The outlook for rural estates in Scotland

Identifying the opportunities and threats for rural estates in Scotland.

16 January 2013, Words by Ian Bailey

 

• Our Estate Benchmarking Survey shows that rural estates, through a range of property assets, are managing the risk of income volatility. This will continue to be necessary as large swings between the peaks and troughs of commodity prices become the norm and the macroeconomic situation remains bleak in the short-term. The benefit in having a blend of significant income from both residential and agricultural sectors has helped ensure robust ongoing performance by Scottish estates.

• Maintaining the success of businesses going forward will require regular evaluation and monitoring of the estates’ assets. A regular and thorough review is essential to ensure new opportunities, which may lie within the core income streams, are not overlooked as these will inevitably benefit from the economy when this does recover and estates will wish to be best placed to harness these opportunities.

• The outlook for rural estate businesses is positive and we see no reason why they will not maintain their relatively ‘recession proof’ status. We expect gross incomes to remain healthily in the black, especially where costs are efficiently managed.

• With opportunities come threats, which is certainly the case in agriculture, where high commodity prices are often balanced by reduced yields and quality (as in the current harvest) and input costs – especially of feed for livestock enterprises. The current CAP reform will have some strategic implications for rural estates. These factors and the uncertainty over the review period will impact on both tenants and landlords.

• Restructuring of farm tenancies, striking a balance between rent levels, capital projects, the release of assets not essential to the tenant’s farming operations, will drive more value (income and capital) and inheritance tax planning from the whole estate, whilst providing a sound infrastructure for the estate’s farming operations (let or in-hand).

• Opportunities still exist to drive more income from the residential sector. 54% of all houses on the average estate are not SATs and therefore rental potential is not maximised. There are many reasons for this and very few estates will even choose to have a 100% target, but converting a proportion of these to SATs will generate more cash and boost capital value.

• Renewable energy is a hot topic and the Renewable Heat Incentive (RHI) and Feed in Tariffs (FITs) may offer the ideal entry into schemes on estates. As with all new projects, technical and financial appraisals are essential to get the best solution for the individual circumstance and that any hurdles are successfully cleared.

• Diversification may still offer opportunities in some locations, but any move down this route will need careful planning and market research to help ensure success. Woodlands might be a prime target in this regard.

• Although the next few years are unlikely to be without their problems, and there may be some serious economic blows especially in Europe, we believe flexible and proactive management strategies will ensure success. In addition, rural assets will continue to dominate the top investment performance.

• The forthcoming review of land reform will create further uncertainty, particularly on the let agricultural sector. Landlords will remain nervous about new lettings and we expect to see a continuing reduction in 1991 Act tenancies in favour of contracting and other arrangements.

• Estate owners will continue to demonstrate their social responsibility investing more and more into the let and in-hand residential agricultural portfolios providing a stable community of jobs, good working environments and affordable homes to live in.

 
 

Key Contacts

Ian Bailey

Ian Bailey

Director
Rural Research

Savills Margaret Street

+44 (0) 207 299 3099

 

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