Rural Market Insight: Farm sales back significantly

As we all take a breath and face into the New Year, many in the Primary Sector will be looking forward to 2024 and putting 2023 behind them, and rural real estate is no exception.

We can all look at life from many perspectives, and being realistic about the present is an excellent place to start this New Year.

Farm sales by value are 33% back on the same time last year for the July to November 2023 spring selling season. Looking under the hood, Sheep and Beef sales 200ha+ are back 60% for the same period with only 27 sales. There were only 36 dairy farms sold this spring, just gone too, back 30% on the same time last year.

One common theme has been the massive adjustment absorbing the current interest rates and the constraints these costs place on buyer confidence to step up and operate. Much is made of the 1980’s and the borrowing rates back then, but the reality is the debt carried by farmers today dwarf’s any prior period, with corresponding annual farm interest charges now, often equivalent to what you could buy an entire farm for back then.

If we are looking to take some optimism from the current season’s sales, buyers will operate, even with debt service interest rate obligations, status quo of 8%+. However, this appetite has yet to match vendor expectations of late, given they often accept returns on capital, less than half the cost of borrowing it. The counter is vendors have some of the best investment options, post settlement, not seen in over a decade. In fact, the perceived value gap is often very temporary, given the reality of actual operating farm profits compared to the clean investment returns of 6% +.

At a high level, rural real estate drivers as the season progresses over 2024 include;

Seizing the decade’s best investment

Dairy represents the best buying opportunity in the last decade. Many of the longer-term signals for the current commodity cycle are very favorable, and the sector drops the strongest pastoral farming profit per hectare by a considerable margin on nationally constrained production.

When it comes to dairy, they literally are not making any more of them, and there are fewer of them each year. Dairy-to-dairy sales drive the premiums, and our business is placing a strategic priority on Tier 2 and 3 dairy farms and linking retiring farmer-owners to aspiring ones, utilising vendors’ terms to maximise value and anchor the next generation of farm owners. Not necessarily family. Dairy medians have hardly shifted in the last decade at around $37,000 to $40,000/ha, but the sector has moved extensively to meet its environmental obligations and produce the same volume of milk from fewer cows and fewer farms.

Significant forces at play with Hill Country real estate

Sheep and Beef, specifically Hill Country, have been hit not only by cyclones and high interest rates but also by the absence of the ‘golden ticket’ of selling to forestry. This has all combined to dramatically impact Hill Country sales, which are at their lowest levels since the Global Financial Crisis in 2009/2010. the median price is still holding up at 12,000/ha levels (200 ha+), but there is real pressure on that price expectation. To what level of ‘reset’ expectation depends on the carbon market. Based on current interest rates and commodity outlook, real farmer-to-farmer sales have buyer expectations back at five years ago levels ($8,000/ha+).

These are national numbers, not local ones; for example, Gisborne and Hawke’s Bay have had price expectations this season of $15,000+/ha, in line with their median. However, for the 11 months to the end of November 2023, only 3,664 ha have been sold compared to 17,441 ha for the 2022 calendar year. While cyclone Gabrielle has had an effect, the most significant impact has been the change in the Overseas Investment Office criteria away from the special forestry exemption in favour of the ‘Benefit to NZ test’. This has seen pasture-to-production forestry applications on stronger land declined in favour of retaining pasture production systems. This, combined with proposals to tighten regulatory expectations associated with forestry management, has significantly moderated previous new forestry investment appetite.

Forestry: Critical crossroads

Permanent and Production forestry remain very dependent on the ETS policy settings. If the new coalition government continues with current ETS settings, where NZ is the only country in the world to offset 100% of emissions using carbon forestry, it’s not hard to envisage NZ-domiciled carbon forestry interests operating again in a significant way. Policy changes are required if NZ food production is to be placed on an equal footing with meeting global climate change obligations as per the intent of these international agreements. Our view is rural NZ is over; seeing large tracts of land retired permanently that adds nothing to the economy and does little to change NZ’s actual emissions profile. The destruction of rural communities will struggle politically and the focus will inevitably shift to better support for NZ-owned production forestry options that support both climate and foreign exchange, not to mention local employment.

The hyped premium for extensive hill country cannot run on if ETS policy moderation is to prevail; hence, forward valuations for NZ Hill Country are much more likely to be aligned to historical medians than the last 3-5 years ‘golden ticket’ carbon exit. Government policy, not the lamb schedule, will dictate the final outcome.

Growers weathering the challenges

Horticulture – has had a hard landing in terms of real estate activity over 2023, operating at a fraction of previous seasons’ levels in terms of actual sales (open market). However, the sector remains in good heart with proven operators and vertically integrated supply chains, often to established premium markets.

Our view is current interest rates will moderate the growth appetite of established operators in favour of existing business operations. However, the sector remains very attractive to new equity investment. With the caveat that recent climate and production risk events of late have seen a significant shift on last season’s land development speculation.

Paving the way for a resilient rural market

In summary, 2023 was a challenging year economically for NZ, and our primary sector was no exception. If decisions are being made on the forward outlook, not the past, we expect the market to reset and get back to where it was prior to the eleven consecutive increases in the Official Cash Rate.

Our team of rural property specialists welcomes the opportunity to play our part in supporting the rural market operation, assisting buyers and sellers in setting themselves up for a brighter and more promising 2024!

Conrad Wilkshire, GM Rural for Property Brokers Ltd

Have a listen to our latest podcast episode on Property Perspectives where we delve into the latest rural market insights