Landed Estates - Future proofing through diversification
“Attractive long-term returns are not generally achieved without adopting some risk and so we applaud forward-thinking families who have taken bold steps to secure their estates for future generations.”
A landed estate of thousands of acres under generations of family ownership paints a picture of tradition and stability. However, this is far from the truth for many asset rich, relatively cash poor families who alongside their trustees and their advisers, need to embrace change to preserve estates for future generations.
It is not uncommon for financial portfolios to be modest in relation to total wealth; dwindled by death duties and other taxes; making other provisions for children or simply maintaining the estate. Families with access to investment portfolios sufficient to fund their lifestyle and estates are few and far between. Diversification away from farming may result in new income streams but also necessitates capital commitments and, importantly, clear decisions about how to raise and allocate that capital efficiently.
Nevertheless, it’s interesting to see the increasingly diverse approaches landed families are taking to generate income to support and maintain their estates including the ‘big house’, commercially let properties and agricultural buildings. The availability of 20-year loans secured against the estate, is enabling many families to take advantage of low interest rates to raise capital to diversify into financial markets and enhance returns. Others have invested in renewables, helping secure steady future cash flows. Increasingly, we see borrowings funding some highly entrepreneurial businesses, spawned to support the estate and their tax position. The catalyst is often transition to the next generation, bringing fresh thinking and a strong desire to modernise.
Attractive long-term returns are not generally achieved without adopting some risk and so we applaud forward-thinking families who have taken bold steps to secure their estates for future generations.
Take Badminton and Goodwood as archetypes. The Badminton Horse Trials have been making a significant contribution to the maintenance of the estate for over 70 years. Goodwood is a shining example of diversification and successful commercialisation of the estate that now includes the racecourse, Festival of Speed, hotel, club, and shop plus over 40 acres dedicated to Rolls-Royce’s headquarters and manufacturing facilities.
We work with families, trustees, and business managers to develop clear financial and non-financial goals and implementation plans. Within financial markets we allocate capital based on projected returns and risks, informed by decades of data and the expertise of strategists and economists. We know it can be challenging to allocate capital effectively across real assets and businesses. New projects are likely to mean change that is personal, long-term, and tangible to the family and community and some decisions, for example, leasing land or installing wind farms, cannot easily be reversed.
To future proof plans we suggest appraising projects using a common cost of capital and a simple return hurdle to reflect the perceived risks. We also recommend the formal inclusion of social impact as a third metric. This provides a useful framework for families and trustees to compare opportunities and engage and reach these long-term decisions.
A key factor in successful diversification is ensuring that any new business initiatives are backed by relevant specialist skills and technical knowledge, sourced through hiring, training of existing staff or accessing external advice.
Even core farming activities are requiring new knowledge and skills as cost-effective food production on large estates is becoming more science based as agronomists respond to the challenges of changing dietary habits and minimising the use of pesticides. Families will benefit by ensuring the composition of boards, trustees or investment committees reflects a broad mix of expertise and experience.
Given the degree of specialisation, financial return projections for new businesses are often generated from those closest to the project and then challenged centrally by trustees and others within the framework described above. It is also important to re-visit any legacy businesses and apply the same criteria to assess their performance and viability.
Risk sits at the heart of these decisions, going beyond the financial to consider the social and reputational risks that can also be high for families. Building wind farms or housing developments on the periphery of landed estates can be very contentious even if there are also wider environmental or social benefits.
Some estates face specific risks which have shaped long-term objectives. One to watch is Holkham in Norfolk, which is taking a pioneering and sustainable approach in the face of the very real challenge of climate change and impact of rising sea levels on their boundary. The estate has a become a leading proponent of reducing reliance on fossil fuels and has set a goal to become self-sufficient in energy generation with anaerobic digestion, solar and biomass capabilities, amongst others, already established.
Increasingly, many large landowners are thinking about the social and environmental impact through community projects such as the creation of bio-diverse habitats. Covid has accelerated this thinking and reinforced the value of outdoor exercise so it is likely we will see more countryside opened for wider benefit. These examples cannot be measured in financial terms alone but are an important part of the legacy that landed families can leave to a wider future generation.
This article was originally published here.
