Property Express - Investment dynamics changing approach to farm valuation
In previous generations farms tended to sell on X factor, with farmers relying on capital gain made over a 30 to 40 year tenure to fund their retirement, while a farm’s financial performance year to year held less relevance.
That has changed over the past few years, particularly where a loan to purchase land will require a rational business case: productivity and performance are scrutinised much more closely.
Over the past 12 months or so, another factor has also arisen supporting this trend: more off-farm investment is coming to the sector. This includes expatriate professionals previously overseas now returning to New Zealand due to Covid and using their equity to purchase rural property then put a manager in.
Such people are not drawn to farming for lifestyle reasons, neither are others with high net worth: they regard agriculture as the best way to make their equity deliver a dependable return, particularly when the likes of term deposits, the stock market or commercial property are less rewarding or less sustainable.
As a consequence, the focus for farm valuation is falling more heavily onto yield.
In the pandemic-influenced world of low bank interest rates, sales valuations take return on investment ever more into account: a commercial approach now overshadows the traditional rural mindset and emphasis on capital gain.
Dairy’s prevalence in New Zealand agriculture today compared to previous decades plays a part in this. Due to generally being more highly geared, dairy farmers have always been more inclined than their pastoral farming neighbours to look at spreadsheets and assess return on investment when ascribing a value to a farm.
Under that influence, sheep and beef farmers have also changed their approach, meaning the basis for buyers and sellers agreeing on the value of a farm is now tied to the income the property is likely to generate.
Today, when parties negotiate the sale and purchase of a farm, typically the vendor’s last three years’ accounts will be an important focus for discussion. Identifying and analysing what profit has been made in the past, and what might be achievable in the future is the key. Captialising that figure, typically at somewhere between five and six per cent, is the starting point for the negotiations.
For anyone considering selling a farm, it pays to keep in mind that this is how your purchaser will evaluate the property and decide whether to buy. Providing good documentation on business performance will enable a buyer to do due diligence, therefore strengthening the hand of the vendor.
Read the full edition of the Autumn Property Express here.