What rural asset class is performing best?

Anna Ward, senior research analyst 

Residential Development Land

Demand remains strongest for housing-led greenfield sites outside London in areas where house price inflation continues to offset build costs.

Greenfield land prices strengthened between January and March by 5%, according to our Residential Development Land Index. Annually, greenfield values rose almost 23%. In contrast, brownfield land prices rose 0.4% in Q1 and were up 3.3% compared with a year ago.

Land market activity in the first quarter remained focused on greenfield housing schemes outside London where house price growth has been stronger. But higher mortgage rates and a cost-of-living squeeze mean we expect UK house price growth to slow later this year. Our fifth quarterly survey of volume and SME housebuilders in England found that 62% think the rising prices of goods and services is weighing on buyer sentiment the most.

Increased construction costs and supply chain issues are a key issue around the country, but particularly in areas where house price growth has been weaker, such as in London. Our survey also found that build costs had had a ‘significant’ impact on 44% of respondents’ businesses in Q1, with nearly half reporting a ‘moderate’ impact.

Looking ahead, 40% of respondents thought that ‘build cost inflation’ and ‘supply chain disruption’ would have the biggest impact on the housebuilding sector in Q2, with over a quarter citing planning delays as another key issue for next quarter. Increased fire safety costs will also continue to weigh on profit margins, but many housebuilders are still lowering margins to compete for land amid rising costs.

For now, a lack of availability of land is currently supporting land pricing. In total, 85% of respondents said that land availability was either ‘limited’ or ‘very limited’, up from 70% in Q4 2021. Against this backdrop, the majority expect land prices to either rise (47%) or stay the same (44%) next quarter.

An increase in competition from logistics players is also exacerbating the land supply issue. It means that residential developers are being outbid on several sites, even those with planning permission in place for housing. Overall, our survey found that over half (56%) of respondents are seeing more land competition from other use classes such as logistics.

Andrew Shirley, head of rural research 

Forestry

Market snapshots Last year was another strong one for the forestry market and 2022 looks like it will be offering more of the same.

Total commercial forestry transaction values in 2021, covering around 25,700 stocked acres – a slight year-on-year decrease – nudged just past the £200 million achieved in 2020 to hit a record high, according to Tilhill’s UK Forest Market Report (FMR). Most of the value was seen in Scotland, which accounted for over three-quarters of sales. England recorded just 2% of the total.

Average values of standing timber plantations also soared by 21% falling just short of £8,000/acre. Although the sparsity of the market makes annual like-for-like comparisons vulnerable to skewing, a number of Scottish timber plantations have been sold multiple times in recent years enabling a more robust comparison. All have seen their values at least double, illustrating the strength of the market.

Demand remains strong from investors attracted by the natural capital opportunities offered by woodland as well as good returns from timber markets.

Carbon markets are also helping to drive demand land for new woodland creation schemes. FMR recorded £53 million of planting-land transactions last year and £26 million of deals that were identified specifically as natural capital-driven transactions.

It will be interesting to see if impending eligibility changes to the Woodland Carbon Code temper demand.

Most of the land purchased for tree planting was unsurprisingly in Scotland, but the proportion in England and Wales rose quite significantly. The average price paid for planting land was almost £4,500 per plantable acre. Despite this, the number of trees being planted in England and Wales is still well below government targets.

Farming unions and local communities in Scotland and Wales are also starting to question the amount of land being acquired for tree planting. They say policymakers should be focusing more on food security, while Sitka spruce plantations, which offer the quickest timber and carbon returns, are not especially popular with local residents.

But given that there seems no let-up in the interest in carbon from funds and other investors, prices should remain firm this year. Adding to the bullish sentiment, as with many other commodities, Russia’s invasion of the Ukraine has also hit global timber supply chains, pushing up prices. Russia, Ukraine and Belarus supply significant volumes of lower-grade timber to the EU.

Chris Druce, senior research analyst 

Country Houses

Two years on from the onset of a pandemic that has transformed the fortunes of the country house and rural property market in the UK, many of the changes it has ushered in now feel locked in.

The rise of working from home, and the interest in the countryside and regional town and city living look set to endure beyond Covid-19’s material impacts.

Prime rural property prices saw their fourth consecutive quarter of double-digit growth in the three months to March 2022. On an annual basis, average prices increased by 11.3%, up from 10.6% in December.

This unprecedented period lifted Knight Frank’s Prime Country House Index 1% above its previous peak in the third quarter of 2007, before the global financial crisis led to a slump in property values.

Price growth outside of London had been relatively muted before the pandemic, due to a series of tax changes that disproportionately affected higher-value properties, and political uncertainty caused by issues such as Brexit. Since then, the market has seen record-breaking growth as buyers have sought more space and greenery, with high-value country properties leading the way.

However, prime rural homes have underperformed compared with the mainstream and prime central London (PCL) markets since 2007. Mainstream property values have increased 48% since the third quarter of 2007 (to February 2022), and PCL by 16.5% over the same period.

The fact average prices in the country have only just recovered to their 2007 level suggests there remains headroom for future growth.

For now, low supply remains the biggest challenge facing buyers outside of London, although this is expected to continue improving as the year progresses.

Market valuation appraisals, a leading indicator of supply, increased by 14% in the first quarter of 2022 versus the five-year average. However, new instructions were down 8% in the same period, while new prospective buyers were up 42%.

With headwinds such as higher mortgage rates and inflation set to bite in the second half of the year, price growth in the prime country market is expected to slow and finish 2022 in single digit territory at 5.5%, suggesting prospective sellers might want to act sooner rather than later.

Chris Druce