Easing the burden
Last year, uncertainty was a significant problem for private clients, particularly landowners. Many people had gotten very comfortable in a seemingly never-ending hyper-low-rate environment; it always appeared certain that money would cost the same tomorrow as it did today. Markets cooled, however, amid the unpredictability of where interest rates would land. When the inevitable rate hikes began, many plans were put on hold as financing large projects became increasingly expensive.
Whilst a low-rate environment makes debt financing cheaper, it is broadly true that people can plan regardless of the actual level of rates. A project with a potential return on capital of 12 per cent, makes borrowing at 5 per cent very worthwhile. What makes planning extremely challenging is paying for one rate today, only for it to become more expensive tomorrow.
This year sentiment over interest rates has shifted. It is widely accepted that interest rates have peaked, even if the debate lingers on how far interest rates will eventually fall. The expectation that rates will at least hold steady, has lifted a significant burden off many estate’s shoulders. A steady interest rate allows for planning and budgeting well into the future – the very thinking that is essential to long-term estate management.
Subsequently, we are currently receiving more requests for credit from estates, particularly overdrafts secured on residential property. Clients can request a limit for a working overdraft to provide flexibility and greater control over managing their debt burden – and, ultimately, interest costs too. Such an overdraft can be a vital tool for estates to manage the peaks and troughs of agricultural costs and income.
New regulations, new opportunities
The residential property market has become the modern-day workhorse for many estates and landowners. It is easy to see why. If they can get costs and tenancies right, a property can provide regular, consistent income from readily available assets, which can also help finance other projects.
However, there have also been recent trends towards putting property assets to work in other ways, driven in part by legislative changes that have dampened the appeal of holding large property portfolios. The Renters Reform Bill, for example, has generated much chatter on the impact it will have on landlords. Arguably, its modus operandi is shifting power from landlords to tenants, by scrapping landlord powers such as Section 21 notices (more commonly known as ‘no fault’ evictions). This has been supported by the incumbent Labour government, who pledged in their manifesto to “immediately” ban Section 21 evictions.
Such changes are causing some landowners to re-evaluate how they use their property assets. Holiday lets, for example, are becoming an increasingly popular alternative way of generating income. Sometimes this will require conversion projects, which can demand high capital costs. But if potential rental yields are favourable against interest servicing costs, borrowing can be an attractive solution to ease cash flow.
Indeed, a core functionality of property on an estate can be for securing borrowing. New regulation set for 2025, will potentially make it easier to acquire borrowing secured against residential property. More than ever, property (particularly owner-occupied property) can work to reduce overall borrowing costs for an estate.
Capitalising on sustainable initiatives
New UK sustainability legislation, which can seem a bit of a minefield, could have a positive impact on landed estates and landowners this year. Consider, for instance, one of the biggest pieces of land management legislation; the previous government’s Biodiversity Net Gain (BNG) requirements, which came into force in February. No changes are expected here with the new government, who have indicated they are keen to press ahead with pro-environmental land use policies, particularly endorsing afforestation projects.
BNG projects have significant potential to be a new revenue stream for landowners. They could supply developers with the BNG credits that planning authorities will now be demanding of them in light of the new legislation. But there is a great deal of uncertainty about so-called new nature markets, and how land used for BNG might fit into the long-term planning of estates. In this sense, trusted advisers are more essential than ever, with a new realm of opportunity (and challenges) to navigate.
Many sustainability-linked income streams also demand high upfront costs. Securing project financing is set to become an essential part of the diversification process, and gives further weight to the trend of increased lending expected over the next year or two.
Keeping it in the family
Trends come and go, but some things never fall out of fashion. Planning for the future – whether it is a generational transfer or long-term management – has always been a key concern for estates.
Traditionally, estates have used trusts to secure their assets for future generations. One pitfall of this approach is that banks can tend to have a limited appetite for trusts or other financial structures, due to a lack of understanding. Trusts used correctly can be hugely beneficial to estate planning – this is why Weatherbys is always comfortable considering a range of family trusts, as well as other structures such as partnerships for its clients.
Estates and landowners are facing a new litany of challenges, from navigating new legislation to facing difficult questions about the costs of diversification. As a family-owned business ourselves, we understand that at the heart of running any estate is the desire to pass it down to the next generation. Distinguishing the opportunities from the pitfalls will always be a challenge, but having trusted advisers on your side can help smooth the course – both for current landowners and future generations.
Weatherbys Bank Ltd is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.