Here’s why builders and developers should be investing in agricultural land

New analysis from Excellion Capital, the boutique debt advisory and investments firm, reveals that developing agricultural Class Q land into residential dwellings can create a market value of £3.7m for savvy investors.

As British farmers face the threat of a new 20% inheritance tax levy on all land and business assets worth more than £1m, some farming families are looking at ways in which they can sell all or part of their land to pay inheritance tax bills, or at the very least mitigate the future cost of inheritance tax.

But does such an investment make sense for developers?

Excellion Capital has analysed the investment potential available to developers who purchase Class Q land for the construction of residential properties, to see what sort of return they can expect.

Some farmers are selling the entire farm

With the new inheritance tax proposal potentially disincentivising farmers from passing their businesses down to the next generation, some families are having to consider the idea of selling the entire farm.

Excellion’s analysis of current market listings* has found that there are currently 112 farms currently listed for sale in England.

Existing data shows that the average sale price of arable land over the first half of 2024 stands at £11,000 per acre, while the average sale value of pasture land stands at £9,600 per acre*.

According to further data from the UK government*, the average size of a UK farm is 202.6 acres. As such, the estimated average value of an arable farm currently stands at £2.23m, while the average value of a pasture farm is £1.94m.

The Class Q option

To avoid having to sell their farms, or sell quality farming land, Excellion’s research reveals that thousands of farmers have the alternative option of selling agricultural buildings and their plots, otherwise known as Class Q land.

Under Class Q permitted development rights, disused or current buildings located on agricultural units can be converted into residential dwellings, with the option to create as many as 10 homes from a single building.

As such, plots that aren’t in regular or meaningful use and don’t contribute greatly to the ongoing success of the farm, can be offloaded to residential developers for substantial amounts of money.

Excellion’s analysis of planning data* reveals that there are currently 8,892 Class Q sites in England eligible for change of use from agricultural to residential. These sites are not necessarily listed for sale. Instead, they are opportunities identified through the planning classification assigned to them.

What investment potential does Class Q land hold for developers?

As of 2024, developers can build a maximum of 10 homes on a Class Q plot across a maximum floor space of 1,000 square metres. As such, the average floor space of each home can be calculated at 100 square metres.

According to the most recent figures (November 2024), the average value of developed land stands at £347 per square foot.

100 square metres is equivalent to 1,076 square feet, which means a 100 square metre home has an average market value of £374,019.

Therefore, developers who build 10 homes on a Class Q site are looking at a potential total sale value of more than £3.7m.

How much should an investor pay for undeveloped Class Q land?

If the potential value of a developed Class Q site sits at £3.7m, how much can developers expect to pay to purchase the land in the first place?

An average expected land cost can be calculated by taking the value of the developed land (£3.7m), and subtracting the estimated cost of construction* combined with the developer’s required profit margin (which sits at an industry average of 20%*). This means removing an average of £2.6m.

The figure you’re left with is roughly £1.1m which is, therefore, the average price that a developer can expect to pay for a plot of undeveloped Class Q land large enough to build the maximum number of properties allowed.

Who is currently buying farmland?

In 2014, private investors, institutional investors, and overseas buyers purchased little more than 20% of English farms that were put up for sale.

By 2023, buyers accounted for approximately 30% of all English farm purchases. This suggests that over the past decade, investors and developers have identified the potential returns available from purchasing and redeveloping farmland, and given the new situation that farmers find themselves in, it’s reasonable to assume that these numbers are going to increase further over the coming months and years.

Robert Sadler, Vice President of Real Estate at Excellion Capital, comments:

“Farmers are understandably concerned about the proposed inheritance tax changes, and the tax bills involved could put real financial pressure on them.

But while many farmers might be cash poor, they are increasingly asset rich – there is a lot of hidden value in farmland – and that’s why Class Q opportunities present such a great opportunity to create cash wealth by selling off what is, in many cases, little more than brownfield land.

And while these Class Q designated plots provide an income opportunity for farmers, they also make for a very promising avenue that investors and developers should now be exploring. Considering that many farmers aren’t even aware of the Class Q opportunities that exist on their land, it’s clear that investors have the chance to strike up some very interesting and lucrative conversations with farmers up and down the country.

But Class Q opportunities aren’t the only thing that developers and investors should be considering when it comes to conversations about farmland. Land promotion – in which a land promoter agrees with a farmer to gain planning permission for a small portion of their land, at which point the land can become up to 100-times more valuable and can be sold to local developers and housebuilders – is also becoming an increasingly fruitful endeavour.

I personally worked on four land promotion deals in 2023, all in local areas with a drastic shortage of housing. With planning permission obtained, the land value was projected to be between £600K and £1.1m per acre, a handsome amount that would certainly help farmers pay their inheritance tax bills.

In these cases, the eventual buyer of the land would be able to build homes with projected selling prices of between £500,000 – £700,000 each, with up to 30 homes on each of the four sites.

Excellion Capital is well versed in helping developers secure finance for a project like this and fully expect to be working more regularly than ever in this area next year.”

Data tables and sources