Covid Implications on Rural Portfolios
Knight Frank is seeing an influx of queries from owners of rural portfolios owners on how COVID-19 is, or will be, impacting their portfolios. As retained advisors on a number of diverse rural property portfolios, James Shepherd from our Rural Asset Management Team has pulled together the views of his colleagues to provide you with insight on the threats and opportunities arising to such portfolios.
5 minutes to read
The planner’s perspective
It will be of little surprise to some that Knight Frank’s Planning Team has observed a slowdown in plan-making at the Local Authority level as a result of the COVID-19 outbreak.
Roland Brass, a green-field and strategic land planning specialist, notes that several local plan consultations (due to take place this year) have not happened and Local Authorities are now aiming to make progress in 2021.
While such delays can be quite frustrating for many, especially if they are waiting on the next stage of plans portfolio managers are trying to make the most of the delay.
Roland suggests the coming weeks and months provide a golden opportunity to take stock and review development aspirations by undertaking reviews of assets, estates and portfolios to identify any opportunities with development potential. The delays give an unexpected opportunity to landowners to think more about strategic planning, emerging local plans and pro-active land promotion.
And whilst the Government’s planning reform agenda sees some radical proposals which will impact the countryside and rural areas, the emerging growth agenda and housing need will continue to influence Local Authority’s plan making and new land for development will be required to come forward.
The rural valuer’s perspective
What has happened to rural property values as a result of COVID-19? Of course the answer to that is one that is always dependent on the specifics of the particular property being valued. However George Jewell, a portfolio valuer in Knight Frank’s Rural Valuation Team shares his insight, noting he and his colleagues have been forced to look more closely at sentiment in recent months due to a lack of transactional data.
Despite some industry concerns about the virus’ outbreak leading to a significant drop in rural portfolio values, George witnesses values remaining remarkably stable.
Some will find this surprising, particularly with uncertainty already existing in abundance in the farming industry. While the UK’s future trading relationships are yet to be settled (and perhaps consequently the detail of the UK Government’s support to the agricultural industry) land availability is much reduced on a year on year basis from what were already low levels in 2019.
George observes many fundamentals remain for holding and investing in rural property. Long-term borrowing secured against rural property remains close to record lows and significant tax benefits continue to exist. When you also consider the non-volatile performance of agricultural property compared to other investments, emerging income streams (such as those linked to carbon neutrality or biodiversity targets) and the ongoing housebuilding agenda, George thinks the resilience and outlook for rural property prices should not seem surprising, even if reports of a “flight to safety” should be treated with caution.
Further, if your portfolio comprises residential property then activity in the country residential market over the past few months will likely only support values in your portfolio. Temporary revisions to stamp duty combined with many people’s evolved working practices (brought about or possibly expedited by COVID-19) and lifestyle aspirations are shining a new light on the benefits of living in the countryside.
A receiver’s perspective
The agricultural sector is already a specialist debt market, however COVID-19 and the Coronavirus Act has only added to complexity for Harry Dunger, LPA Receiver in Knight Frank’s Restructuring & Recovery Team.
Whilst many corporate or institutional rural landowners have comparatively low levels of secured lending, income from let property portfolios is increasingly under pressure. Harry notes that on let portfolios, tenants are often at the sharper end when it comes to servicing debt. However, lenders he works with have so far taken their cues from the UK Government and Financial Conduct Authority, and there have been few hasty moves for lenders to make use of his services and call in debts owed by the nation’s farmers.
The virus’ full toll on the economy, bank lending and agricultural property prices is yet to be seen although (as commented above in respect of values) the picture is perhaps not currently as bleak as some might think. Harry suggests lenders are mindful of their reputations, as well as the real world practicalities and costs of a receiver going about their duties this year (and potentially much of next). However, at some point, the proverbial “can” won’t be kicked further down the road.
Rural portfolio managers should take stock now and review exposure to debt across their portfolio and keep in mind what their tenants’ position may be. What contingency plans exist if a tenancy is to be forfeited, or if receivers are called into a farming business? Harry points out that there may also be opportunities for landlords and tenants to work collaboratively where tenant’s business are in trouble. Restructuring restrictive tenancies (for example, Agricultural Holdings Act tenancies) could be part of the solution to debt in some cases.
The farm business consultant’s perspective
Knight Frank’s Head of Agri-consultancy, Tom Heathcote has more awareness than many other professionals of what the UK’s farmers have faced over the past few months.
Tom is relieved to report to the majority of his farming clients have been able to carry on their usual operations, despite the virus. COVID-19 has by-and-large not impacted agriculture in the same way it has the high street. Agricultural commodity markets have behaved rationally with COVID-19 having little, if any, discernible impact on prices seen over the past few months.
Of course, Tom notes exceptions – such as those with diversified businesses, where footfall is important. Likewise those farms where human labour is critical faced considerable challenges, although for many the worst case scenarios of produce left rotting on the farm was avoided.
However, many arable farming business’s budgets have been torn up due to exceptionally challenging weather impacting their 2019/20 harvest. Whilst hugely variable, grain stores are in some instances half as full as they were forecast to be. With the increasing frequency of extreme weather events the impacts of climate change are no longer hypothetical. Tom is concerned that farming’s exposure to extreme weather this year should not be seen as a one-off and farmers need to reflect on how sustainable and resilient their businesses are.
Despite such a challenging year and many unknowns (including future trading arrangements, which is a whole separate matter), Tom maintains a remarkable degree of optimism for the UK’s farmers and landowners. Indeed, Tom sees opportunities. This may be in the form of attractively priced traditional farming businesses backed by real assets or, for example, by way of the unexpected boost the virus has given to local food producers growing their market share by selling direct to the end consumer.