CPD: Rural property – the next investment frontier?

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Farmers have seen the value of their acreages skyrocket.

In this article DomaCom examines the case for investing in rural property and looks at how investors can invest in this pandemic-proof sector at a time of steeply appreciating land values.

It’s not just city dwellers that are amazed – or in some cases bemused – about the resilience of the Australian property market. Farmers have also seen the value of their acreages skyrocket, with some analysts pondering whether the increases have exceeded the ability of the earnings potential of the land.

According to Rural Bank’s annual report on farmland values, the median price of Australian farmland rose 12.9 per cent in 2020 – to $5907 per hectare. This marks the seventh consecutive year of growth, with farm values increasing at a compound annual rate of 7.6 per cent over 20 years.

The 2020 increase was spurred, in part, by the easing of the drought and booming commodity prices, along with the realisation that the Covid-19 pandemic would not temper agricultural demand (except for niche sectors such as lobster production).

Along with Northern Territory beef growing country, Tasmania leads the way on farm values. Based on 3.71 million hectares of land traded nationally during the year, the Apple Isle recorded a 25 per cent year on year increase, while NT values soared 65 per cent.

Victorian, NSW and Queensland values gained 6.9 per cent, 15.6 per cent and 11.8 per cent respectively.

“The demand is being driven by strong, relatively consistent commodity prices,” the Rural Bank report says. “When coupled with an excellent season (it) has also provided farmers with capital to invest.

“Unlike other parts of the economy, Covid-19 has (with some exceptions) not dented agricultural returns or confidence.”

Firming commodity prices improve sentiment…

The confidence is reflected in the buoyant market for most ‘soft’ commodities, notably wheat and beef, coupled with largely ideal growing conditions.

The United Nations Food and Agriculture Organisation’s (FAO’s) food price index stood at 127 points in May 2021, a circa 40 per cent year-on-year increase. The index is also only a touch below its record high of 137.6 points achieved in February 2011.

“The sharp increase in May reflects a surge in prices of oil, sugars and cereals along with firmer meat and dairy prices,” the FAO says.

The Australian Bureau of Agricultural and Resource Economics forecasts winter crop conditions to be well above average, but with regional variations.

“The opening to the winter crop season was promising … with favourable late summer and autumn rainfall in most cropping regions in Western Australia, New South Wales and Queensland,” the agency says in its June crop update.

“The favourable seasonal conditions in these regions, and high world prices, are expected to drive the area planted to winter crops nationally to a record high.”

Most South Australian and Victorian cropping regions have been less fortunate and will rely on decent winter rainfall for a good harvest.

For existing landowners, the robust values provide further equity to invest at a time of rock-bottom interest rates.

But beware the cycles…

But as any farmer knows, there’s always room for caution.

“If the history of Australian agriculture has taught us anything, the next economic shock, drought, natural disaster or unforeseen challenge is just around the corner,” Rural Bank says.

“And we are all familiar with the ever-increasing challenges presented by a changing climate.”

On balance, the bank expects agricultural productivity and profitability to continue to support the value of Australian farmland.

“The optimism and ingenuity of Australian farmers cannot be overestimated,” the report says.

“Farmers are achieving returns from seasons that would have been loss makers a decade ago (and) they manage inputs and costs more effectively than ever before, achieving returns on good and marginal land.”

Investing in agribusiness

For most investors, listed agricultural companies have provided a broad exposure to the rural offering in some form or another.

ASX agricultural stocks include the diversified Elders, landowner Rural Funds Management, beef producer Australian Agricultural Company, wheat handler Graincorp and almond grower Select Harvests.

Specialist listed trust Vitalharvest owns many of fruit and vegetable grower Costa Group’s properties and has been subject to a spirited takeover battle.

Such companies allow the investor exposure to the benefits of scale and technology-driven innovation and best-practice land and water management.

However, a listed entity will generally move in line with the market, removing the benefits of diversification that investing directly in rural property can provide.

In most cases the farms are corporatised, so success depends heavily on the calibre of management.

Divide and conquer

While fractional investing may sound exotic, the share market uses the same principle. By breaking a company into shares, investors can buy a portion of the entity for a relatively small outlay.

Thus, many everyday Australians can claim to ‘own’ Telstra, BHP or the Commonwealth Bank. Similarly, we can be ‘farmers’: fractional rural property investment breaks a rural property into affordable segments, thus enabling investors to buy a portion of a property.

Fractional investment also enables farmers to raise capital while retaining a significant portion of their landholding.

Mutual benefits

For investors, fractional investing:

  • allows limited funds to be spread across multiple rural property assets, providing diversification through different geographic locations and agricultural usage
  • enables a socially responsible investment – investing in rural property can relieve farmers of bank debt and enable them to make capital investments that improve productivity and, in turn, reinvigorate rural communities
  • enables co-investment with the farmer – in any situation where the person driving the investment has ‘skin in the game’, they will work hard for positive outcomes
  • provides security – fractionalised property is an asset of a registered managed investment scheme and the property title is held by a registered custodian
  • allows for transparency – each property asset is segregated into a sub-fund, so returns and costs pertinent to each property are kept separate and applicable to investors in that property only.

Benefits to farmers include:

  • selling a portion of equity enables expansion and investment, which in turn provides farm businesses with a mechanism to improve economies of scale
  • increased financial flexibility and security – family-run farms have been under strain from increasing debt, which in turn limits borrowing capacity to purchase more land and grow the business.

And for financial advisers:

  • fractional rural property investment provides an opportunity for financial to add value to clients by providing exposure to a true growth asset, one that is generally uncorrelated with other growth assets.
  • advisers can easily invest a portion of their clients’ investment portfolio in rural property and take advantage of this emerging thematic. A liquidity facility allows investors to trade out when they are ready to do so, subject to the availability of a buyer.
  • fractional rural investment offers the potential for enhanced fees by including direct rural property investment in client asset allocation strategies.

DomaCom’s rural strategy

In an Australian first, in 2017 DomaCom crowdfunded the $858,000 purchase of Doyles, a western district beef property. Since then, DomaCom has continued to revolutionise farm ownership with its fractional investing model.

The DomaCom Rural Farmland Strategy is a perpetual campaign designed to acquire quality agricultural properties in the range of $1 million to $5 million.

The properties can be suitable for grazing, cropping or other areas of food production. The acquisition may be in syndication with other investors, the property vendor or a next-generation farmer.

When sufficient funds have been accumulated, investors can accept or decline specific properties as presented and join one or more individual campaigns.

When a property is accepted with sufficient funds, DomaCom moves to acquire it after conducting due diligence (including legal review of the contract of sale, formal valuation and a property inspection).

Funds surplus to the acquisition cost may be applied to the next farm acquisition which will also need investor acceptance and its own due diligence process.

As each property becomes fully subscribed it is segregated in its own sub-fund.

DomaCom is targeting an average yield of 5 per cent per annum across its rural portfolio, over and above expected capital growth averaging 6 per cent.

In many cases, the property will be leased to the current, or next-generation farmer operating the property.

Using the DomaCom platform, aspiring farmers can increase their equity over time by purchasing investor units in the sub-fund that holds the property. Retiring farmers who sell and lease back the family farm will similarly not be burdened with debt and can use the released equity to increase productivity.

DomaCom’s next rural funding campaign is for Highclere Farm, a 100-hectare grazing and orcharding property next Scottsdale in northern Tasmania.

The campaign seeks to raise a minimum of $300,000 for a 52 per cent interest in the property. The vendor will retain 48 per cent equity in the property and enter a ten-year rental lease, providing investors with comfort about the owner’s ongoing commitment.

Meanwhile, Doyles has delivered a 43 per cent for the 94 investors, over and above a 4 per cent rental yield.

As rare as hens’ teeth

According to Rural Bank, 8,187 farm deals took place in 2020, a 14.5 per cent increase. But this rebound was from record low levels in 2019 and the number of transactions is still about 40 per cent below the peak levels of two decades ago.

The longer-term trend of declining transactions means opportunities are becoming less frequent. Thus, tightening access to suitable parcels of land and increased competition for fewer parcels will play a role in driving increased values.

DomaCom expects farmland values to continue to rise, underpinned by both the buyer demand and increased farm profitability.

Feed the world

When it comes to global commodities, the only certainty is that demand for food – and quality farmland – will continue to rise as the population swells and arable land decreases.

This means Australian farmland is almost certain to increase in value in the long term, although access to sustainable water supplies remains a key variable.

According to the FAO, 690 million people – about 9 per cent of the world’s population – go hungry every day and two billion do not have access to adequate nutritious food.

If the trends continue, 830 million people will be undernourished by 2030 and the organisation’s ‘zero hunger 2030’ target will not be met.

 

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This article provides general information only and has been prepared without taking into account the objectives, financial situation or needs of individuals. The information contained in this article reflects, as of the date of publication, the views of DomaCom Australia Limited ABN: 33 153 951 770, AFSL 444365 (DomaCom) and sources believed by DomaCom to be reliable. We do not represent that this information is accurate and com­plete, and it should not be relied upon as such. Any opinions expressed in this material reflect our judgment at this date, are subject to change and should not be relied upon as the basis of your investment decisions. All reasonable care has been taken in producing the information set out in this article however subsequent changes in circumstances may occur at any time and may impact on the accuracy of the information. Neither DomaCom, its related bodies nor associates gives any warranty nor makes any representation nor accepts responsibility for the accuracy or completeness of the information contained in this article. Past performance is not a reliable indicator of future performance. Investing involves risk including loss of capital invested. ©2021 DomaCom Australia Limited.

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