PGG Wrightson Real Estate – Investment dynamics changing approach to farm valuation
March 2021
In previous generations, farms tended to sell using the X factor, with farmers relying on 30-40 year capital gains to fund their retirement, while a farm’s financial performance became less relevant year on year was.
This has changed in recent years, especially where a land purchase loan requires a rational business model: productivity and performance are being scrutinized much more closely.
Another factor has emerged in the past 12 months to support this trend: there is more investment outside of agriculture in the sector. This includes expatriate professionals who have previously been overseas and are returning to New Zealand due to Covid and using their equity to buy land property and then employ a manager.
Such people are not attracted to farming for lifestyle reasons, any more than others with high wealth: They view farming as the best way to get a steady return on their equity, especially when it comes to time deposits, stock markets, or commercial property acts less profitably or less sustainably.
As a result, the farm valuation focuses more on yield.
In the pandemic-affected world of low bank interest rates, sales valuations increasingly take the return on investment into account: a commercial approach is now overshadowing traditional rural thinking and an emphasis on capital gains.
The prevalence of dairy products in New Zealand’s agriculture today plays a role compared to past decades. Because of the generally higher orientation, dairy farmers have always been more inclined than their pastoral neighbors to look at spreadsheets and evaluate the return on investment when adding value to a farm.
Under this influence, sheep and beef farmers have also changed their approach, meaning that the basis for buyers and sellers to agree on the value of a business is now tied to the income the property is expected to generate.
Typically, when parties negotiate the sale and purchase of a farm today, the vendor’s accounts for the past three years will be a major discussion point. The key is to identify and analyze what profits have been made in the past and what may be achievable in the future. Recording this number, typically between five and six percent, is the starting point for the negotiations.
For anyone looking to sell a farm, it is worth remembering that this is how your buyer values the property and decides whether to buy it. By providing good documentation of business development, a buyer can conduct due diligence and thus strengthen the hand of the seller.
Read the full edition of Autumn Property Express here.
