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NATIONAL RURAL 2010

ROLLERCOASTER RIDE FOR RURAL PROPERTY

Like all investment markets, rural property has experienced considerable volatility in recent times. However, it has been a strong performer over the long term and looks set to follow commodity prices upwards again.

Right now though, the rural property sector is moving through a challenging period, contending with a combination of suppressed sales activity and an average sale price, which has fallen significantly over the last two years. These adjustments have rolled off the back of a decade of robust price growth and elevated sales activity, a consequence for the most part of increasing commodity prices.

For much of the past decade, strong interest in rural property investment placed upward pressure on average farm prices, on both a per unit basis and per hectare. In the first half of the decade, the average sale price of rural property moved steadily upwards, almost doubling according to Real Estate Institute of New Zealand (REINZ) sales statistics from $857,000, in December 2000 to $1,650,000 five years later.

 

 

More spectacular price movements were to come in the second half of the decade, as commodity prices spiked – particularly dairy. From the December quarter 2005 through to the peak in prices in March 2008, the average sale price increased by over $1,000,000 to $2,691,000. The majority of this price increase came in the last 12 months to March 2008. Annual farm price inflation was a phenomenal 58% over this period.

The quantity of farm transactions was also elevated throughout most of the decade, with a peak in annual sales in the year to the March 2002 quarter of over 3,000, according to REINZ data. A spike in activity through 2007 and into the first two quarters of 2008, along with the big boost in average prices, coincided with the dairy commodity price boom through 2007 and 2008. Transactions reached 2,745 in the year to June 2008.

The end of the last decade and the start of the next have been particularly trying for investors in the rural sector. Both the average sale price and the level of activity dropped sharply, with values shedding all of their gains from September 2006 to September 2008 in the year that followed. Subsequently, the average farm sale price has remained relatively stable, albeit with some price fluctuation on a quarterly basis.

While, in keeping with most investment markets there has been a high degree of volatility in the value of farms over the last 18 months, anybody investing in a rural property at the start of the last decade would have done very well for themselves, with the average farm value still increasing 150 percent from $631,000 in the first quarter of 2000 to just over $1,600,000 in the final quarter of 2009.

There is no doubt that part of the increase in average farm prices can also be attributed to changing patterns of farming which has resulted in farms growing in size as a result of amalgamation. However, Quotable Value (QV) statistics show that over the decade there has been value growth across all main farming sectors on a per hectare basis also.

Despite a not unsurprising correction in the last 12 months, the average price per hectare of land used for dairy farming is valued at $31,323 – three times the price per hectare recorded in 2000 according to QV.

 

 

The value of arable land has followed much the same trend as dairy land since 2000. Again, driven by increasing food prices and increasing demand for primary products, the value of arable land in 2009, at $33,786 per hectare, was over three times the value in 2000 and still appeared to be trending up at the end of the decade.

While valued significantly lower than arable and dairy land, investors in grazing and fattening farms have experienced equivalent strong value growth in their assets over the past decade, according to QV. Despite values also tailing off in 2008 and 2009, grazing land increased by 200% to $4,173 per hectare over the decade while fattening land grew in value by 229% to $11,227.

As indicated above, a significant driver of the increase in farm values has been the trend towards amalgamation. Farmers have been taking the opportunities, as they arise, to purchase neighbouring or nearby farms in order to expand their operation and benefit from economies of scale.

The trend has been particularly evident within the dairy sector, with the total number of herds falling from over 18,500 in 1975 to 11,618 at the end of the 2008/2009 season, according to industry statistics released by Livestock Improvement Corporation (LIC). During the same period, however, the average herd size rose from 112 to 366 cows. The trend towards fewer herds was arrested during the 2008/09 season due to a surge of farm conversions from sheep and beef to dairy. It is the latter trend which has seen dairy’s influence over farm prices increase significantly.