Land value is not simple economics
The value of land is not directly related to its economic value. Supply and demand, as well as other considerations, set the sale price of agricultural ground
Land prices in 2008 were the lowest recorded in five years and the number of farms sold last year was significantly down. As the economy crumbles around us, are we seeing the beginning of the end of high land prices? Will agricultural land fall back to its economic value?
Never, says leading agricultural consultant and investment expert, Philip Farrelly.
"The economic value of agricultural land will never be relevant," he insists. "Land always has a value but it is not related to the returns from farming it."
However, he agrees that a reduction in the price of land is inevitable. "There has to be a slowdown but it will not be a collapse," he says.
"We couldn't possibly expect it to stay high, as the value of houses in Ballsbridge, shares in companies and apartments abroad falls.
"It is unrealistic to expect land to buck the trend that has everything around it falling."
Land prices are a factor of supply and demand, explains the agricultural expert.
"The only variable is the amount of land that is being sold, and unless the market is flooded, land will still make a solid price," he insists.
Interest
He takes the example of a farmer who sells land to the NRA for a motorway in Tipperary for €200,000.
"If a farm comes up for sale in Westmeath, he's not interested. But if a farm comes up in Tipperary, he is interested. However, there are probably another four farmers who also received money from the NRA interested in it too. Interest in land is what drives the price."
In the five-year peak for land prices, between early 2003 and late 2007, agricultural land was commonly bought by business people. Accountants, managers and solicitors all over the country bought land and the price for choice bits of land tripled.
The speed and scale of the increase was totally unprecedented.
"Look at companies like CRH and Kerry, brilliant companies that have transformed themselves completely but yet their share value today is the same as it was five years ago," he says.
"How could we expect one asset class, land, to stay up when everything else is falling?"
The economic value of land is between €1,500 and €2,000/ac, based on the price of grain over the past five years.
However, land cannot be valued in this way, according to the investment guru.
Instead, the value of the land depends on wider criteria: what businesses are in the locality; which dairy farmer is nearby; who sold land for development; who's returning from four years in Australia with money; and whether planning permission would be achievable.
As for the land that changed hands in the recent past for €400,000-€600,000/ac, Mr Farrelly predicts it will take another boom like the one that started in the 1990s before that land will be built on.
"That is for the next generation," he says.
But will developers sit on the land for that long or will they take their loss and put it back on the market at farmland price?
Will they even have a choice or will it be the bankers who decide?
"That's the nature of boom and burst -- some people are very lucky and some people get caught," he explains.
"Some farmers got a few million for land for development but then put the money into Bank of Ireland shares.
"Their money is now one-tenth or one-twelfth of what it was."
The episode will scare people away from investment, he believes. "My father went through the economic war and the depression and saw what happened in the 1930s," says Mr Farrelly.
"Throughout the years, he could have bought some really nice bits of land but he had a real fear of getting into such a state of indebtedness that he could lose everything."
On the day that Anglo Irish Bank was nationalised, bringing its share value down to 1/85th of when it traded at €17 per share, Mr Farrelly said people could be scared to invest in the future.
"It will chasten things," he predicted.
- Caitriona Murphy
