Diversification - investment and bank funding on the up

A recent survey of farming estate owners has shown increased confidence and commitment to invest in rural business, despite rising political and economic uncertainty.

But, none of the respondents plan to diversify within farming. Instead, investment is being diverted to alternative rural enterprises. Two-thirds of respondents of the survey by Rural Solutions covering 225,000 ha in England, Scotland and Wales, are planning to invest in diversified enterprises.

Commenting on the survey results, Rob Lister Director at R&BS says: “We’ve undoubtedly seen a decline in the investment in core agricultural enterprises due to the uncertainty of Brexit and its effect on trade in the short and medium term. Landowners are also protecting themselves against the loss of subsidies. There are some farm investments including land purchases going ahead, but at a lower level than in past years. However, over the last 24 months, we’ve helped many more farmers source finance to invest in diversification enterprises.”

Building conversions are a popular choice

The survey showed landowners planned to invest in commercial space (47%), self-catering accommodation (40%), residential lettings (38%) and event venues including festivals and weddings (36%).

Rob says, “The easing of the planning system to change the use of farm buildings has been a major catalyst. Wedding venues, holiday lets, residential conversions, commercial conversions including storage and office spaces are amongst the diversification enterprises that we have supported with mortgage funding recently.”

More bank finance in the plans

73% of respondents plan to use bank finance combined with reinvestment from the business to support investment. This compares to a mixed funding in the past from personal investment, sales and grant funding.

“This makes perfect sense,” says Rob. “There has never been a better time to borrow with continued low interest rates. Having recently achieved fixed rates for five years at 2.5%, fixed rates were becoming more competitive than variable rate lending. Although the markets are volatile with political uncertainty and actions in overseas markets, rates continue to be at historic lows.”

“We’ve also achieved longer-term interest-only facilities of between 3.25% and 4.25% through the private banks. The private banks take a longer-term view and are more flexible in their approach, so suit those farms or estates that already have a good degree of rental property incomes but are looking to increase these further. 

“With these opportunities from the right, supportive lenders, farmers can assist with future-proofing their finance costs and take control of the sustainability and profitability of the business.”

“It’s encouraging to see that many entrepreneurial farmers are thinking ahead and reshaping their businesses to manage the looming period of uncertainty and change – before it manages them. But, those that haven’t yet thought ahead must do so now,” says Rob.

A caution on the use of funds

It's important to be aware that if the funds are for non-agricultural use or the mix of the business sees the percentage of agriculture drop too much, there is danger of the funding no longer fitting some lenders' agricultural policies. If that occurs, it could move the proposal into general commercial lending rather than agricultural lending. Commercial lending policies and terms can be less attractive with tighter serviceability criteria, restricted or shorter loan durations and higher interest rates.