Drivers and takeaways of a bullish rural real estate market
The strength of demand for virtually all forms of productive rural property has been well reported over recent months.
Demand for land is being driven by low interest rates, sound fundamentals for most commodity markets and agricultural land gaining popularity as an investable asset class.
In the experience of our rural real estate team across the country, family farms are competing most strongly for land when it comes onto the market. Family farms can afford to compete for land due to:
- recent favourable conditions – in most areas post drought
- strong commodity prices – with records being achieved in several commodities
- low interest rates – and an intent by central banks to keep them low to stimulate the economy
- strong balance sheets – as a result of solid earnings and asset value appreciation
- most importantly – positive long-term view of the sector and producers’ capacity to achieve competitive returns.
A holding of $5.2 billion in Farm Management Deposits (FMD) at the end of May 2021 is a strong indication of the robustness of the family farm – quite a war chest. However, it is interesting to note the draw-down of deposits since June 2019.
Adding to this landscape is some competition from corporate and institutional investors, both domestically and from offshore.
The Foreign Investment Review Board (FIRB) approved $8.3b of agricultural and forestry investments in 2020 up from $7.3b (13.7 per cent) from the year before.
Over 30 per cent of this came from Canada (and of this from only one or two very large investors). 56 per cent came from just three countries – Canada, Singapore and the United States. If the Canadian investors are removed from the 2020 amount, there has been a moderate downward trend in investments since 2016 – 17.
Still, given that the trend in foreign investment seems to be for larger transactions (the average size of approval was $48m in 2020), the majority of transactions remain between domestic investors and large family businesses.
While the market is strong and seemingly setting new records with every sale, vendors should not become complacent. A strong market means it is just as import to ensure that your asset is marketed to achieve the best result as there is more to gain from a professionally run transaction.
In our experience over the last 12 months, vendors need to consider the following to ensure they optimise the result from an asset sale:
1. A strong market means that there are likely to be several new entrants to be made aware of the sale who may not be tuned into the usual media.
2. The asset needs to be presented to all sections of the market, as there are likely to be interest from a diverse buyer group with different needs.
3. COVID-19 means that it is harder to engage remote buyers, increasing the need to use innovative marketing techniques.
4. Experienced negotiations are essential throughout the process to maximise competitive tension to make sure no money is left on the table.
5. Many buyers may be attracted to assets outside their region to expand their business if local market competition is strong. This makes it important to work with a company with a national network to ensure all buyers are made aware of the sale, not only through the media, but from personal referrals from trusted advisors.
If you are considering selling an asset, make sure you deal with a professional transaction team with a deep understanding of the market.
Article written by Mark Barber, Elders head of agribusiness investment services.
With a network over almost 300 offices and 1,200 agents across the country Elders Real Estate can assist you.