Why it’s important for landowners to make a strategic review
Having a long-term plan is more crucial for farms and rural estates than ever before. The Rural Report hosted a virtual meeting of Knight Frank’s senior Rural Asset Management team to discuss strategy matters. We share some of the key talking points from the discussion.
9 minutes to read
THE PANELLISTS
Tom Heathcote
Head of Agri-Consultancy. Passionate advocate of regenerative agriculture
Edward Dixon
Head of Rural Asset Management, West of England. A champion for rural diversity
Alastair Paul
Head of Rural Asset Management, East of England. Institutional investment specialist
Is a strategic review more important than ever?
TH Yes, definitely. Now is the opportune moment to take stock of what you’ve got. It’s the opportunity for the industry as a whole to reform itself and get itself un-addicted to subsidies, to innovate and drive forward.
ED In my mind, this is the biggest change in agricultural and environmental policy – both are completely ground-breaking. No generation alive has seen this level of change, so there’s no “this is the way we did it before, this is the way we always do it” option to follow.
AP The role and calibre of trustees is also very important. With all this change they would need a very good reason why they weren’t having a strategic review done at the moment. There’s so much going on, that if you weren’t being seen to be proactive and prepared for that, there is a risk you’re not performing your duties. The estate world is full of sleeping trustees.
ED It’s interesting, but as a result of all this change, more estates have finally made the decision to talk about succession, or are, in some cases, actually expediting succession a bit earlier than they might have considered. Obviously that is driving a lot of people to look at their estates from the ground up with a new set of eyes coming on to it.
AP Definitely. This generation of successors is in a position like no generation ever before – in terms of social media engagement, in terms of understanding being public facing, and in terms of understanding branding and identifying with brands. So I think, in a way, the successor has been more useful to the owner than ever before.
TH There’s a huge amount of business that’s coming to the countryside because of Covid-19 – staycations, local produce… People are more interested in the provenance of their food and people are wanting to get experiences out in open spaces. I was on an estate recently that has taken on a full-time person purely to focus on leisure and tourism opportunities. The local authority are really engaged and happy to dish out lots of planning consents for different things. We haven’t seen that sort of opportunity for a while.
Where do you start?
TH From my agri-consultancy angle, I always say you can’t make the plan until you actually understand what you’ve got and how your business is actually performing. When you understand what you’ve got, then you can make a plan for the future.
AP We’d also start trying to identify what the owner’s purpose and aspirations are so we can work out what the portfolio needs to deliver on. One of the things I always look at is which bits of an estate are sacrosanct and which are sacrificial. If you understand the bits you can work with and the bits you just have to leave as they are, that helps as part of that framework. What we end up with is a framework by which to assess opportunity, because you can’t predict exactly what is going to happen, but what we do is identify what is acceptable to the estate. It’s about testing the boundaries, particularly on things like risk because, historically, a lot of estates we go to, they wouldn’t have had debt and they wouldn’t have thought about taking debt up. It’s not something they would want
to consider.
ED As Alastair and Tom said, it’s understanding what you’ve got, and that includes the people around you, the local economy and community, incomes, affordable housing percentages, that kind of thing. We put a lot of effort into really understanding that because it dictates the opportunities you’re likely to be able to attract, based on the money and the people around you, essentially. Ultimately, the process never ends. Once you set a plan, it will continue to evolve and change as you go forward. Some clients have a more strategic approach to how they deal with their assets, whereas others have literally just taken over or they’ve just done what has gone before them. They do need that help to go right the way through the process, because otherwise they won’t get to a conclusion.
Will losing BPS hurt?
AP I think an important point is that most estates have, say, five different income streams. Therefore, if you’re losing half of one fifth, it’s not as disastrous as it may sound from the outset. It’s not ideal by any means and you’ve got to find that money back again, but in a way, you don’t necessarily have to find it back from that particular income stream, as long as you find it back overall.
ED I think Alastair makes a valid point. The Basic Payment Scheme (BPS) is what everyone focuses on, but actually it can almost be a red herring in some respects. People can focus too much on trying to replace it and miss the bigger picture about whether that fundamental land use or that fundamental agricultural enterprise is actually the right thing to have there.
TH You certainly shouldn’t look at environmental schemes as a silver bullet that’s going to replace BPS and save your estate in the future. I think that’s such a misconception among some farmers and farming estates.
WHERE DOES ESG FIT INTO THE PLAN?
AP Environment is a topic you can talk about on an estate forever, but social and governance, which include issues like diversity, are more difficult subjects and I have to try and work my way into it carefully. Gender diversity is probably the main topic of conversation, but if an estate changes its diversity to replicate the community that’s around them, it’s a natural draw for people to visit.
ED Talking about gender diversity, if you’ve got an estate where the eldest son is taking over, but there are older daughters, that’s a really difficult thing. How do you get your staff and your workforce to respect gender diversity when that decision has been taken?
TH Ed’s so right. We shouldn’t shy away from primogeniture. We all understand the reasons why it is there, and it has been a remarkably successful policy over the years, but it can completely wreck your family skill set. That’s a big problem, because the future of the estate is not necessarily secured by one person, especially if that person isn’t the best person to run it.
AP Primogeniture is just about ensuring an asset doesn’t get broken up. There are other ways of doing that where family members can get involved through trusts or through corporate structures.
TH We have to think far more holistically as a whole when we’re doing strategic reviews, about how enterprises on estates and farms are interconnected. You can no longer just look at residential property in isolation from the farming, in isolation from environmental income, in isolation from staff.
What Es should estates consider?
AP For me, the ideological purpose and desires of the owner, the owners, the trustees – that is the key element. They’re either up for it or they’re not. It’s identifying the opportunities that exist or might exist, and seeing how they fit the framework of your review. Net gain is generating a huge amount of excitement, but it’s not a magic wand.
ED Something I’m interested in at the moment is the “natural health service”. If the General Medical Council is going to offer social prescribing guidance for doctors, there’s an ideologically interesting angle there for some estate owners. It’s one of those things that might have real traction if the government gets behind it.
AP I was speaking to a commercial property fund manager and he believes that there is a desperation in the market for a serious rural HQ, which is all birds and bees and carbon and everything. He thinks that there will be seriously long leases and high values paid by blue chip tenants.
TH What a lot of people are waiting for is a soil carbon scheme in the UK. It’s tricky preparing for something when you don’t know when, or even if, it will arrive. But I think you’ve basically just got to make sure that your structures and everything are in place so that you are best positioned to respond to these things as and when they arrive. That’s all you can do.
Anything else to consider?
TH Because a lot of environmental support will be for landscape-scale schemes, people definitely need to work out whether they can join up and work in collaborations or joint ventures. The trouble is, though, people often want to achieve something similar. They all have slightly different views, slightly different aspirations, and it can be really hard to achieve.
AP One of the biggest problems in terms of making a plan, and something I seem to come across the whole time, is footfall. I think people forget that Knepp, for example, equals a huge amount of people visiting Charlie Burrell’s home. No more than we want people walking around our gardens, do some owners want people walking around their estate. Footfall is the massive, massive downside of income generation. Some owners are prepared to make less money for a quieter life. I think it’s an easy one to forget: “Do you actually like engaging with the public?”
ED I can see regulation being a big factor further down the line. So you may as well make the money while you can. Look at the telecoms industry where the early sites were quite lucrative but then it went through a period where rents went a bit soft except for very select and key locations. And then the government got involved.
TH Because there is so much uncertainty at the moment about future schemes and funding streams, one thing to be slightly careful of is focusing too much on the few things that are clear, like biodiversity net gain, just because we know about them.
ED Exactly. A lot of landowners are being asked to commit their land to future ESG schemes. We’re seeing people rushing around promising that they will then broker deals on their behalf, but, frankly, you won’t know what you’re signing up to. You could be signing away something potentially quite valuable.
AP And while you’re signing up to an income stream, you’re also signing yourself up for a burden, in terms of management and fulfilling your obligations. I don’t think people have quite got their head around some of these carbon schemes yet.