Property

Weekly property review: How neighbours can value a property differently – Part 2

Property Editor, Linda Rowley, 07/10/2015

southern grassfed beef

 

This is the second and final part of a report exploring the issues surrounding purchasing a neighbouring grazing property. Click here to access last week’s opening discussion.

 

QUEENSLAND based rural accountants and advisers, Powers Agribusiness & Finance suggests clients should not adopt a ‘buy at any cost’ approach, despite the obvious attractions of adding to an existing grazing holding, should the opportunity arise.

Director Martin Pentecost said landholders should run the numbers on neighbouring properties, but if they don’t stack up, then they should move-on.

“The purchase still needs to be financially feasible,” he said.

“Some property owners are leveraged enough. They ask themselves how much extra productivity they can get out of the neighbouring piece of land, and whether it will service new debt,” Mr Pentecost said.

“If they can’t gain enough cash flow from the combined asset, there is no point buying the neighbouring property and going broke in the process.”

Powers cites the case of a recent Central Queensland client who turned down the opportunity to purchase a 2000 hectare neighbouring grazing property.

“In this case, this particular block was a smaller size, and not of the same quality breeding country as the original property. While it offered an expanded land area, due to its proximity to town, it was being offered to the market at a premium, so he turned it down,” Mr Pentecost said.

 

Days of “Buy out the neighbour at all costs” long gone

Murray Davis, who specialises in rural valuations in Biloela, Central Queensland, said the times of ten years ago, where the attitude was often “buy out the neighbour at all costs”, were well and truly a thing of the past.

Mr Davis said he knew of local producers who had bid recently for neighbouring properties, but withdrew after reaching their limit.

“They were certainly in the competition to buy and were pushing up the prices, but in the end they just weren’t successful,” he said.

Mr Davis, a director of the Opteon Property Group which provides valuation and property advice, said landholders were increasingly looking at overall value by questioning the pure economics of purchasing a neighbouring property.

“If the neighbour knows you are interested in his property and is charging you a premium, are you better off buying somewhere else at market value? And what is the cost difference?” he asked.

“For instance, if a producer is are going to buy remotely and drive 300 kilometres, two or three times a week, they need to consider their time, wear and tear on vehicles, and what infrastructure is needed for the new property.”

Mr Davis cites a mixed farmer/grazier in Central Queensland who purchased a property on a different river system as an example of the economic approach.

“He thought the current irrigation land around Biloela was well past the point of making the land viable, but he is now experiencing the negatives of purchasing extra irrigation land elsewhere.”

“He always knew there would be negatives: he didn’t have a family member who could go out and operate the second property, so he’s had to employ someone. While he has certainly achieved better water security by making the purchase, he is travelling hundreds of kilometres to and from the two holdings each week,” Mr David said.

“There are also increased freight costs. He is moving tractors and equipment between properties and he’s had to double-up on some equipment.  All those costs add-up, however the land was almost half the price.”

 

Smaller blocks may have appeal

Tim Lyne from Ray White Rural Moree said property holdings in Queensland were generally much larger than those in New South Wales, and a neighbouring property purchase in some cases might still need a whole new set of plant.

He is one of a number of southern agents who take the view that for a ‘reasonably-sized’ operator, if a similar-sized place comes on the market next door, they’ve “got to be able to handle it.”

“Buying is one thing, but stocking can be another – and that’s why adding a smaller neighbouring holding to grow an existing grazing enterprise can be a good approach,” Mr Lyne said.

Regular Beef Central contributor Michael Vail, a director of Brisbane-based Tre Ponte Corporate, said while smaller blocks might appear to be more affordable in the southern states, they are often actually more expensive on a beast-area basis.

“That’s the economic view-point a potential neighbouring buyer needs to look at – the return required for that beast and the return you can get from that beast. That’s the real test. Everyone thinks it’s about the area, but my view is it’s the production from that particular country that’s most important,” Mr Vail said.

 

 

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Comments

  1. Michael Vail, 08/10/2015

    I find it fundamentally interesting and intriguing that a price is paid for a property, which is significantly more than a neighbour is prepared to pay; especially considering that property has likely been coveted by the neighbours for some considerable period of time.

    Is it down to decision making under irrationality, or does the buyer have a view of the future and expectations vastly different from other experienced players?

    I suggest caution in capital budgeting decisions, and a strong nod towards prospect theory concepts, and also looking back to understand, take a view looking through a 10-year rolling cycle to avoid the winners’ curse of paying too much for an asset.

    Food for thought …

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