There is a shift taking place in rural property investment that has more farmers putting their hard earned equity down the road in commercial property, often alongside their home farm investments.
Bayleys National Country manager Duncan Ross says farmers are starting to recognise the opportunities urban commercial property investments offer.
This was in part due to the ability of Bayleys to introduce them to a range of investment opportunities, backed by an appreciation of the challenges that go with having a significant portion of equity secured within lower earning farm businesses.
The company’s extensive network of skilled rural and commercial agents spanning the country made it possible to link interested farmer investors with opportunities well outside their home district.
“It could well be you are a sheep and beef farmer in Southland looking for an investment opportunity, and through our network we can find a property in Tauranga that meets your needs in terms of investment, return and future potential. The beauty of sound, well laid out lease agreements, and certainty of cashflow can allay the usual concerns that may arise when considering another farm investment.
“While Bayleys are facilitating many of these deals, farmers themselves are also coming to us. We are finding they are wanting to look beyond the most traditional urban investment option, the residential rental property, as the look for properties delivering good cash flow returns, without the challenges that traditional investment can bring.”
In recent years greater scrutiny by the Inland Revenue Department on the structure of residential property investments, and enforcement of tighter rental quality standards has made residential rental investments often more problematic, with returns challenged by the time and investment they involve.
The additional attention methamphetamine production and use has bought to rental properties has also added another layer of risk to a residential investment.
Meantime the continued strength of small to medium businesses in New Zealand has continued to keep commercial property returns buoyant, typically between 5.5-6%.
“Small to medium businesses in New Zealand continue to keep commercial property returns buoyant, typically between 5.5-6%.”
This compares very favourably to standard bank returns of about 3-3.5%, while lease agreements also come with an inflation proofed allowance for an incremental 3% a year increase.
The differential between returns is hard to ignore and Bayleys national commercial property director Ryan Johnson says commercial property is an increasingly appealing option for high equity, retiring farmers to consider.
The payment nature, as a regular monthly deposit also holds significant appeal to a farmer market more accustomed to lumpy “one off” revenue returns off farm businesses, and for this reason the commercial property entity can make a welcome addition to a farm ownership portfolio.
Purchase of a commercial property can also enable the considerable equity tied up in a farm to be unlocked without necessarily having to sell the farm itself. Making a variety of smaller commercial investments can ease the pathway to succession if there are a number of non-farming family members.
The considerable sums held as equity in a farm can mean a range and combination of commercial investment opportunities exist that are not possible with the lumpier, singular, high value farm investment.
“The considerable sums held as equity in a farm can mean a range and combination of commercial investment opportunities exist.”
Importantly too says Ryan, there are tax efficiencies to be gained by using debt raised against the farm’s equity, and against the building as security.
The smaller value parcels of commercial property can be spread geographically, and could range from sole ownership of a small provincial light industrial site, to a syndicated share of a large scale, big city retail site.
Bayleys can assist in advising on syndication, a popular option that resulted in $120 million of funds being directed to such investments last year alone, giving investors the opportunity to “scale up” their property ownership goals.
Co-operation between the “town and country” agents at Bayleys means rural and commercial agents work closely together and offer a network of contacts across the country to put potential country investors in touch with urban opportunities.
“Bayleys have worked to build a professional network capable of opening doors to investment possibly not considered before. The opportunity to diversity your investment off the farm, with a lot of proven data and professional support can deliver some very positive earning and succession outcomes,” says Duncan.