Real Estate Institute spokesman Brian Peacocke says a perfect storm has taken the wind out of the sector’s sails but he notes activity has started to pick up.
Rules governing the sale of land to foreign buyers have been tightened, banks are viewing lending to dairying less favourably, tax changes are possible, the introduction of environmental taxes and regulations are expected and borrowing costs are likely to rise following a Reserve Bank requirement that banks retain more capital.
“No one factor is compressing the market,” he says.
The South Island has a greater number of larger dairy farms so has been hit harder than other parts of the country from a tightening of the Overseas Investment Office (OIO) criteria on land purchases and that is reflected in the weaker activity in Canterbury and Southland.
“When big properties do not sell, which is the case currently, the trickle-down effect does not happen.”
A KPMG Foreign Direct Investment report said foreigners are now investing more money in forestry than dairy.
From 2016-18 forestry attracted 36% of foreign investment in agribusiness and dairy, including milk processing, 12%. From 2013-15 dairy attracted 38% of investment and forestry 16%.
The report also shows new restrictions on foreign investors have cut OIO approvals by two-thirds, with about 60 approved in 2013 but just 20 in 2018 and most of those for forestry.
Also hindering the market is a softening of bank lending to dairy, an end to interest-only loans and a greater emphasis on cashflow when assessing deals.
The level of debt held by the dairy sector has been a concern for banks and the Reserve Bank but despite that farmers are borrowing more than ever.
Reserve Bank figures show in February 2017 dairy sector debt was $40.7 billion out of total agriculture borrowing of $59.3b.
A year later that had grown to $40.8b out of total lending of $60.6b but by February this year dairy had $41.5b out of total sector borrowing of $62.8b.
Peacocke says top quality farms are selling while second tier ones have a more restricted market and third tier are especially hard to move.
Buyers are increasingly more discerning when considering a farm purchase and that includes looking at environmental rules, the standard of improvements and location.
Southern Wide Real Estate’s Southland rural sales managing director Dallas Lucas says after a halving in the normal number of sales during spring and summer, activity in Southland and west Otago has picked up in recent weeks with four or five sales under negotiation.
Land prices are back about 15% with the best now making $34,000 to $38,000 a hectare with more expansive properties or those outside traditional dairying areas selling for $25,000 to $30,000 a hectare.
Lucas says banks requiring a capital repayment element is impacting purchase deals.
“At the moment including capital repayment in what can look like a good budget can knock it around.”
KPMG’s head of banking and finance John Kensington says banks have looked at the performance and risk of the various sectors and have also toughened lending conditions for construction, property development and small businesses.
Kensington says interest in dairying has taken a hit from a shift to valuing farms on cashflow but also a realisation among the corporate sector that investing in farms is costly to manage and govern and the business is complex.
“Corporate farming experience has probably brought out the home truth that it’s not as easy as it looks.”
