Property: Small signs of recovery starting to show up

Jon Condon, 21/03/2013


NOW is a good time to buy into the Australian rural property market, specialist marketing agency Colliers International told a Brisbane investor and advisor briefing recently.

Tim Jelbart, Colliers’ rural and agribusiness valuation manager, told the gathering that the market was beginning to show small signs of recovery, evidenced by an increase in transactional activity in some regions.

“In some markets, mean land values have marginally increased and the volume of transactional activity has started to pick up,” he said.

“There’s a lot of interest out there now for rural property. A lot of people have been sitting on their hands now for five years, thinking, this thing has to turn around soon.”

“Yes, there’s still pressure on commodity prices, and that will continue to be a motivating factor in purchasers’ consideration, but I believe we will see an increase in transactional activity in 2013 – be it vendors simply meeting the market, or being pushed a little harder by the banks after two or three years in financial stress.”

“We see the volumes continuing to pick up, and that’s where we will see new value benchmarks being set,” Mr Jelbart said.     

Using the Richmond cattle production area in Queensland’s northwest as an example, he said the property market was showing positive signs after several subdued years, with transactional activity on the rise.

Colliers data showed that there were only four transactions in which properties 5000 hectares or larger changed hands in the Richmond Local Government Area between 2009 and 2011, whereas in 2012 there were 10 transactions, and mostly in the last six months.

“The increase may have started to re-establish local value levels, with the mean land value in this area appearing to have increased marginally,” Mr Jelbart said.

“It’s too early yet to call whether this trend is common across other LGA’s, before we can gain any real confidence from this, but it is certainly a positive sign for this market.”  

He warned, however, that there was potential for further dampening of values if a lot of distressed assets hit the market this year.

“We’re not sure what’s going to happen further north. It’s the million dollar question, but it has potential to further dampen values this year.”

Speaking about broader rural land values, he said for any increase in values to occur, some fundamental structural changes would be needed, in areas like farmer subsidies and tariffs in international markets, a lowering in value for the A$, and/or reduced regulatory cost burdens.     

Mr Jelbart said another region where the rural property market was showing signs of improvement was Moree, in northern New South Wales.

This area had also shown a slight rise in mean value over the past six months, he said. But while there had been some rise, they were still not back to the levels seen in 2008 and 2009, before the market started to decline.

While there were some rural markets in Australia showing signs of recovery, it was too early to tell whether there was a recovery starting across the board.

“There is a consensus, however, that the market is at or near the bottom and this is attracting investors,” he said.

“It appears sentiment has improved, with more interest and enquiry so far this year in the rural market. Now is certainly a good time to buy – it is a buyer’s market.”


‘Distressed’ listings on the rise

Colliers' Rawdon Briggs addresses the Brisbane investor briefingColliers’ rural and agribusiness director Rawdon Briggs told the briefing there had been an increased amount of distressed rural properties that had come onto the market in 2012, and with this trend expected to continue into 2013, there would be ample opportunities for buyers in this realm.

According to Colliers’ recently-released Insolvency and Distressed Assets report, the rural and agribusiness sector was one of three segments that saw a big spike in the number of distressed assets coming to the market over 2012.

Ninety seven rural distressed properties came on the market in 2012, according to the report – a 73 percent increase on the 2011 figure of 56.

“Despite the rise in average farm cash incomes, many agribusinesses continue to struggle with high debt obligations and the commercial consequences of drought conditions prior to 2010,” Mr Briggs said.

While Colliers expects distressed assets to continue to come to the market in 2013, the long-term outlook for the Australian agribusiness and rural sector was brighter.

“The Department of Agriculture, Fisheries and Forestry maintains that the volume index of farm production will rise throughout the next five years by 5.4pc, and this strong performance will be one of the key drivers of investor interest in the Australian rural and agribusiness sector in the long term,” he said.


Beef opportunity

One of the biggest opportunities in the rural market over 2013 would be in the beef industry and consequently, cattle properties, he said.

“While the live export market is experiencing significant depressed conditions, the export beef market is fundamentally strong, particularly given the strength of the Australian dollar.”

“Grinding beef in particular is increasingly sought-after globally, with demand particularly coming from the US, Asia’s emerging middle class and to some extent the Middle East and Russia.”

In time, demand for live exports might also return, but that was dependent on what happens in the political arena.

Mr Briggs said Colliers had gone from basically zero week-on-week inquiry for northern cattle operations earlier, to a situation now where there were multiple strong inquiries each week.

“It’s a perception of value. Investors are seeing values now that encourage participation, and looking at assets.”

Mr Jelbart agreed, saying there had been an increase in due diligence activity from overseas fund managers, looking to get into cattle in Australia.

“They are not quite sure where yet, or at what price, but it is certainly up on last year.”

Mr Briggs said there was an increasing trend towards vendor diligence packages, prepared by the vendor’s legal representatives, providing detailed financial performance, before the property was advertised for sale.

Mr Jelbart said much of the inquiry coming into agriculture at the moment was new players – external sources – and the first question often asked was, where’s the financial information, and what’s the management capability?

“That’s often the two key things that can be very hard to get from vendors – either distressed or otherwise – but a high level of financial information is increasingly important, from the investor’s side.”       

Mr Briggs said the Australian rural market could become even more attractive to buyers over the course of 2013, with the potential for property earnings to improve.

“We continue to see a rising and bullish soft commodity market, with pricing strong globally,” he said.

“This positive pricing is currently being dampened by the rising cost of undertaking business in Australia and a strong A$ sitting at levels 25pc above the long-term average. But that can turn very quickly – depending on what happens with the currency trade.

“With the RBA still cutting rates in Australia and the reduced intervention in offshore markets, the base currencies will be brought into focus and push the A$, making the Australian rural market more profitable and in turn, even more attractive for investors,” he said.

Looking at some bigger picture issues, Mr Briggs pointed to rising world food prices – recording double digit growth again last year – and the impact this was having on the mood for investment in Australian agriculture.

“The fund managers who are looking at investing in agriculture globally are looking at this and saying, ‘that’s a great opportunity’,” he said.

“We’re getting inquiry now from commercial and infrastructure investor clients that have never held an ag asset before, in the life of the fund, that are now looking at balancing their portfolios with some food sector assets.”

Looking at the Northern Australia region most directly exposed to live exports, Mr Briggs suggested there was about 7.3 million head of cattle in the NT, pastoral zone of WA, and northwest Queensland in the trade’s direct catchment area.

Based on offers being seen today, he presented a table based on balance sheet exposure by beast area, suggesting the region may have suffered a $4.53 billion total asset write-down due to the impact of the live export crisis, compared with beast area value figures back in 2007. BAV had declined from $10.6 billion in 2007 to below $6 billion in 2012.

Within that, he suggested the beast area value in the NT/WA live export catchment region had declined from an average of $1000 to around $350, while the exposed region of North Queensland had gone from $1800 to $1200, using conservative figures.

“That’s based on offers we receiving for VRD-type assets in the last few weeks – it’s where the buyers are sitting on the serviceability side, in being able to make money out of these assets,” he said.

However he stressed that it was not all bad news, because it was “7.3 million head out of a total national herd size of 28.5 million”, suggesting there were many areas less directly impact by the live export crisis.


Trend towards tenders, EOIs

Prominent Brisbane agribusiness solicitor Bill Loughnan asked whether there was a trend towards a tender sale process this year, rather than auction listings in the beef segment.

“I think it will be two stage: tenders and expressions of interest, initially, and if an outcome is not achieved, going to auction as the second stage. It has to be a pretty simple asset to go straight to auction,” Mr Briggs said.

Questioned about overseas buyer sectoral preferences in Australian agriculture, he said beef would be ‘front and centre’ for the next two years, but minimum transaction size for most offshore buyers was $20 million – otherwise the implementation of structures through the major four accounting firms was too dear.

There was also a trend to have the end-market secured, before making the production investment in Australia.


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