What does sale of Far Ralia tell us about 'natural capital'?

In that time it has been awarded £2.5 million in grants from Scottish Forestry, which have funded the planting of 1.2 million trees, around 1 million of which have already been planted, with the rest to be done over the coming year. It has also registered the plantings, for carbon credits, under the woodland carbon code.

Far Ralia was bought by a real estate investment trust that was in 2021 called Standard Life Property Income Trust, but has since been rebranded, along with its parent company abrdn, as abrdn Property Income Trust. The purchase marked a moment in the development of natural capital investment in Scotland  - an investment company, buying land with a view to using it to offset the carbon emissions across the rest of its portfolio - and seemed to usher in a new era of 'green lairds'..

Domiciled in Guernsey, the trust is exempt, like all real estate investment trusts, from paying corporation tax on capital gains realised within its portfolio, although investors in the trust are still liable for capital gains tax on profits when selling their investments.

The sale has raised many questions, and triggered much speculation about the state of Scotland’s natural capital markets, the policies around them, and how they have impacted communities and land prices.

It comes at a time of controversy around other so-called green lairds, like Brewdog, many of whose trees planted at the  Lost Forest in Kinrara died, and had to be replanted, and who recently announced that their status as a carbon negative company has lapsed. In such context, some are asking, has the natural capital bubble burst?

But how much the sale says about the state of  natural capital markets is not clear.

The placing of the estate  on the market, according to abrdn, follows the decision by shareholders of abrdn Property Income Trust Limited (aPIT) to enter a managed wind-down of the trust and divest of all its assets. 

Far Ralia is just one asset in a portfolio made up chiefly of commercial and residential properties, and the only large estate and natural capital asset. As such its sale is incidental to the performance of  much of the rest of the portfolio  which was chiefly impacted by high interest rates.

The trust's  winding down also follows news earlier this year that it might be acquired by a bigger real estate investment trust, Custodian Real Estate Investment Trust. The buy-out was rejected by shareholders who instead made the majority decision to wind it down.

However, even before the shareholder decision, Far Ralia had been lined-up for possible sale. The trust’s 2023 annual report, published on December 31,  indicates this was already under consideration. It states: “Soft marketing commenced after the period end for the sale of Far Ralia, the Company’s natural capital asset. Timing of the exit is being influenced by changes to the grant funding submission period and strong progress on planting in order to maximise value for the Company."

This too was related to wider financial issues in aPIT. When Far Ralia  was acquired, the trust had a low cost of debt. But the debt was refinanced late in 2022 at a much higher cost, at which point the company started sale programme of its ‘lower yielding’ assets, and since Far Ralia was non-income producing it came into the firing line.  

Brewdog's Lost Forest (Image: Martini)

The annual report noted: “It is realised that at a time of higher interest rates a non-income producing asset sits less comfortably in an income focused fund. Indications suggest the capital value uplift on a sale will make this investment one of the Company’s better investments.”

This seemed a turn around from earlier in 2023, when a blog written by aPIT investment manager Jason Baggaley revealed no signs of being in it for anything other than the long term. 

"Change can be difficult and needs to be done with the region’s best interests at heart. This is our goal at abrdn Property Income Trust and this project should bring long-term benefits to the wider community through reforestation, improved air quality, flood mitigation and improved biodiversity - important for both the region and for the planet."

The sale, however, does not mean the impacts of the work done won't be seen and felt in the long term under the new owners.

It also  does not mean that its parent company, abrdn, is stepping back from natural capital investment. Nor does it mean that the natural capital rush is over. But it does raise questions, in an ongoing fraught debate,  about the role of land ownership and speculation within it.

Fraser Green, Head of Natural Capital Investments, abrdn, said: ‘Although abrdn Property Income trust is now pursuing the sale of Far Ralia, abrdn is actively exploring how we can connect responsible investors with future opportunities of this kind. Wherever we do so, we are committed to following best practice in conjunction with relevant nature and heritage bodies and other stakeholder groups and will be building on the insights gathered through our experience with Far Ralia." 

He also noted: “abrdn is committed to playing its part in the transition to a low carbon economy and there is widespread agreement that promoting environmentally sustainable land management has an important role to play in that. Government subsidy has been a key part of making that process financially viable for landowners of all kinds.”

The purchase of Far Ralia has been well documented and  was used as a case study in 2022 report by Laurie Macfarlane and Miriam Brett for Community Land Scotland, titled Community Wealth Building and a Just Transition to Net Zero.

The authors noted that at the time of acquisition the trust announced that it “was not investing in commercial forestry, but is acquiring a gold standard carbon offset at a fixed price”. According to its plan, the carbon sequestered would represent 73% of the residual embedded and operational carbon of the company, which includes all those other assets from B&Q warehouse to Morrison's supermarket.

From the start, the Community Land Scotland report noted, "the company stated that it anticipated that the costs of planting will be met through grant funding, meaning that the net costs associated with planting the proposed 1.5 million trees will be minimal".

Far Ralia (Image: Knight Frank)

Macfarlane, a co-director of Future Economy Scotland, commenting this week on the current sale, described what the company was doing in 2021 as “speculating on the carbon price and hoping to profit from rising land values”.

“By buying the land they locked in a price of around £38 per tonne of CO2, which was higher than carbon prices at the time of purchase but lower than a lot of the forecasters were saying carbon prices were going to be in the future.”

He added: “Standard Life were trying to position themselves as an early mover in the carbon offsetting space by snapping up this land. I think if they sales goes ahead and the trust gets the £12 million which is substantially more than the £7.5 million they paid for it just a few years ago, they will have done well. That's a 60% increase in land value, which the firm won’t pay tax on because it’s a real estate investment trust, based in Guernsey.”

Meanwhile, Far Ralia has gone through the beginnings of what is now called landscape scale change. The original intention was to plant 1.5 million trees, which was then reduced to 1.2 million due to impact on peatland. According to Claire Whitfield, a partner in the rural consultancy team at Knight Frank: “Nearly 1,000,000 trees have now been planted with the remaining planting and validation of the scheme for the Woodland Carbon Code due to be undertaken later this year.”

The estate is clearly being marketed as natural capital.  Will Matthews, Head of Farms & Estates at Knight Frank said: "For investors seeking to align profits with sustainability, Far Ralia represents a rare and compelling opportunity for investors to acquire a vast natural asset that can deliver both environmental and financial prospects.

“The estate offers a turnkey solution for any investor looking to establish a scalable carbon sequestration project. The projections that biodiversity can recover to 94%, highlights the tremendous potential for enhancing the resilience and ecosystem services provided by this landscape.”

Far Ralia, as Matthews points out,  has also had its biodiversity intactness studied by the Natural History Museum, whose index is the go-to on biodiversity.  Current levels, according to the NHM research, sit just below 52% according to the Biodiversity Intactness Index. 

This does not mean that iodiversity has already improved over the time of aPIT ownership, only  that the plantings are the foundations of a wider plan that could see that happen. In fact, as Nick Kempe points out in his Parkswatchscotland blog, it's also possible that the biodiversity intactness has dipped slightly, due to mounding work and disruption during the plantings.

"Might not, " he wrote "for example, the mounding, unlawful track upgrade, driving vehicles all over the moor and other human interventions on the site  create a setback for biodiversity intactness in the short-term."

Meanwhile Abrdn have yet to reveal their new natural capital plan.

The market has altered since aPIT’s entry into it, and its arrival as an early mover in carbon offset sector has been part of fuelling recent rises in  land values in Scotland, but also created a backlash from communities who have felt priced out, or questioned the ecological values of projects.

The result of such backlash is that more recently, the Scottish Government stated, in its Interim Principles of Natural Capital Responsibility, said "If seeking to secure carbon units or natural capital value, investors should consider whether ownership of land is necessary."

A report by the SRUC, published in April this year, showed that there had been a slowing in the market. Ian Merrell, Research Fellow at SRUC, said: “We have found that the initial rush into Scottish land by natural capital investors and companies has started to slow down, but land is still increasing at a pace that excludes smaller players from the land market.” 

There was an increase, the report said,  in applications to the Woodland Carbon Code in 2021 and 2022, this was followed by a slowdown in 2023. This, it said, could be attributed to changes in the eligibility criteria as well as to various uncertainties - such as the war in Ukraine, rising commodity prices, rising interest rates, inflation and the cost-of-living crisis - which have contributed to a greater sense of market uncertainty." 

It's into this market that aPIT is now selling.  Will it seal it's £12 million price?

Mr Macfarlane said: “The company moved early to ride the wave of speculation over carbon prices, hoping to offset the its own emissions cheaply. But over the past year the global carbon offsetting market has shrunk substantially, as investor appetite has waned following accusations of ‘greenwashing’ and schemes failing to deliver the impact promised.

“Now that the trust is winding up, it no longer needs to offset its emissions, and so the land has become dispensable. After planting trees paid for mostly by the taxpayer, the firm will likely exit with a healthy profit, but the impact of Scotland’s soaring land values on local communities remains. The example raises questions over the extent to which speculative corporate investors can restore nature in a way that is consistent with the principles of a just transition.”