OVER the past five years, leasing is becoming more prevalent in the ownership and operation of North Queensland agricultural assets, suggests Herron Todd White’s Townsville-based valuer, Roger Hill.
“The majority of North Queensland cattle stations are owned and operated by families, who have been owner-operators of the going concern for years,” he said, in HTW’s latest monthly rural property review.
Why would a family want to lease out their property when they have the maximum exposure to both business income and capital growth?
At this time, many families were not even going to entertain the idea and may never do so, Mr Hill said. But the reasons why a family might change from the status quo included:
- Spare country due to lower cattle numbers
- Lucrative rental rate being offered. This may be from other graziers in need of grass or for the purposes of solar farm or wind farm sites. Solar farm and wind farm site rentals are increasing
- Passive holding – ageing parents with children off working elsewhere who may want to return to the bush later in life
- Succession planning – by leasing the family property to the future owner, the intending beneficiary (through either bequest or sale) can grow their business with the eventual goal of owning the property. This is quite a popular way for the younger generation to get a start and also provides the retiring parents with some income and perhaps enable some taxation efficiency
- Financial restructuring, superannuation and taxation management
- Asset protection and wealth creation.
“While at this point there are a limited number of families who would lease out their country, on the flip side, there is demand for country to lease,” Mr Hill said.
“Leasing country to expand cattle business without having to buy the property is a popular option for the younger generation starting out. It is also a popular option for established graziers to expand their herd size prior to buying a property.
“Agisting country does not provide the tenure security, so leasing is certainly an option,” he said.
“Of course there was a spike in demand for country to agist or lease during the drought. Any grazier who had grass was like the cold lemonade seller on a hot day. But now that the northern cattle inventory has reduced and there has been rain about, this demand has weakened.”
Big range seen in lease rents
Commencing lease rents in the region currently ranged from 3.5 percent to 7 percent of the property value, depending on what each party is contributing to the operation of the property, Mr Hill said.
“The higher percentage rates usually involve the property owner doing the water runs, putting out lick and attending to the muster. There was an instance where a higher rental percentage was paid, so long as an agreed amount was invested into capital development.”
Mr Hill said this percentage range had been around for years.
“The issue that arises is the question of sustainability of the business being able to afford to pay such a rental percentage. In town, the commercial and industrial property leases often have annual increases in line with movements in the Consumer Price Index (inflation) or fixed percentage increases.
“For investors, income growth through the annual rental increases is part of the due diligence process. Rental increases sound good for the property owner or investor. The issue is though that the business also needs to grow at the same (or more) percentage every year, otherwise the rent can become too expensive.
“In recent years, cattle prices have been at an all-time high. What happens though when the cattle market softens? What happens when there is a drought? Often when reviewing lease agreements for businesses in country towns, the rate of business growth is less than the increase in the Consumer Price Index.
At the start of the lease, the rental appears to be affordable, yet time and time again after say three to five years, the rental becomes too much for the business to afford.
“When negotiating a lease, perhaps the annual rental reviews should link to business performance, seasonal conditions or the cattle market. Then there is consideration for the business performance and the sustainability of the lease.”
Recently, there had been an increase in investment vehicles (trusts and listed fund managers) buying rural assets and leasing them back to the grazier or to a related operating entity, Mr Hill said.
In time, that is likely to increase, especially as a superannuation investment option. The sustainability of rentals and their annual increases is critical. These agreements need to be win-win for both the business and the landlord,” he said.