We see a mixed outlook in rural property for the rest of the 2024 as a two-speed market emerges.
The sharp rise in interest rates, alongside mixed seasons, and commodity prices, is refocusing the market on cash returns and productivity of rural assets. The higher cost of debt and run up in rural property values over recent years, has seen buyers motivated by capital growth less active. The activity has been from cashed up buyers looking for productive assets or assets with productivity upside. This is holding values for high quality assets – a glass half full.
The glass half empty is for secondary assets with inferior productivity, assets in certain commodities e.g. livestock and wine grapes, and regions that experienced a dry start to 2024. The cash return outlook for these assets is less appealing and driving a correction in property values.
An example of this two-speed market, is evident in the below market activity:
- Northwest NSW – a favourable start to 2024 and strong appetite for land is reflected in a recent cropping sale at $16,169/ha. This was a 22% uplift on the neighbouring property which sold 9 months earlier for $13,209/ha.
- Western Districts VIC – a drier start to 2024 and challenges in the livestock space saw a mixed farm sell recently for $19,523/ha. This was a 5% discount to the neighbour which sold 24 months earlier for $21,251/ha.
A slower start to the year
Rural property sale volumes for Q1 2024 were down 44% nationally on Q1 2023. The sharpest declines were in Victoria and Tasmania which were down 61% and 87% respectively, with these states having particularly dry starts that played on some buyer’s minds along with high interest rates and record farmland values.
How has Australian farmland performed over the long term?
Australian farmland values have remained remarkably resilient over the last decade. The appreciation in land values has been one of the key reasons for investing in rural property and created significant wealth for landowners. This is highlighted by the high single digit compound annual growth rates (‘CAGR’) as reflected by most farmland growth indexes. Some high rainfall areas and key cropping regions exceeded these levels.
# Note the indexes vary widely in their approach to data cleansing, data analysis, duration, and source data (sales or valuations). All these factors account for a range of index results.
Globally, Australian farmland has performed well. In 2023 Savills prepared a Global Farmland Index based on 15 key agricultural markets, converted to US Dollars. On average the regions produced a CAGR of 10% with Australia close to the index average. In 2021 Australia experienced the second highest annual growth rate before tapering in 2022.
What is driving farmland values?
The long-term fundamentals of farmland values remain supportive however like all markets, values are exposed to fluctuations. We look how the key drivers of value (interest rates, agricultural production, and agricultural prices) will perform in the second half of 2024.
Interest rates
Investment in rural property slows when interest rates rise. The farmland market has been driven by the ‘neighbour to neighbour’ segment, which rely on debt funding to complete most acquisitions. This makes them more sensitive to interest rate changes than cashed up buyers less reliant on debt.
As an example, a farmer borrows half the purchase price for a property acquisition under an interest only, variable rate loan. In 2022 they would have been paying around 2.00%. Today they are paying closer to 6.00% as interest rates followed the cash rate higher. This means the farmer is today paying 3 times more in interest costs annually than in 2022. More farm cashflow is required to service the debt and if the borrower was a livestock producer cashflow are just able to meet debt obligations.
# Note the example uses operating returns of 5% for cropping and 3% for livestock, and all in interest rates of 3.00% in 2022 and 6.50% in 2024.
Most lenders require a minimum serviceability buffer of 1.25-1.50 times i.e. operating profit needs to be 1.25-1.50 times higher than interest costs. This buffer seeks to cover any potential issues that arise e.g. production setback, lower commodity prices, higher interest rates (bank regulation requires the buffer to cover a 3% increase to current interest rates) and is vitally important given the variability of agricultural production. As interest rates increase the buffer decreases and borrowers have less margin for error.
We consistently get feedback that reduced serviceability is driving a ‘risk off’ mentality at the banks. This is making it harder for farmers to access debt to fund acquisitions. This drop off in appetite is heightened in some regions and commodities that are experiencing drier conditions and/or weak commodity prices.
On the other hand, cashed up buyers including corporate buyers and farmers with sound balance sheets, have become more active in the market over the past 12 months. Most of these buyers are less sensitive to interest rates given conservative levels of debt in their business and cash accumulated from profits in recent years. They continue to seek out opportunities for larger, blue-ribbon properties that have strong production credentials, but are disciplined and patient in waiting for the right opportunity.
Overall, until interest rates recede interest rates will continue to be a headwind for rural property values.
2. Agricultural production
Seasonal conditions drive agricultural production. The forecast is for wetter than average conditions for much of eastern and central Australia whilst it will be drier than average in parts of the north, west and south.
A positive outlook and widespread autumn-winter rain on the east coast has ABARES forecasting an increase in national agricultural production volumes in 2024-25. Crop production is the main driver, expected to be up 9% on last year as many farmers on the east coast experience one of the best starts to a winter crop in recent years. This is expected to drive appetite for farmland in the second half of the year. In drier regions, farmers will look to tighten their belts which could see farmland values contract/hold.
Irrigation water in many of Australia’s key irrigation districts is also relatively secure for the coming 24 months, supporting production levels. The main curve ball for water markets continues to be the Federal Government’s voluntary water buyback of 450GL. This is expected to see water prices increase by 10 to 20% as the government enters a market that has seen historically low volumes of entitlement trade. Based on previous buybacks this sets a new water price level in the market which remains after the buybacks stop given water has been taken out of the system.
3. Agricultural prices
It has been a mixed bag for commodity prices and on average the outlook is neutral. Accordingly, it is unlikely commodity prices will materially stoke rural property buyer appetite in the second half of 2024. ABARES June quarter 2024 agricultural commodity report below outlines the forecast annual change in production values between 2023-24 and 2024-25.
What to expected in 2H 2024?
We expect the recent price boom for rural property to level off as a two-speed market emerges. Property values will come under pressure for secondary assets and in regions where property values have become disconnected from long-term cash returns. A drier start to the year and outlook will also be a headwind for values in southern Australia. These farming districts could see a higher number of listings in the second half of 2024 which could see an easing in prices.
Demand for quality assets remains and we expect to see financially strong family farms and corporate buyers become more active. The long-term fundamentals for farmland are strong and the second half of 2024 is likely to present good buying opportunities for astute purchasers.
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