CATTLE property owners looking at future business options are being encouraged to consider sale and leaseback as a way of liberating capital to invest in their core grazing business.

Last week, CBRE’s regional director for agribusiness based in Melbourne, Danny Thomas, was a keynote speaker at the Australian Property Institute’s Rural Queensland Property Conference in Toowoomba. His broader topic was rural joint venture proposals, but his presentation focused somewhat on sale and leaseback arrangements.

“Rural joint ventures are about alternative capital strategies,” Mr Thomas said.

“It is working out ways for producers to grow their business, which doesn’t include farmers using their own equity, or going to the conventional first mortgage debt market.

“It means capturing some of the foreign or domestic investment capital that wants to get involved in agriculture,” Mr Thomas said.

Flush with buffel grass, Roma’s Bracco is currently being offered with a sale and five-year leaseback option.

A 2015 White Paper by Colliers International and Grant Thornton Australia titled “Sale and leaseback – how it could benefit your business,”  identified a typical sale and leaseback arrangement as “a real estate transaction in which one party sells its rural assets to another party. The seller then leases the property back at a rental rate and lease term that is acceptable to the new owner.”

The White Paper outlined two key reasons for entities to consider a sale and leaseback transaction:

• The first was to release funds so capital can be redeployed into core business activities with higher rates of return, or to reduce higher costs of borrowing.
• The second was so that companies can investigate sale and leaseback transactions as an alternative to borrowing from more traditional sources.

According to the White Paper, there has been a limited supply of high quality, long-term lease investment products on the rural property market.

“Investor demand for rural and agribusiness assets is running high. Therefore owner-operators willing to sell their assets can be in a position of strength to secure strong prices and negotiate attractive leaseback terms,” the paper said.

Mr Thomas believes sale and leaseback is currently the deepest part of the property market.

“The reason that it can be so effective is that it is almost like 100 percent finance. As long as the rent being paid is not too dissimilar to current interest rates, then the participant is in a very favourable position. The lease payment is 100 percent tax deductible – just the same as the interest is – and that’s allowing them to grow their business, and spread the management model and fixed costs over more country.”

Mr Thomas said one of the main issues with sale and leaseback was structure, and how it would work best for a livestock producer.

“There’s a whole lot of money out there that wants to be invested in agriculture, but only for a passive return. It doesn’t want active exposure to the ups and downs of drought and flooding rains.”

Nor was the model dependent on size, he said.

“In fact, smaller farmers who are lacking economies of scale are probably the prime candidates, in the same way as businesses leasing commercial premises in the city. There should be a very deep leasing market for agricultural land for anyone wanting to grow their business and who can’t afford to buy the farm next door.”

Benefits seen in joint ventures

Mr Thomas told the Australian Property Institute’s rural conference in Toowoomba that rural joint ventures offered two main benefits.

“Depending on the capital being sourced, it allows the individual to grow their business and in some respects, may allow them to defray or mitigate some risk.”

“If a landholder is using someone’s money to grow their business, they need to give them a return. The benefit is that the level of exposure is not as high as if the individual had borrowed to the hilt to buy the farm next door. Secondly, a capital partner can bring some special skills, such as financial, marketing or management to the table, can help access a market, or bring development capital to help improve productivity.”

According to Mr Thomas, Australian agriculture should be embracing rural joint ventures more vigorously. “Unfortunately, we still have an anxiety about foreign investment, which I don’t understand,” he said.

“People get a bit lost and captivated by this concept of foreign ownership. I think it’s a falsehood.”

“When we own a property, we are the steward of that property for a finite period of time. At some point in time, someone is going to succeed us as the steward of that land. The money that comes in – whether it is debt capital because we are borrowing it to buy the farm next door or investor’s capital – is seeking a financial return. Only a small part of the foreign investment market is motivated by food security or production. The majority of investors are seeking a financial return,” he said.

Mr Thomas said there were also substantial potential rewards for the investor.

“They benefit from the intellectual property and experience the manager holds, such as in climate and grazing land management. They also benefit from the commercial relationships that a farmer has built up over many years.”

He said he was confident that joint ventures in the cattle industry and red meat supply chain would become more common in the future – particularly as the market becomes more institutionalised and investors become more sophisticated.

“I think we’ll see the involvement of more trading houses and more corporates.”

Rural joint ventures would help support the cattle property market and rationalise investor behaviour.

“In my view, the market’s got a little bit ahead of itself.  There are some vendors with very high expectations that won’t be met. If I was to give anyone advice it would be don’t look a gift horse in the mouth when you receive a strong offer for your property,” he said.

“Don’t believe everything you hear or read. Many active participants are saying that properties are too expensive and are not purchasing.”

• Coincidentally, a property listing featuring on Beef Central’s property pages this week is being advertised with the option of either outright sale, or sale and leaseback. The 1876ha Roma (Qld) district grazing property Bracco has capacity for 800 breeders or 1300 backgrounders, and is described by marketing agents Colliers as “highly regarded in the district and among some of the finest pastoral land in the Maranoa.” Colliers’ Trenton Hindman said Bracco was returning 4.3pc per annum and was available for sale or sale and leaseback for a five-year term with the current owner.