Income Summary

The 2016 survey results show that average gross income on ‘All Estates’ in Scotland increased by a significant 11% to £155 per acre across the whole estate. This performance was stronger than the annualised 5% recorded over the past three years and shows a proactive determination to use all opportunities to generate income, creating a strong business which is not exposed to single enterprises.

Net Incomes (before depreciation, finance, drawings and tax) followed a similar trend and rose by almost 30%, equating to £76 per acre as total costs fell -2.3% on 2015.

Diversity of the Rural Estate

The diversity of assets (agricultural, residential, commercial and more recently renewable energy) and therefore opportunities to generate income, continues to increase and help spread risk. This has also been a key factor in the recent improved performance.

There has, as illustrated in Figure 1, been a greatly reduced reliance on the proportion of gross income generated from agriculture towards other income streams.

^{Source: Savills Research}

Although the contribution from agricultural assets has fallen, together with residential they still provide two thirds of the average estate’s income.

Most estates have a number of other income sources including woodland, shooting, minerals and, in many cases, leisure and commercial trading enterprises. The character and value of these additional income sources is often dependent on location. Notably on their own these ‘alternative’ income streams can be demonstrated to be very volatile, however as a portfolio the total income derived from them continues to grow.

These opportunities have given estates steady positive income growth over the long term. This is in stark contrast to single farm enterprises where exposure to price, exchange rates and weather volatility has created significant swings in financial results from one year to another.

Rural estates remain the foundation of many rural communities, employing and housing specialist in-house tradesmen and also contracting-out to local businesses. Our research demonstrates that, on average over the past five years, over 70% of repairs are undertaken by in-house staff with the remainder undertaken by local builders.

Up to £50,000 is paid to local contractors, from an average estate spend on property repairs of over £150,000 per annum. In addition, on the average estate, around 30% (up to 20 houses) are provided, rent free to staff and former employees. The balance of housing stock (over 200 houses on some estates) is let to local families in the rural community.

The results demonstrate that long-term retention of the business remains the overriding key objective of the owners, providing neighbouring communities and businesses with a stable platform allowing third parties to make assured investments into their own businesses.

Ranked in order, owners’ objectives are:

1. long-term retention of the core estate

2. income generation

3. return on capital

4. environmental stewardship.

Agricultural Assets

The increasing diversity is a result of the changing structure of estates, both in the agricultural and residential sectors. Our research shows that there has been a shift from let, notably traditional tenancies, to in-hand farming (including the use of contract farming agreements).

This shift is in part driven by tenants renouncing their tenancies and part by landlords’ anxiety to let land, in the shadow of the uncertainty generated by Land Reform legislation.

Figure 2 shows that over the past five years the area occupied on the average estate by traditional tenancies has fallen from 44% to 22% of the lowland area. Conversely, the area occupied by in hand farming enterprises has increased from 15% to 43%. In addition, land let on modern tenancies has dropped from 41% to 35% - a depressing consequence of the land reform process.

Our survey records average agricultural rents in 2016 as:

• Traditional Tenancy: £65 per acre, up 4.0% on 2015
• Limited Duration Tenancy (LDT): £93 per acre, up 7.3% on 2015
• Short Limited Duration Tenancy (SLDT): £67 per acre, up 14% on 2015
• By comparison, the average Farm Business Tenancy (FBT) across England in 2016 was £118 per acre, up 2.2% on 2015 and on Traditional tenancies £84, up 4.9% on 2015.

Our research indicates that the average net income (after deduction of property repairs, insurance, third party rents and interest on borrowed working capital) recorded for in-hand farming, including contract farming, enterprises over the past five years was around £30 per acre. It ranged from -£26 per acre to £80 per acre as incomes were exposed to input and output volatility.

Reviewing the results of our rents survey demonstrates that SLDTs are most closely linked to commodity prices and productivity. It would also indicate that rents on traditional tenancies are closing the gap on modern tenancies.

It will be interesting to observe the impact of the Land Reform legislation on rental levels. The results also demonstrate the volatility of in-hand and contract farming; both are critically exposed to commodity prices and ongoing delays to subsidy payments.

^{Source: Savills Research}

Residential Assets

Residential assets on Scottish estates on average contributed £57 per acre to gross income, an increase of 7.2%. This represented 37% of gross income. Average annual rental income from Short Assured Tenancies (SATs) on ’All Estates’ fell by -3.8% during 2016 to just over £7,000 per dwelling. Despite an overall increase in residential income, the annualised growth for SATs has stalled (0.6%) over the past three years and this is explained below.

As with the agricultural sector, our survey records some fundamental changes in the occupancy of the housing stock on rural estates. Figure 3 shows that over the past five years the proportion of housing stock on the average estate let as SATs has increased from 45% to 63%.

Conversely, those held in traditional agricultural tenancies has fallen from 34% to 14%, releasing housing to be let at market rents: this a result of negotiated resumptions of farm cottages from traditional tenancies.

The consequence is an overall increase in residential income, but of lower value cottages diluting the average SAT rental figures. Many of these are likely to be let at lower rents until full repairs and improvements have been completed.

^{Source: Savills Research}

^{Source: Savills Research}

Commercial/Other/ Telecom Assets

In 2016 commercial and leisure assets and enterprises on ’All Estates’ contributed almost £47 per acre to gross income and represented 30% of gross income. This was significantly above the 18% recorded in 2011. The success of commercial enterprises is often location driven.

Where estates have commercial workspace our research suggests that rental growth, from offices to storage, was positive in 2016.

Average rental income from telecom masts increased by 20% to average £12,500 per mast. This figure includes site sharing payments and accordingly this income source is at considerable risk from the Digital Economy Bill. Protecting this income through new negotiated leases is imperative prior to the new legislation

Costs controlled

Total estate expenditure fell by -2.3% in 2016 compared with 2015 and amounted to £79 per acre. In 2016 this represented 50% of gross income, which was below the average of the past five years of 57%.

The two principal costs are property repairs and management legislation. which, over the past five years on average, represent 23.6% and 15.2% of gross income respectively or 70% of ‘All Estate’ costs.

A useful Key Performance Indicator (KPI) is cost relative to gross income. Figure 5 below gives a snapshot, but understanding the relationship between costs to the individual enterprises and resources available on an individual estate is crucial.

^{Source: Savills Research}