More turbulence is expected for farms and rural businesses across England after a difficult 12 months.
Changing agricultural policy, the impacts of climate change and higher input prices continue to be major influences within the rural economy, placing pressure on margins.
Inflation and interest rate rises are also prompting a slowdown in borrowing across the sector, with agricultural debt down £2 billion in the last 12 months according to the Bank of England, as farmers adopt a “wait and see approach”.
However trends in the financial markets point to an opportunity for farm owners and rural businesses to offset the challenges.
One of the easiest wins in today’s market is to review your existing finances. Much of the debt held by farm businesses across the sector is historic, which outdates the changes we’ve been seeing in the mortgage market of late. This means it’s not uncommon for businesses to be paying 2-3% over the base rate.
Most farmers are on variable rates so when the base rate was as low as 0.5%, being 2.5% over the base rate – or 3% overall – was manageable. But in today’s market, where the base rate now sits at 4.25% following the Bank of England’s rate rise in March, it’s becoming costly for some farmers.
Unknown to many clients, however, is that some lenders are offering rates below that 2% mark in certain circumstances. Knight Frank Finance recently secured a rate of 1.45% over base for one client.
This means it’s a good time to review your existing finances to see if there’s a cheaper deal out there. With costs spiralling, if farm businesses are able to save money on their existing debt book by moving to another bank, then that’s an easy win before they start to look at alternative cost-saving measures.
- Diversification of income stream
When businesses are ready to explore alternative options to weather any storms ahead, however, diversification remains a good way to boost income streams and provide additional business stability.
Diversification is becoming increasingly critical now the sector’s Single Farm Payment has almost completely wound down for English businesses. This was an agricultural subsidy paid to farmers in the EU and, for many businesses, formed a large proportion of their income stream.
To date around 37% of farmers have already diversified, a figure that is growing year-on-year. Recent examples of diversification include the installation of solar panels on farmland, which in addition to boosting income streams by charging ground rent to solar businesses, can have the added benefit of reducing energy costs for power-hungry farms.
Elsewhere, a farm turned a number of disused barns and buildings across its 3.5-acre estate into a thriving commercial and residential lettings business.
The farm had a large number of redundant buildings and over the last decade has been investing and building out those properties when they are approached by prospective tenants. So, they upgrade a building specifically for a tenant and then move on to the next property and repeat the process.
As a result, the farm has grown its yearly rent roll from £500,000 to £1.2 million – with an average yield of 20%, which is helping to secure their business for the future by smoothing out the peaks and troughs of farming that are becoming all the more regular.
If you would like to discuss how the current market conditions may impact your property plans, or those of a client, please contact us at mortgages@knightfrankfinance.com