Farming the cream of the real estate crop

Although the housing market has slumped and commercial property is showing signs of speed wobbles, the grass on the nation's farmland has never been more valuable.

Sales figures compiled by the Real Estate Institute (REINZ) show the median farm price increased by 52 per cent between April 2007 and April 2008, rising from $1.19 million to $1.81m.

Farm prices are also leaping ahead at a greater rate than the commercial property sector, which generated average capital growth of 13.7% last year, according to the Property Council.

According to REINZ rural spokesman Peter McDonald, the farm sector is looking increasingly like a safe harbour as overall economic conditions worsen.

"There is a huge amount of capital pouring into the rural property market at present, both from higher dairy returns as well as non-farmer investors. The dollar has fallen back which has given the market renewed confidence," McDonald said.

This shift in fortune towards the rural sector is becoming so pronounced it is starting to affect the performance of the real estate industry itself.

When real estate company Bayleys released its sales figures for the year to March, they showed that the total value of unconditional sales the company had handled declined by 4% (to $5.81 billion from $6.08b) compared with the previous year. Bayleys said the figures would have been worse but for the value of the company's rural sales which grew by 38% to $1.3b over the same period.

Although the dairy industry has been the rural sector's star performer, underpinned by exceptionally high prices for milk products, rising rural property prices are not restricted to dairy farms.

The REINZ figures show that prices for most farm properties have risen strongly over the past year, even for beef and sheep farms where the underlying returns have been poor compared with dairying.

This is because high dairy prices are having a spillover effect into non-dairy farm prices.

A good example of this was the $32.5m sale of a 3138ha sheep and beef farm in the Waipa Valley, 35km south-east of Te Kuiti.

The property was bought by a syndicate of buyers put together by AgInvest, a company which specialises in purchasing rural properties and then managing them under contract.

This has been a common type of investment with commercial properties and has appealed to smaller investors who could not afford to buy a commercial property outright, and to wealthier investors wanting to spread their risk.

The pasture quality on the Waipa farm is not good enough for dairying, which is why the farm changed hands for $10,357 per hectare, compared with the $62,000 per hectare which Fonterra director Jim van der Poel and his wife Sue recently paid for 186ha of prime Waikato dairy land.

But all the investors who took a share of the Waipa farm syndicate had substantial dairy farms within comfortable trucking distance of the Waipa property.

The financial arrangement was that for every $1 million each farmer invested, they would have access to the equivalent of 100ha of grazing on the farm.

In this way, the prime pastures on the home farms are used to produce milk, and the extra grazing property is used to support this. The arrangement allows the farmers to maximise the milk producing capability of the home farm and make more efficient use of their capital.

Although this particular syndicate was made up entirely of hands-on farmers, smaller syndicates have attracted outside investors and it is likely future offerings will be promoted more widely to the investing public.

What non-farming investors may have trouble getting their heads around is the different investment characteristics of farms compared with other forms of property.

Farms are notorious for producing low income yields, which can be cyclical in nature and affected by factors such as drought and the exchange rate. Most of the value growth comes from capital gain on the underlying land and for this reason most syndicates are set up to run on a seven- or eight-year cycle.

AgInvest is forecasting the Waipa property will provide its owners with an income return of about 4% and an overall return of about 11% a year over the next seven years.

However,even the farming sector is not immune to the general economic slowdown.

AgInvest director Andrew Watters said about a quarter of investors in smaller syndicates were non-farmers, but turmoil on financial and equity markets meant they had been sitting on the sidelines over the past six months, while the farmers had continued to invest.

To make its syndicates more attractive to investors, AgInvest was looking at sourcing dairy farms in Australia, where suitable land was often only 50-60% the cost of equivalent land in New Zealand.

This would give Australian farms a higher income yield, but probably a lower capital gain.

Watters said AgInvest hoped to be offering its first Australian farm syndicate to New Zealand investors by the end of the year.

- © Fairfax NZ News