Model Estate 2024

A continuation of the trend towards higher energy prices is likely

The Estate's solar farm recorded a remarkable year-on-year value increase of 18.6% which, combined with the addition of a Battery Energy Storage System (BESS), made the renewable energy category the top performer in 2023.

Despite there now being a year less on the remaining lease term, the Net Present Value of the solar farm has been bolstered by an increase in rent (in line with RPI inflation) and longer-term buoyant energy prices. In addition to rent, the Estate receives income from the solar farm based on a percentage of its output. The wholesale energy price has fallen sharply from its record highs in 2022 but remains inflated compared to historic averages. A continuation of the trend towards higher energy prices is likely with the effects of the Ukraine conflict and disruption to global energy supplies lingering, which means the Estate is likely to continue to receive a ‘top-up’ rent.

A major challenge with many renewable energy sources is their intermittent nature, and so there is a growing demand for BESS to assist in their management. These are essentially large rechargeable batteries that store energy and discharge during times of peak demand.

The Estate has removed 5 acres from in-hand arable farmland and reallocated it to develop a 100 MW BESS. An Option to Lease agreement has been signed with a BESS developer on a 30-year term (at £1,500/MW, with a connection date in 2025), and a £15,000 option payment has been received.

Reflective of a decline in minerals markets for housebuilding activity and infrastructure projects, reported levels of productivity and sales at the quarry demonstrated a notable year-on-year downturn. Sales reported by Quarry Co. for the prior year represent a 30% fall in volume when compared to the previous year. Yet, falls in lease-derived income (the income received based on sales performance), have been offset in part by an increase in rent of approximately +11%.

More positively, the environmental permit required to facilitate inert waste tipping and recovery operations has now been granted. The commencement of the first phase of inert infilling is anticipated within the next twelve months. Acknowledging lead-in times for planning applications, Quarry Co. also remain keen to progress their proposals for a planning application supporting a lateral extension to the quarry in the next 18 months. They recognise that the long-term benefits of progressing an application outweigh any potential short-term costs.

Despite downward pressures on mineral sales in the short-term and the continued depletion of the mineral asset, the asset value of the quarry is observed to have been somewhat insulated from a corresponding fall in value. This is attributable to the impacts of inflation imposed and applied under the quarry lease, an expected upturn in market activity in the year ahead and the continued development potential at the quarry. As such, the capital value of the quarry has increased by 7.5% year-on-year.

In the southern regions (where the Estate is located), farmland values continue to trade above national averages.

The Estate's in-hand agricultural land climbed in value by 3.4% year-on-year, marking the third consecutive year of growth. The arable land saw a 3.5% uplift to reach £10,250/acre, while the pasture land increased by 3.3% to £8,750/acre. With farmland accounting for a large percentage of the total value of the Estate, these positive movements underpinned much of the overall growth for the year.

This growth broadly aligns with national trends, which saw annual increases of 3.8% and 3.7% for average arable and pasture land, respectively. While national year-on-year growth has eased from the levels seen between Q4 2021 and Q2 2023, it remains on a healthy upward trajectory. In the southern regions (where the Estate is located), farmland values continue to trade above national averages. Notably, South West values have surpassed their 2016 record highs, with the South East following closely.

The combined pressures of a historically low supply of marketed farmland, a sizable cash presence and an increasing array of purchasers continue to drive up land values, while negative influences on market sentiment have been easing. In particular, inflation has fallen sharply, which increases the expectation of interest rate cuts and could lead to improved profit margins.

Additionally, long-awaited details on public environmental schemes arrived in the latter half of 2023, providing farmers with the ability to plan for the near-term and boosting market sentiment. The Estate, like its peers, has been assessing the impact of the Basic Payment Scheme (BPS) phase-out and has looked to the Sustainable Farming Incentive (SFI) as a potential source of income to replace it. While the longer-term opportunities presented by private natural capital markets, like Biodiversity Net Gain, are still appealing, SFI’s flexibility offers a favourable solution, at least while private markets develop.

The Estate’s woodland also gained value this year, outpacing both arable and pasture land at 9.0%. It is now valued at £5,960/acre, on average. Totalling 60 acres, the woodland offers a range of amenity benefits and acts as a shelterbelt for the farmland. Demand for woodland is being driven by the increasing calls to mitigate climate change and enhance biodiversity, with a key focus on sustainable management practices.

The value of the let farmland has seen a moderate 2.1% increase over the last year, albeit a slower pace than the in-hand farmland. This can be attributed, in part, to the return of 5 acres of arable land to the Estate and reallocated for the future development of a BESS (without the reallocation, the overall increase would have been 2.4%). Also, the sluggish performance of the residential sector has constrained the potential uplift of the accompanying cottages.

The latest Land Occupation Survey by the Central Association of Agricultural Valuers (CAAV) highlights that activity in the sector remains subdued, a trend continuing since 2005. This is attributed to the phase-out of direct payments and a cautious approach while new policies develop.

However, the increasing appeal of SFI has sustained a healthy level of demand over the past year, preventing rents from falling. Looking forward, this, coupled with a longer-term decline in let holdings, is likely to put upward pressure on rental values.

On the Estate, the 740 acres of Farm Business Tenancy (FBT) lets average £158/acre and are all on sub-3 year or periodic FBTs to three different farming businesses. Overall, we are reporting a gross yield of 1.53% on the let agricultural assets, reducing marginally from 1.56% last year but still largely in line with regional averages.

Overall, the Estate’s let residential assets saw their value increase 1.4% over the year. This marks a slowdown from an increase of 3.6% the year before, and a significant deceleration from 2021, when its value surged by 15.8%.

The year saw a lull in the sales market as buyers adjusted to a new reality of higher mortgage rates, with total mortgage approvals down 23.2% (Bank of England) and house prices falling across most of the country. HM Land Registry reports a 1.6% fall in average house prices nationally in 2023, with gains in the summer months offset by falls at the start and end of the year.

However, the lettings market remains competitive which, coupled with the continued appeal of picturesque countryside locations, has boosted the value of the let residential portfolio. The imbalance of supply and demand is evident in the strong rental growth from mid-2022 onwards. Official data (ONS) revealed that UK private rental prices climbed 6.2% by the end of 2023, showing a strong upward trend throughout the year. While the Royal Institution of Chartered Surveyors (RICS) reports that growth in tenant demand softened towards the end of the year, it highlights that supply remains scarce. Consequently, it is generally expected that rents will continue to rise over the near-term.

With that in mind, the three rent reviews on the Estate resulted in significant uplifts to move rents in line with the local market. The residential portfolio is now reporting a yield of 3.75%, up from 3.51% a year earlier.

The country house market remains subdued, with low transactional activity translating into little change in values. As such, the value of the Estate’s manor house and accompanying gardens has held firm at £7.85m for a second year in a row. Mirroring pressures in the wider residential market, the increased cost of borrowing has reduced demand for those requiring finance. However, the market for larger, prime assets is largely underpinned by cash-rich buyers with less exposure to increased interest rates. Demand from these buyers has kept prices buoyant, with discerning buyers taking advantage of a slight lull in price growth in anticipation of a healthy trajectory for future capital growth.

The value of the sporting rights, telecoms mast and fishing rights have held firm over the last year.

The UK commercial property sector continues to evolve, and both office and industrial markets are navigating varying periods of adjustment. As a result, the value of the Estate’s commercial portfolio fell by 0.8% year-on-year for the second year in a row.

Both office and industrial occupiers are exposed to persistently high inflation and rising labour costs, putting pressure on profit margins for businesses and exacerbating the focus on cost reduction. For the office occupational market specifically, 2023 highlighted the growing importance of location and building features for tenants, who are seeking higher quality, flexible office spaces with strong sustainability credentials. Demand has weakened for out-of-town and secondary office stock (such as on the Estate), which are generally underperforming in comparison to their prime, city-centre counterparts, and negatively impacting investor sentiment.

More positively, we have seen a decline in the number of office occupiers downsizing, and recent data suggests that office occupancy rates have broadly levelled off over the last year (Remit Consulting), and the three-day office week has emerged as the new normal. In addition, offices on rural estates have many unique advantages, including a sense of community among businesses, value for money, proximity to nature and ample parking away from congested town and city centres. As such, all office tenants on the Estate have remained in place, with rents averaging £14.50/sq ft.

Logistics demand has been holding up relatively well, buoyed by ongoing structural change, and the influence of e-commerce, with ‘last mile’ units for urban delivery being a key growth area. However, the market has also been facing headwinds, with subdued consumer confidence and the near flatlining of household expenditure having had a knock-on effect on the need for warehouse space. While assets in urban locations have benefited from the growing demand for last-mile logistics, demand for out-of-town, demand for rural industrial spaces has cooled. The previously vacant unit has now been re-let at a discounted rate of £3.72/sq ft (from a previous rent of £3.84/sq ft). Rents on the industrial units vary from a low of £3.72/sq ft for an old airport hangar to £6.25 for a workshop unit.

It is expected that commercial property markets have reached the bottom of the current cycle (RICS UK Commercial Property Monitor), with a more optimistic outlook for the year ahead. However, the Estate is starting to consider what needs to be done to comply with upcoming tightening of the minimum energy rating required for rented properties. Under MEES (Minimum Energy Efficiency Standards), it is expected that the minimum rating for commercial rented properties will be bought up to an EPC ‘C’ by 2027. Several of the assets fall short of this and have an ‘E’ rating (the current minimum), and so the Estate is starting to anticipate the capital expenditure needed to bring these up to standard before 2027.