Things to think about this spring: Real Estate
Spring is real estate season and, with good rain across swathes of Australia, is this the right time to buy or sell? We asked Elders Real Estate general manager Tom Russo for his thoughts on where farmland prices are headed.
We have seen very robust appreciation in farmland values in recent years, so it’s a fair question to ask how long this can be sustained. It really comes back to an issue of supply and demand. Transaction volumes have been historically low over the last 18 months, indicating that there is constrained supply of farmland offerings as existing owners retain their assets and look to expand. This has occurred at a time where there has been high demand on the buy side, driven primarily by a near perfect storm of variables, such as:
- Healthy commodity prices driven by strong long-term fundamentals in demand for Australian agricultural products globally
- Low cost of capital with record low interest rates
- A favourable Aussie dollar, notwithstanding recent appreciation
- Access to capital with healthy farm balance sheets driven by strong operational performance and land appreciation
- Favourable seasonal conditions
At its most basic level, the question we’re asking here is really “will the supply/demand dynamics rebalance and, if so, when?”. One of the really interesting themes we’ve seen in the last 12 to 18 months is that, even in those regions experiencing extreme drought conditions, values increased due to low liquidity but high buyer demand. So, can we expect the balance to shift in favour of buyers? Let’s look at the key variables that will drive this.
On the buy side:
- This is undeniably buoyant, driven largely by strong long-term fundamentals in demand for agricultural products and resulting outlook for commodity prices. Whilst GDP may take a hit in the short to medium term, populations continue to grow and there are more and more mouths to feed.
- We can now also throw on top of this an excellent break in the season, which is driving confidence. If you look at lamb and mutton as an example, the re-stocker market will be very strong and there is enormous confidence within the industry with producers looking at strong returns. We are seeing this flow through to the farmland market as producers seek to acquire more land in order to expand their flocks. We are seeing values well in excess of $1,000 per DSE in high rainfall areas.
Cost of capital:
- We have record low interest rates and I think it would take a brave person to punt on sharp rise any time soon.
Access to capital:
- Debt: All our discussions with major banks indicate that our industry is very much viewed as a safe haven. The banks are very much open for business.
Farmer equity: strong as a result of existing real estate portfolio performance and historically low farm debt position.
Investment scale market:
- Will investors move to preserve cash rather than invest into alternative and ag assets?
- Will the AUD volatility scare some pools of capital off or make buying that much more attractive?
- The large fund managers are very well set, with excellent domestic executive and operational management teams, plus strong investor support.
- Mid-tier investment managers may see a tightening in ability to raise capital.
Weight of capital:
- With all of this in mind, the result is that there remains strong weight of capital looking for a home in the Australian farmland market from more pools of capital than we’ve ever seen, ranging from local farmers, through to Australian and offshore corporate farms and institutional investors accessing the market through well establish intermediaries who now have solid track records justifying further investment.
On the Sell side:
Could increased liquidity absorb this demand?
- The increase in liquidity will be interesting to watch. Whilst some owners are now prepared to offer their properties to market given their improved presentation in favourable seasons, others are finally set to take advantage of the seasons to produce operational profits and are therefore going nowhere.
- Our own network activity suggests there is a strong increase in listings, particularly in areas coming out of drought.
- My view is that the increased liquidity will not materially rebalance supply and demand and we will still see a seller’s market for quite some time.
Willingness to pay:
- So, will the weight of capital still be willing to pay at appreciating values?
- I do believe that there will come a point where returns on investment will slow down rapid land value appreciation. My view is that we are probably approaching that level and we can expect growth this year, albeit at a more subdued level.
Elders Real Estate couples local knowledge with an Australia-wide network to help farmers make the most of their number one asset, land. When you’re ready to take the next step, contact your local Elders Real Estate agent for advice you can trust.
For more information on how Elders can support you this spring, contact your local Elders Real Estate Office or Agent.