Agribusiness Report: Rural real estate in demand

11:44 AM Thursday July 24, 2014 Colin Taylor

Ian Little

Soaring rural property prices are showing no sign of abating, writes Colin Taylor.

Confidence in the future of the New Zealand farming sector is continuing to drive an increase in rural property sales and values despite a cooling in dairy prices over recent months.

"Sales data suggests that purchasers of farms are less affected by short-term changes in commodity prices than they are by the long term drivers of the market," says Ian Little, senior property research analyst for Bayleys Real Estate.

These drivers include a growing world population with an increasing demand for more high quality and safe foodstuffs, which is being met by New Zealand improving its market access through free trade agreements.

The most recent data released by the Real Estate Institute of NZ (REINZ) shows there were 52 more farm sales for the three months ended May 2014 compared to the same three months ended May last year - a rise in farm sales of 10.2 per cent.

In total 564 sales were reported to REINZ in the three months ending in May 2014, the highest three-monthly figure since July 2008, while, during the past year to May 2014, a total of 1881 farms were sold - an increase in sales of 26.2 per cent above the year ended May 2013.

Little says the 12-month total of 1881 farm sales was the highest recorded since February 2008, when there were 1915 sales.

Brian Peacocke, rural spokesman for REINZ, says the market report for the three months ending May 2014 reflected the healthy state of the rural sector with a lift in volumes and prices compared to the same period last year.

However, the impact of winter was yet to be felt.

"The tail-end of the season is experiencing a shortage of stock and a hint of caution as the mix of an easing in the dairy pay-out, increasing interest rates and compliance issues cause purchasers to be more thorough with their due diligence investigations," Peacocke says.

Demand for farms is also continuing to push up the price of rural land. Last year the price per hectare for the three months ended May 2013 was $20,499 compared to $25,018 per hectare for the same period this year -- an increase in price of 22 per cent.

Little says the median sales value of farm properties has been volatile due to a wide variety of properties sold and differing locations "but it has, nevertheless, been trending upwards since mid 2011".

He says the median sales value of $25,018 per hectare is the highest value recorded over a quarter since the opening three months of 2009.

"While the sales prices of farms overall have shown an increase of 13.7 per cent over the last 12 months and have increased over the past two years, dairy farm values have remained fairly flat over an extended period of time," says Little.

"Conversely however there is no doubt that it is the success of the dairy sector over recent years which has driven the upward value in land values," he says.

"This is due to the trend towards conversion which has been a significant feature in the market over recent years.

"From the mid-seventies the total number of herds declined on an annual basis reflecting farm amalgamation.

"However, since the 2007/2008 season the scale of conversion from alternative uses to dairy has reversed this long term trend.

"Competition for land under alternative uses such as for farming sheep and beef, but also capable of being used for dairy or dairy support, has put upward pressure on land values which in turn has lifted the median all-farm prices.

Little says it would be expected high commodity prices achieved for exported agricultural products should also have an impact on the sale of rural properties.

"These prices reached a record level in February 2014 according to figures published by ANZ when the bank's commodity price index stood at 337.3 driven by record dairy prices," he says.

"Since that time the index has declined for four consecutive months standing, as at June, at 314.7 - a 6.7 per cent decline from its peak.

"That overall figure however, masks a continued strong performance within other sectors.

"The latest ANZ report, for example, points out that horticulture prices are the highest they have been for 12 months while meat prices are at a 14-year high. In the latest index, kiwifruit and wool prices rose by 3 per cent.

"It is the dairy prices that have come under pressure recently and that was to be expected following the surge in values witnessed over the period between mid-2012 and early 2014," Little says.

The impact on prices is clearly illustrated by the results of Fonterra's Global Dairy Trade auctions. Record prices were achieved at the first of the February 2014 auctions when the average winning price was US$5042 per tonne.

"Subsequently prices have declined by approximately 28.5 per cent with the average winning price at the July 1 auction being US$3595 per tonne," says Little.

Despite the recent declines, the commodity price index remains at an elevated level and is still 24 per cent ahead of a cyclical low reached in July 2012, when the index stood at 252.9.

"However, as stated earlier, the rural property market seems to remain focused on the long term potential of the rural sector as opposed to the recent downturns in commodity prices which are primarily affecting dairy farmers."

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