IN our previous weekly property review (click here to view), Herron Todd White’s north and northwest Queensland regional property valuer Roger Hill posed some questions about whether pasture condition can influence property value.
Buying property can be all about taking up an opportunity with potential, but land management and condition is increasingly being seen as an attribute with the potential to impact the final market value of a landholding.
This week, Mr Hill concludes his discussion, using a motel as an analogy to explain the gross margin parameters of land and soil condition.
Would a purchaser pay the same price for a rundown motel trading at 50 percent of capacity or one that has well been maintained, over time trading at circa 80 percent? he asked.
No matter the farm commodity, whether it be tomatoes, cane or cows, the relationship between farm blocks and paddocks was like talking about motel rooms.
“The Gross Margin of the varying management decisions to maintain and upgrade rooms over time are a culmination of the occupancy rate and the room rate per night sold,” Mr Hill said.
“Just like tomatoes, cane and grazing, management choosing to rotate a crop or paddock is a maintenance choice. The reward is the higher crop yield, increased grazing days and improved business performance.”
“Over time, the soil biology increase produces substantial yield benefit.”
For the motelier, there was more often than not an increase in the value of the property. The value there is reflective of the combination of the following factors:
- Occupancy rate (not too dissimilar to the tonnage production history of a farm or grazing days per annum of a grazing property);
- Business location and trading environment (not too dissimilar to irrigated farms/dry land farms, cattle stations with monsoons or cattle stations with rainfall variability or those located close to markets);
- Location, construction and condition of the infrastructure and the property itself;
- Expected future earnings risk profiles given the market pricing, competition and other demand factors;
- Property market conditions of the day. For motels, this is one of the factors that contribute to the adoption of a capitalisation risk rate (%). This is not dissimilar to the valuation of specialist agricultural assets or as a check method within the volume property sale market segments, where there is directly comparable sales evidence.
Motel room condition as a guest and purchaser varied in relevance with the room demand, Mr Hill said.
“Take for example a mining boom. There are limited rooms. The guests and buyers of motels in that situation appear to pay less relevance to the standard of the rooms.”
Another purchaser consideration was the capital expense, time and effort required to raise the standard of the rooms and trade them up to a prudent standard.
- Click here to read Roger Hill’s original discussion on pasture condition and its impact on property value in our previous Weekly Property Review.