A closer look at New Zealand's Rural Real Estate Sector
Thursday, 25 July 2024
The market continues to reset, supported by a much stronger outlook for the Spring.
Our business transacts 1 in 4 rural sales nationally, and like anyone whose business is tied to the land, we’re fairly invested in finding the silver linings in the current primary sector outlook. Our business goes back 38-plus years supporting provincial NZ real estate, and our rural real estate business has trebled in size over the last five years, so our roots go deep with rural NZ.
Understanding the impact of economic cycles and regulatory frameworks on real estate supply and demand, has proved more useful than traditional benchmarks of commodity prices and farmer/grower confidence surveys.
In our view, the NZ rural real estate market is entering a new era this spring as interest rates and land use options continue to evolve. Historically, we’ve quoted 10-year benchmarks and annual sales performance, but we have changed tack this season and are instead looking at market information quarter on quarter, aligned to the seasons to compare like-with-like selling periods.
Interest rates and access to capital have had a significant effect on real estate markets over the last three years, and as interest rates have gone up, demand for rural property has reduced dramatically. The best illustration is Spring 2021, the OCR had just increased to 0.5%, and over that three-month spring period, the rural real estate market transacted $1.674b from 472 rural properties. Dial forward two years to last Spring 2023, and OCR had reached 5.5%, and we saw $679m of transactions from 239 sales.
Put another way, last year’s spring market dropped almost 60% in sales value compared to 2021.
Interestingly, the median price per hectare has held up well at $31,900/ha over spring 2023, but this winter 2024, we’ve seen that drop to $25,000/ ha as the ongoing reality of higher interest rates and the current commodity cycle moderate vendor expectations. Extended marketing campaigns for some farms dating back 12-18 months have also been a factor.
The recent RBNZ decision on the 14th of August to lower the OCR by 0.25% to 5.25% is welcome news for this spring. To date, the market has absorbed a steadfast OCR held at 5.5% over consecutive Reserve Bank decisions dating back to May 2023. Importantly, should the market perceive interest rates have now peaked, this will flow through to improved market confidence generally.
The commodity cycle has negatively impacted farm gate returns for dairy, sheep, and beef production systems, particularly the Hill Country. Not much about that is expected to change dramatically this season. However, the standing orders with the Overseas Investment Office (OIO) have changed under the new government to significantly speed up decision-making under the current policy settings.
This has already had an immediate effect with the backlog of OIO applications cleared and a stronger business focus when processing new applications well within prescribed guidelines. This is potentially very helpful to vendors weighing up the risks of a conditional sale and purchase agreement tied to an OIO application. Solar is starting to feature in recent OIO decisions, suiting well-located flat land adjacent to key utility infrastructure. At the other end of the scale, pasture-to-forestry applications will be considered by the OIO for production forestry, specifically Land Use Class (LUC) 6 and 7; importantly, these decisions are expected to be confirmed within months.
So don’t let recent media suggest there is no pasture to forestry investment appetite; there is, but it’s more aligned with what a farmer will pay than historic market premiums.
New planting of forestry is expected to be back 40% this year. Should the carbon price spike this season, that could change; however, on recent data, it seems unlikely.
For this season, having some pasture-to-forestry activity operating helps underpin the market, and given the pressure on Hill Country balance sheets, this demand is welcomed by those looking for options to diversify or exit the farm.
Growers are having a much better year in 2024, and given all the production headwinds of 2023, that would not have been hard. Demand for grower exports continues to fi rm. This segment of the property market all but stopped last year; however, unlike pastoral systems, orchard values are very much tied to the underlying return, so there is good reason to be positive here, too.
In short, both interest rates and regulatory settings are set to help stimulate market activity as we head into the new season. There are no silver bullets, but it is worth reflecting that this recent economic period has been challenging for everyone, and for real estate, has been tougher than the GFC, but there is always a rebound. When you take stock of the charts, the worst is behind us, so for those wanting options, we are of the view that you should “go early” to market and catch this renewed confidence before you have to compete with a flood of new listings. Our advice is always very simple: get some advice; our rural team is always open to talking through the options specific to your property and its unique location.
Whether you’re looking to buy or sell your farm or lifestyle property, our True Team is here to exceed your expectations. With a perfect blend of energy and experience on your side, you can’t go wrong with Property Brokers.
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