Viticulture – missed the boat or time to jump on board?
I’m sure many of you will have had the chance to enjoy a glass or two of wine over the recent heatwave and for many that might have included a glass of English wine.
The most recent figures published by WineGB show the major growth enjoyed by the British viticulture sector in recent years and this upward trend is expected to continue especially in the South East, where 76% of UK production already takes place.
For those interested in investing in the viticulture sector, or for those already in the sector looking to expand further, options can be limited.
Land is the most important aspect to any vineyard operation, but the very specific requirements for soil, aspect and elevation mean there are finite number of good sites in the region. This has naturally driven up the price per acre but due to COVID-19 we now live in different times and new opportunities could start to open up.
If existing landholdings are not suitable, and if land isn’t available to buy, then renting land is a way into the market or to expand. However, the long-term nature of the production and the capital investment required means that land needs to be rented under long-term agreements.
Landowners are often reticent to lock up their land for long periods and in doing so need to be assured that the vineyard tenant can afford the rent on an ongoing basis. Far easier for an established, well-funded business rather than a start-up venture.
The time frame from planting to production means there is a need for working capital to be funded before any income is generated. Funding is therefore critical and private money has been the key source to date (either own funds or with other equity investors).
Lenders are increasingly taking an interest but given it is a relatively young industry, they are showing caution. This means cashflow management and access to real-time accounting data is essential.
With the significant capital investment into a viticulture business comes the opportunity to claim available tax allowances. The proposed reduction of 100% year one Capital Allowances for Plant and Machinery from £1 million per annum back to £200,000 per annum from 1 January 2021 will not be helpful in this respect.
If you are planning on growing your own grapes and outsourcing winemaking then a number of potential issues arise. Contract production is a good way for a smaller business to operate with relatively low volumes but as the business expands it needs to focus on achieving consistent quality and timeliness of operations.
There are concerns that wineries which have the capacity to undertake contract production have used this as a way of filling their own spare capacity and ‘sweating their assets’. As these operations themselves expand, their ability to undertake contract production will shrink, so what do you do then?
There are also concerns about the future size of the market for English sparkling wine as supply increases, which could have a downward effect on prices and larger producers will be looking towards new export markets now and for the future.
Looking at how the business is structured, consideration needs to be given to individual circumstances from a tax and risk perspective. Some new investors into the sector may have been attracted due to planting and growing grapes being added to the list of activities that qualify for Agricultural Property Relief (APR) to mitigate Inheritance Tax. The COVID-19 pandemic has however raised the spectre of APR being removed, so certainly caution is needed.
A word on diversification and whilst tourism is a natural progression for many vineyards which has helped underpin cashflow for many with tours and events, this has been severely affected by the COVID-19 pandemic. Having the cashflow to navigate the months ahead will be vital for many businesses.
Steps to take to find the best source of funding are to first approach your existing lender. They have built a relationship with you over time, have detailed information about how your business and accounts have been managed and are focussing on their existing customers so there are a number of options and products available including reviewing the terms of existing lending. Secondly, speak to your existing private investors regarding further investment and/or consider attracting new investors.
Other options still available to at least the end of September to a business which was both ‘viable and profitable before the pandemic’ are the various Government Coronavirus Business Interruption Loan schemes including the Bounce Back Loan Scheme (BBLS) or the Coronavirus Business Interruption Loan Scheme (CBILS).
Ultimately over time, we are likely to see the viticulture market here in the UK continue to fragment further into larger brand-driven commercial operations and lifestyle producers. There is a place for both business models as other wine-producing countries demonstrate.
If you would like to discuss the topics explored in this article, contact Adrian Pearce.
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