Rural Scotland’s ‘land rush’ slows as natural capital bubble bursts

First it was the “green owners”, billionaire investors such as Danish retailer Anders Povlsen, who bought up sections of the Scottish Highlands to rewild the moors for grouse shooting.

Wealthy rewilding activists have recently been joined by fund managers investing in commercial forestry and peatland restoration, who are looking at incentive schemes that provide voluntary carbon credits that can be bought to offset UK emissions.

But the latest rush into the Scottish landscape has peaked, bursting a bubble not seen for decades. The slump is a sign of a market that, despite its potential, has yet to mature, institutional investors say.

Questions about the validity of carbon credits, a weaker economy and delays in approving forestry programmes have neutralised sentiment in an overheated market.

In the UK, you can buy carbon credits representing the reduction or removal of carbon dioxide to offset your greenhouse gas emissions.

“There’s a lot of promise that natural capital is going to be important, so it’s just a matter of time before it becomes important as a market, rather than as a transaction to order,” said Tim Coates, co-founder of Oxbury, a bank focused on agriculture. “But we’re not there yet.”

Interest in carbon credits has driven investment into rural Scotland and could underpin the country’s goal of net zero emissions by 2045. But large-scale plans have faced opposition, particularly from agricultural interests, while also inflating land prices for other uses.

UK and Scottish government funding is available for tree planting and peatland restoration, and applications for natural capital schemes to the Woodland Carbon Code, a UK government-backed body that oversees woodland creation projects, have accelerated in 2021-22, helping to boost land prices.

The value of land in mountainous areas quadrupled and landed estates tripled between 2018 and 2021.

Private equity veteran Guy Hands, the founder of Terra Firma, and his wife Julia have more than tripled their Scottish land holdings in the past 12 years, according to public records, including the Griffin Estate in Perthshire, which was up for sale last year for £130m.

“My family sees this as an opportunity to own and develop sustainable forests and woodlands with the goal of creating environmental benefits while achieving economic returns for many generations,” he said.

In May 2022, the Scottish government strengthened the code with revised “additionality” tests to ensure better quality carbon credits, prompting schemes to plant more native broadleaf trees alongside faster-growing Sitka spruce.

As intended, this eliminated plans that would have been unprofitable without loans, which cooled the land market while increasing species diversity.

Natural capital investors, paying increasingly higher prices for land, have found themselves on the wrong side of inflationary pressures, rising interest rates and lower timber prices.

Foresight Sustainable Forestry, the first London-listed natural capital company, was taken private in May, a move widely viewed by market participants as “damaging.”

The “additionality” reforms in the Forest Code on carbon emissions have led investors to plant more broadleaf trees, which sequester carbon more slowly but increase biodiversity.

“That’s fine, but there’s a danger the pendulum could swing too far back towards broadleaf trees and not produce enough timber,” said Olly Hughes, head of forestry at asset manager Gresham House, which runs a portfolio that has collectively become the third-largest estate in Scotland, according to public records.

The reforms, which are intended to slow the recent trend of expanding farmland, echo the views of land reform activists who say the programs do not benefit local communities.

Willie McGhee, a forester and board member of the Forest Policy Group, opposes government support for reforestation using monocultures of non-native coniferous species and large-scale logging — a process driven by what he calls the “forest-industrial complex.”

He argues that the Scottish Government could “reorganise grants to reward sustainable management rather than opportunistic planting for the benefit of natural capital” and advocates greater community ownership.

Investors have also had to contend with weather-related risks, such as Scottish brewery Brewdog losing half of its seedlings at its Lost Forest project in the Cairngorms this year due to a combination of heatwaves, strong winds and frost.

The retreat of institutional investors has facilitated a resurgence of “lifestyle” buyers looking for sports or family properties, said Patrick Porteus of sales agency Landfor.

He added that land valuations have fallen by 20 to 25 percent over the past two years.

“The government’s ambition is to drive towards net zero emissions – so there is an opportunity for capital to flow into Scotland,” said Tom Croy, investment director at Par Equity, adding that “this will not be sustainable” if there is a significant drop in investor interest.

Three years ago, the Edinburgh venture capital firm partnered with Aviva Investors to regenerate Glen Dye Moor, which was once used solely for grouse shooting.

“A lot of the peat on the site was in really bad shape when we took it over,” he said. But the project has hit a bottleneck in approval from Scottish Forestry, the government body that manages the code.

David Robertson, forestry manager for Scottish Woodlands, said Scottish Forestry did not have enough staff to “meet the requirements for generating carbon credits in the UK”.

Scottish Forestry said its team grew last year, doubling the number of project validations compared to the previous year, with 170 projects approved in 2023-24, covering 47 per cent of all new forests in the UK.

Because degraded peatlands account for 15 per cent of Scotland’s emissions (the fifth largest emitter of carbon dioxide), restoring them is a quicker and cheaper way to offset emissions than planting trees.

But Freddie Ingleby, of peatland specialist Caledonian Climate, said doubts about the effectiveness of carbon credits and tighter government funding for peatland projects were hurting a market that is set to grow to £1bn this decade.

Buccleuch Estates, one of Scotland’s largest landowners, has embarked on a comprehensive peatland restoration programme but is not engaging with institutional investors who need specific exit terms from contracts lasting up to 60 years that define natural capital projects.

“Trying to fit the square peg of finance into the round hole of nature brings its own set of challenges,” said Adrian Dolby, head of agriculture.