Saturday, March 30, 2024

FIELDAYS: A new era for rural land value

Neal Wallace
The pricing of farmland is entering an era where cash generation will be a greater determinant than speculation for future capital gain. With forecasts for primary product prices to stay buoyant for the next five to 10 years the cash generated from those ventures will be the main determinant of land price instead of capital gain, as has been the case for the last few decades, ASB chief economist Nathan Penny says.
Reading Time: 2 minutes

Pressure, that once came from dairying, from alternative land use that generates greater cashflow is now being driven by horticulture, especially in Bay of Plenty and Northland and will now come from carbon farming of forestry.

Sheep and beef farmers enjoying a buoyant period are also competing for land but the drivers of price are different to what they have been.

“Looking to the long term we think there is still room for capital gains to be had but it will not be the same as it has been in past.

“We think there will be a greater emphasis on cashflow in the long term,” he said.

A combination of greater environmental compliance and banks concerned at their exposure and degree of leveraging has driven the change.

“There is competition for land use and at the same time society has said they are not comfortable in terms of nutrient levels and it’s fair to say banks are being more careful with their lending and level of leveraging than they have been.”

The dairy market has effectively become two tiers because of economic and environmental constraints and tighter rules governing overseas ownership.

The price of farms that generate healthy cash returns has held up but those that aren’t and are outside the mainstream dairying areas are drifting lower.

“We think over the next few years that wedge will continue.”

That land price differential or wedge will remain irrespective of the milk price and despite the removal of the threat of a capital gains tax.

“The more nuanced aspects of farming are being looked at rather than production per hectare.”

For example, the Superannuation Fund has started buying farmland but it bases buying decisions on the returns that can be achieved not what size capital gains they expect to make.

Shifting the drivers determining land price is the way the sector must move even though it could cause problems for those relying on making financial gains from substantial capital gains.

“There is a lot less speculation and that was a big part of the market in the last 10 years.”

Those prices were driven by speculation of a heightened milk price or increased production.

“Now let’s dial it back to what the farm can generate in cash and in terms of what local limits are and constraints around water.”

Removing land speculation should also make it easier to attract people to the industry.

Total
0
Shares
People are also reading