Farmland investment for successive success

Farmland investment for successive success


Opinion
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While the ongoing tender process between the big guns for the S. Kidman and Company pastoral empire continues to fuel industry speculation and debate, things are stirring on the “family farm” property market scene.

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WHILE the ongoing tender process between the big guns for the S. Kidman and Company pastoral empire continues to fuel industry speculation and debate, things are stirring on the “family farm” property market scene.

After several years of marking time, and even going backwards in some places, rural property values are heading north again, driven by a new mood of optimism mostly a result of much-improved markets for cattle and wool.

All we need now to complete the turnaround is a breaking of the drought that still grips much of eastern Australia.

Already, though, there are signs established farmers are once again prepared to borrow to expand their businesses, seizing the opportunity afforded by extremely low interest rates and much-improved cashflows.

Just as importantly, banks are joining in the optimism revival, and showing more willingness to lend for farm business expansion. It’s been their reluctance to do this during recent years that has weighed heavily on the property market.

Perhaps they’re finally realising farm values have some basis in commodity values and the world’s need to eat, whereas sky-rocketing city house prices – largely kept aloft by bank loans – bear no relation to anything of substance.

The upsurge in rural property activity is borne out by sales data released this month by national property specialists Herron Todd White, and used to compile the Australian Grazing Property Index, which measures property value trends.

For properties of 2000 hectares and more, the index is now back up to within 10 per cent of the market’s 2009 high point of $541/ha, having dropped well below during the market low point of 2013-14.

Looking at the bigger picture of all properties from 250ha upwards (more relevant to family farm considerations), the recovery has been even more marked, with December 2015 values being just 5pc short of the 2008 peak of $1315/ha.

Successful investment in rural property is as much about timing of entry as anything else. Many a well-intentioned investment has gone pear-shaped simply because a purchase was made at the wrong point on the property value cycle.

As the index figures show, rural property prices will inevitably trend upwards over the long term, but investors need to have steady nerves and a sympathetic bank. From 1980 to 1988 the index lifted by 14pc, only to fall by 4pc from 1988 to 1999; then followed a 15pc hike to the high point of 2008, which unravelled by 5pc to the trough of 2013-14.

If the fund managers controlling the destiny of the $2 trillion now held by Australian super funds had been half smart, they would have been directing a sizeable flow of that money into rural property investment during that trough, knowing it was bound to be temporary.

Instead, as Deputy Prime Minister Barnaby Joyce pointed out during the recent ABARES Outlook conference, only 0.3pc of that super nest-egg is invested in agriculture, reflecting the long-standing city perception of farming as “too risky”.

Perhaps the fund managers should all be sent a copy (with a “must read” injunction) of last week’s article in The Land by Andrew Marshall, reporting on another Outlook presentation – by Victorian farm financial consultant David Cornish.

As Cornish demonstrated, taken over the 10-year period to 2015, notional returns on investment in agricultural property easily outranked returns from shares (local or international), rental property or bank interest.

The key is to harness the capital gain factor, which requires patience. For most of the 10-year period in question, the capital gain was negligible, but before the rot set in it had delivered gains of up to 20pc, and now we’re probably on the cusp of another lift.

ABARES has predicted the value of farm production will top $60 billion in 2016-17 for the first time – not that ABARES always gets it right, of course (and this prediction would assume a return to “normal” seasons and irrigation activity).

But leaving such predictions aside, the mood is still undeniably buoyant. There’s a renewed spring in the step of country showgoers at Sydney Royal this week, and talk around many a farm kitchen table of new projects and expanded horizons.

The property value cycle referred to earlier is one thing; an even more important cycle is that of farm succession, and that’s where the present upswing may have come just in time.

During the wool disaster decade of the 1990s and the drought-plagued “noughties”, the best part of a generation of young people left the embattled farms to which they might once have succeeded, to seek careers in other, more promising sectors.

Only now are we seeing among young people the signs of a return of confidence in a farm-based future, and it’s being reflected in the appetite for additional land by established farmers.

Let’s hope the turnaround inspires a new generation of farm-raised young folk to pick up the baton and pursue a rewarding career in the industry that so badly needs their inherited knowledge, skills and enthusiasm.

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