Funding to buy a croft — securing a sustainable future for the sector
There are more crofters over 80 than there are aged 40 and below.
The Crofting Commission’s Annual Report and Accounts 2019/20 shows 1,318 in the 21 to 40 bracket, with 1,325 over 80-years-old.
But if keeping the ages-old traditions of crofting alive means attracting more young people to the sector, where should our focus be?
In the next in my series of articles on the future of crofting, I take a look at funding: a hurdle every purchaser has to get over.
Younger buyers of owner-occupied crofts or tenancies — including those starting out — face particular issues. Not least that land prices were riding high in late 2020 and into early 2021 and show no signs of slowing down. Plus, banks and commercial lenders will not consider croft land as security for a loan, in the same way they would for farmland.
The reason for this isn’t entirely clear, but it’s likely to hinge on heavy regulation, and the perceived complexity and pitfalls if something goes wrong. Banks are primarily concerned with getting their money back if they have to re-possess after all, and these issues might be seen as a barrier.
A perfect storm
We have, then, a perfect storm that compounds the ageing crofting population.
The sector needs new blood, but those people find it hard to acquire a croft. Unlike older buyers who are more likely to have cash reserves, generally younger would-be crofters don’t, and banks won’t lend, as I’ve said.
They also may not have other collateral (such as other land, a house) to put down as security or sufficient trading accounts in business to give banks and lenders comfort for unsecured lending.
If we want to attract young people, we have to find a way to make buying affordable.
The Scottish Government recently published its National Development Plan for Crofting which makes suggestions for ways to make more crofts available to these buyers, including greater enforcement of breaches of crofting duties.
That is to be applauded; however, it doesn’t in itself make crofts more affordable, just more available. Market conditions will still dictate the selling price.
There have been suggestions too that further regulation to artificially suppress the market in crofts and croft tenancies will make them more affordable. However, over-regulation has probably contributed to the problem and more regulation to solve it doesn’t seem right to me. A more sensible way to make crofts affordable is access to some form of lending, using a croft as security.
Despite regulation, owner-occupied crofts are not that different from owning other land. Yes, there are duties to use and maintain it, as well as residency restrictions, but those wanting crofts more often than not can comfortably meet these.
The bottom line is that an owner-occupied croft is an asset with a value the bank can use to get its money back in the event of a default.
Secondly, croft tenancies are for life, with eviction or termination only possible in very limited breach circumstances. It’s more akin to ownership than any other type of tenancy under Scots Law. The value of the improvements, for example to the house and agricultural buildings, rest with the crofter.
There is also an open market in these tenancies with a crofter (and therefore the bank) free to sell the tenancy, and a recognised means of identifying value. Therefore, both owner-occupied and tenanted crofts represent very secure assets, with recognised and identifiable values that could be used as security, subject to certain safeguards.
There are more risks here than owned farmland.
However, these can be mitigated. For a start, banks could ensure they have solicitors representing them who understand crofting law and can assure them the croft being offered up for security is acceptable.
Secondly, compliance with crofting duties could be made a loan condition.
That way, a breach of duties would in turn be grounds for calling up the loan if the situation wasn’t rectified. This would mean the bank could repossess before the Crofting Commission stepped in.
Thirdly, the lending sector could introduce measures to reduce the risk these loans might create by, for example —
- Capping loan to value at more conservative values than they do in other areas. Even a relatively low loan to value would give buyers something to put towards a croft and it would reduce the bank’s risk
- Introducing the option of a guarantor. Some younger crofters may have relatives with large capital assets, including successful agricultural businesses, that could act as a back-up in the event of default
- Banks could restrict the availability of these loans to those who need them most: young people and new entrants. That would limit the amount lent on these higher risk terms and reduce the bank’s exposure
Finally, if it is a Scottish Government priority to get more young people living in rural areas, then a scheme offering some sort of loan guarantee might help.
These steps, together with the progress in the areas of legal reform I’ve written about before, including succession, common grazings and joint tenancies, should create an environment where the lending sector can feel more comfortable offering loans secured on croft land.
Ultimately, this would help young people buy crofts: a positive move to help secure the sector’s future in Scotland.