Rural market resets as we dive into 2023

Nationally, for the six months to December 2022, rural property sales (20ha+) equalled $1.6 billion, back from $2.3 billion on the same period last year.

Nationally, the number of farm sales at 395 is back a third on last year too.  December rural sales nationally equalled $548m approx. a third of this season's total sales in a single month. These numbers are significant, there just have not been anything like the same number of dairy farm transactions last December. However, the size of properties and premiums paid are back, particularly for dairy in the larger farming regions like the Waikato.

While farmer confidence surveys are at an all-time low and the commodity cycle continues to moderate on last season, the most significant factor impacting buy/ sell decision-making appears to be the cost of finance.

The cost of borrowing now typically exceeds the return from the land and when combined with double-digit farmgate inflation, is influencing more and more vendor decisions to deleverage. The ongoing pressure to stay ahead of ever-increasing operating costs and labour management challenges has always been part of farming. These last 12 months, however, have taken these challenges to an altogether new level. Most farmers and growers will opt to shut the front gate, keep costs to a bare minimum, and farm through. Others, however, are looking to capitalise on the very favourable trading results of the last few seasons and take the opportunity for a business exit now rather than wait out the uncertainty of another economic cycle.

While our business has the vantage point of dealing with 1 in 3 rural transactions this season, it does not make us fortune tellers but what we do know is interest rates have a big impact on our rural market. But it does tend to lag, given the seasonality of rural real estate. Over the past year, the Reserve Bank has lifted the Official Cash Rate (OCR) from its all time low of 0.25% to 4.25% - a level not seen since before the GFC, in 2008.

The RBNZ is projecting further OCR increases to settle around 5.5% this year. Under any scenario, this is going to put additional downward pressure on our rural real estate market.

Our industry has managed high interest rates in the past and will again, but valuations as a ratio of farm earnings are much higher this time around. The good news for those looking to exit the industry is the return you can get at the bank is now ahead of what most are generating from the land. It’s likely to be that way for some time, given the turnaround required to change the current economic outlook.

So, what’s our advice for the balance of this season? For dairy operations, the marketing window to take advantage of an autumn campaign is closing fast, not least because many have their employee labour contracts under review, and these are often firmed up by 31st March. We continue to see demand for large-scale, well-located dairy businesses nationally, and this often involves canvassing opportunities from outside of the district, a considerable strength of our national coverage and strong dairy capabilities.

There continues to be two markets for sheep and beef production systems: properties suited to alternative land use options and normal arm’s length farmer-to-farmer sales.

Both have been strong in recent seasons. While alternative land use has captured many of the headlines, we have seen significant farmer-to-farmer activity this season too, and in some instances setting new levels as cashed-up buyers secure highly sought-after farm holdings that can finish stock. Given the political uncertainty with respect to alternative land use options, to what extent current demand continues remains uncertain. Equally, higher and higher interest rates will impact farmer-to-farmer buy/sell decision-making too.

For our growers, the impact of ongoing labour constraints has been massive. Like all sectors, pressure on borrowing will be a factor too, particularly for those with ongoing commitments to new orchard development, should grower returns not meet grower expectations for a second season over 2023/24.

The opportunity for buyers of primary sector assets in 2023 remains significant; exports for the current season are still tracking ahead of MPI’s previous forecasts and are now predicted to hit $55 billion this June, which would be 15% up on two years ago.

We have seen some exceptional farm sales confirmed heading into the New Year as vendors make pragmatic decisions on the money being offered. From a buyer’s perspective, the effort of doing the hard yards now and getting around the table has seen very positive results for all concerned. Buyers with a clear strategy for the future will continue to take opportunities as and when they present, but there is no shortcut for the due diligence required in today’s very regulated environment. Many vendors are now prepared to negotiate long-dated due diligence clauses to accommodate this reality.

Our advice is, if there is a strategic need for a business exit, this autumn offers an excellent marketing window. On balance, we expect vendor sales results to be more favourable this autumn compared to deferring a decision into next season. This view reflects the ongoing uncertainty in the forward economic outlook, specifically interest rates, further compounded by an election year.

Talking of “outlooks”, the opportunity to be part of our autumn marketing program is still available; see your local agent before the end of February and grab the opportunity to showcase your property online and to 75,000 rural letterboxes nationwide.

For rural and lifestyle property advice from a national team of committed salespeople, supported by our expert marketing team, right across New Zealand, call 0800 367 5263 or click here. To explore our latest Rural Outlook magazine, click here.