IN our first weekly property review for the year, industry experts look at what’s in store for 2022.
The background trading environment is little changed from last year’s record settings, with commodity prices remaining at, or close to last year’s record highs, and seasonal conditions in many areas underpinning confidence on both the buy and sell side.
Here’s what the experts think:
Tom Russo, Elders Real Estate general manager
After a stellar run of capital growth in 2021, Elders’ boss Tom Russo said the logical question is how much longer can it go on, and what might this year’s report look like?
At its most basic level, Mr Russo questioned whether the supply/demand dynamics will rebalance and, if so, when can stakeholders expect the balance to shift in favour of buyers?
Below, he examines the key variables driving this.
Market sentiment: Mr Russo said market sentiment remains undeniably buoyant, driven largely by strong long-term fundamentals in demand for agricultural products and the resulting outlook for commodity prices.
“While GDP may take a hit in the short to medium term, human populations continue to grow and there are more and more mouths to feed. Throw on top of this an excellent break in the season which is driving confidence and demand for livestock.”
“We are seeing this flow through to the farmland market as producers seek to acquire more land in order to expand their herds, which in turn flows through to land values,” he said.
Cost of capital: Mr Russo said interest rates are at record lows and it would take a brave person to punt on a sharp rise any time soon, with investor yield expectations more conservative due to cost of funds being so low.
Access to capital
Debt: Discussions with major banks indicate Australian agriculture is a safe haven.
Farmer equity is strong as a result of existing real estate portfolio performance and historically low farm debt.
Investment scale market: Large fund managers are well set with excellent domestic executive and operational management teams, plus strong investor support. This market has matured and continues to grow as investors seek managed exposure to the Australian soft commodity boom.
Weight of capital
Mr Russo said bearing this in mind, there remains a strong weight of capital looking for a home in the Australian farmland market, from more pools of capital than has ever been seen previously.
“These range from local farmers to Australian and offshore corporate farms and institutional investors accessing the market through well-established intermediaries who now have solid track records justifying further investment.”
Mr Russo questions whether increased liquidity can absorb this demand.
“There was an average 15 percent increase in farmland transactions in Australia in 2020 and prices continued to appreciate rapidly. My view is the increased liquidity will not materially rebalance supply and demand, and it will be a seller’s market for quite some time.”
Willingness to pay
So, will the weight of capital still be willing to pay at appreciating values? Mr Russo believes there will come a point where returns on investment will slow down rapid land value appreciation.
“If we take a global view, the reality is that ability and willingness to pay is driven by productivity and profit. The more profitable the industry is, the more people can invest in the underlying assets and achieve an acceptable return through a blend of operational yields and capital growth.”
He said from 2007 to 2018 there was about a 500 percent growth in broadacre farm cash incomes across Australia, prior to the drought biting.
“In 2020–21, improved seasonal conditions across much of Australia saw a turnaround in farm financial performance from those recent drought-affected outcomes.”
“Average farm cash income for all broadacre farms is projected to increase by 18pc in 2020-21 and incomes on cropping farms are expected to rise by around 37pc, with good rainfall contributing to increased crop production,” he said.
Mr Russo said farm incomes have been rising and commodity price growth has largely been tracking in line with land value appreciation.
“In recent years, there has been a gap opening between the two – however low interest rates and higher productivity levels have offset this.”
Farm management deposits had also increased and debt to equity ratios on average had not moved, let alone trended towards dangerous levels.
“So, our collective farm balance sheet in Australia still has some fire power in it,” Mr Russo said.
Chris Meares, Meares & Associates
Chris Meares believes the 2022/23 transaction space is looking extremely promising.
“Rabobank has forecast a further 10pc increase in rural property this year, with another 8pc rise the following year. This is on top of excellent farm returns which have seen most good operations showing at least a 20-30pc total return, and up to 40pc in some cases.”
Mr Meares said as a result, farmer equity levels had improved dramatically, to the extent they now represented one of the largest sections in the market seeking to purchase additional rural property.
“This, coupled with the Reserve Bank stating interest rates will virtually remain at their present levels for the next 12 to 24 months, has further added confidence to both the banking system and potential investors.”
However, he noted two negatives for the new year.
“The rising cost of farm inputs and the shortage of supply of labour are negatives – which is the case with nearly all sectors of the Australian economy at present.”
While opportunities to invest in quality farms in the rural sector will continue to be limited this coming year, Mr Meares said he had already been appointed to market some outstanding investments in the early part of 2022.
Jesse Manual, Colliers Agribusiness
Director Jesse Manuel said the supply of grazing properties was limited in 2021, resulting in considerable buyer competition for assets, with record after record prices being set.
“All of the planets aligned during the year with record high beef prices, record low interest rates and very few buying opportunities and we expect the buoyancy to continue into 2022.”
Mr Manuel believes recent rains will kick-start the Central Australian property market.
“The Centre’s ability to access a diverse range of markets, coupled with the emerging abundant feed in many areas, will hold the region in good stead for stations that come onto the market.”
He said premiums will continue to be paid for large standalone properties.
“Whether buyers are family operations or corporates, everyone is seeking scale. The last 12 months has shown these types of opportunities are becoming very tightly held, especially in Victoria, South Australia and Tasmania where the market is dominated by successful multi-generation family operators.”
Richie Inglis, Inglis Rural Property
Richie Inglis does not believe there will be a cooling of the rural property market any time soon.
“Areas such as the South West Slopes, Riverina, Eastern Riverina of New South Wales will continue to achieve strong prices,” he said.
Mr Inglis believes there is some catching up to do in the rest of the state.
“The Central West seems undervalued compared to what is happening south, so I’m predicting a movement in this market if the stock becomes available.”
Geoff Warriner, JLL
JLL’s Geoff Warriner expects a strong start to the year and the continuation of the same trends seen in 2021.
“JLL anticipates the corporate market playing a larger role in 2022 and beyond, with institutional players more comfortable coming out of COVID, with greater abilities to conduct due diligence and transact on assets.”
Mr Warriner predicts supply to remain limited.
“It is certainly a sellers’ market. We also expect to see the recycling of capital. After a few large and notable transactions this year, we expect to see that money will be looking to find a home back in agriculture.”
In over 50-years of being in and around a few agricultural-markets, I do not believe I’ve ever heard a Salesman public ally talk a market-down … as they’re ‘conflicted’, you may understand.
Bankers too, fit that description …
Yet, privately, with the experienced ones, those who’ve seen a cycle or three, it’s a different matter … IMO
I simply ask, “What’s real?”
It’s interesting to note that based on around 60-years of empirical-data (around 25% of the time since first-settlement), the long-term median moving-average of BAV (on a ‘land only’, as improved, including enough plant to operate, and ex-livestock basis), is around $1,650 (or a bit over $4.00 per Kg at the farm-gate) for the pastoral regions of Queensland.
Yes, we see much higher reported headline numbers from sale-transactions for ‘land-only’ (maybe the higher-highs as out-liars, are being talked-up): yet, the long-term CPI growth is only around 4.5% pa (geo-metric-mean).
And where there’s ‘structure’ in the market, the compound growth for nominal-data is only around 2.0% pa over the long-term, as adjusted for CPI.
Beef-Meat prices at the farm-gate for the same regions, seems to be rising at around 3.25% pa on a Geo-metric mean CPI basis.
So, with FOMO reigning supreme (and La Niña only threatening to stay awhile), and neighbours buying neighbours (where an expected large premium usually already exists), just be very careful of paying too much.
There’s anecdotes of people buying at the height of the ‘50’s wool-boom, and not seeing the same prices again for over 35-years …
Caveat Emptor …