seem apt here• there is a market• land ownership is very fragmented• owning farmland forces choices over current use

• “Efficiency does not imply happiness”• markets are about allocating resources • not liking the outcome is not market failure

• The supply of land is indeed limited• the more so for viable full time opportunities for

competitive commodity sellers

• The market is affected by some existing interventions

What is Changing? – Tenant Right

• Repeal of 1978-1983 Regulations• from 1st October for AHAs in England• to be current value to incoming tenant• with current scientific knowledge• CAAV’s A Review of Tenant Valuations• so more effectively priced• a state-imposed pricing failure resolved

• Could well see substantial claims• read across to FBTs and routine improvements

• Encourage longer/continuing tenancies?• Links to debate over soil health, etc

What is Changing? – IHT

• Private landowners are the key players• includes ageing farmers

• 1995 extension of 100% APR to new lettings was important

• “Farmhouse” still an issue• requires day-to-day farming of land• increasing challenge by HMRC

• Proposed IHT Residence Nil Rate Band Amount may change this for many cases• claim that relief instead and let the land?

• NB CGT - Watch Entrepreneurs’ Relief

What is Not Changing (Yet)? – CAP

• Is this likely to change in the near future?

• Continues to put upwards pressure on rents

• At what level would area payments cease to distort the market?

• What changes would have to be made for wider commercial competition for land?

The Risk of Future Failure?

• We have seen failure as:• the 1986 Act led to 18 month lettings and use of

other arrangements instead• the Scottish 2003 legislation has not stopped a

growing decline led by political risk• Irish owners have not yet wanted to be landlords• the CAP inhibits change

• With today’s change and challenge, will new interventions• discourage lettings? • encourage other options instead?• strengthen or weaken farming commercially?

Any Questions?

www.caav.org.uk