Opportunities in farm and rural estate finance in a volatile market

With a 25-year background in farm and rural estate finance, Mark Ashbridge was best placed to offer farmers thought-provoking financial insights as a guest speaker at the Scrutton Bland Farming Conference titled ‘Navigating Change – Seeking Opportunity’ in early 2023.

Having started out as an agricultural consultant, Mr Ashbridge soon moved into the banking world, focusing on estates and farms, before founding his own business Ashbridge Partners in 2012. Now supporting a team of 14, the company provides financial advice to landowners of many estates across the country, with a focus on the East Anglia region.

Projects currently funded by Ashbridge Partners include:

• Core agribusiness such as dairy/poultry/arable infrastructure
• Property development & commercial real estate
• Residential farm purchases
• Tourism, hospitality and leisure
• Debt re-structuring

Addressing the current volatility of the finance market, Mr Ashbridge remarked: “I don’t think we have seen this level of change in the finance marketplace since 2008.”

He identified the pandemic of 2020, the invasion of Ukraine and rising inflation as the main factors driving the UK market, highlighting inflation as a key component that fundamentally changes the economic climate.

With regards to agriculture, he mentioned the issue of farmers seeing low levels of return (1-2%) on yield, with diversification projects offering much higher returns, though at the cost of greater time inputs and risk.

However, when it comes to lenders, farmers and landowners enjoy a competitive advantage. Mr Ashbridge explained banks view agriculture as a ‘safe’ sector from a risk perspective and are prepared to offer better loan terms, structure and pricing.

The reason for this being that farmers don’t tend to disappear as they are rooted on their land. Therefore, growers can more easily access flexible credit policies with the possibility to fix interest rates for 20 or even 30 years. This can also be extended to diversification enterprises that can be done underneath the hat of agriculture, Mr Ashbridge added.

The all-important data

As banks need to lend responsibly, however, data is absolutely crucial when it comes to negotiating the best terms for farmers. “In the early 2000’s, the due diligence process wasn’t nearly as robust as it is today,” Mr Ashbridge noted.

When working with clients looking to borrow, he added: “Our interest will be to look back at least three years, possibly five, to see financial accounts, to analyse those, to dig into not just the financial performance but the physical performance of yields, cost control, as well as the human side of having the right people employed and the positive and negative impact they make.

“We are under considerable pressure to gather the right data and present it in a way that lenders can easily absorb and convey to their credit underwriters, will deliver better terms, structure and better options all around,” he stressed.

Collecting sufficient data may mean that farmers will have three to four lenders to choose from rather than one, which implies a greater chance of one lender offering fundamentally different terms that suit the individual needs of the farm business, Mr Ashbridge explained.

Interest rates and the long-term cost of money are also key aspects to consider when making an investment. Since the highs of 1996, interest rates have shown a downward trend falling from above 8% to under 1% in 2020, with the lowest point coinciding with the rollout of covid vaccination.

“Now with base rates having moved up quite considerably, even with the underlying cost of money higher, interest margins could compress, so we may be seeing more pricing sub 2% margin,” Mr Ashbridge said, adding this may present an opportunity to fix rates and let inflation ‘repay’ the debt.

“Over the long term, inflation can be a sign partner in repaying debt,” he pointed out.

“The more rapidly your asset base increases in value, the more dramatically your debt is depreciated – may be an adjustment to our mentality over how we see debt.”

“Taking no risk at all is a risk in itself”

Addressing how ESG (Environmental, Social and Governance), green finance and sustainability trends will impact the finance market, Mr Ashbridge said it will certainly play a part with big lenders, who will want to see those incorporated. Meanwhile, green loans are a growing opportunity for funding climate-related projects that often come with discounts on interest margins.

Mr Ashbridge added: “Change definitely brings opportunity; post-2008, we saw very significantly positive uplift in the number of opportunities that clients were looking to pursue. We certainly did much more bigger business, exciting business, and I think that (…) we’re likely to see that again.”

He also emphasized that the bank and finance market is innovative, with more lenders in the marketplace than have ever been seen before, and urged landowners to look for opportunities beyond the rural/agricultural space as there are considerable differences in the lending spectrum.

When asked how farmers can be safe in the knowledge that gaining funding is the right thing to do, he said it’s all about the investment they’re making and whether the conditions are right for the project to become a success.

“If that primary decision is handled correctly, then debt can just follow along as a matter of course, a ‘support service’,” he said. As with any investment, assessment of risk is crucial, as well as having a plan B and C in case something goes wrong.

“There’s no reward without risk, and it’s about finding the right balance for your business,” he stressed.

“Taking no risk at all is a risk in itself, in that you’re endangering the long-term sustainability of your business. You’ll go on fine for now, but you’ll be eating away at your capital base simply because you’re not producing enough profit,” Mr Ashbridge concluded.