2022/2023 rural real estate outlook will be the hardest to pick in the last five years

In recent seasons, there has been clear data reflecting a significant upswing in rural sales.

Reversing a constrained market from 2017 to 2019 as a result of a swath of environmental policy reforms, OIA rule changes, and regulatory pressure to deleverage rural debt.

Our dairy sector absorbed the brunt of these pressures, highlighted in 2019 when dairy farm sales dropped to post-GFC levels despite significantly improving payouts. So, where is the rural property market today? First, we probably need to consider the impact of current government policies and rising interest rates on our primary sector.

The most obvious is the current legislated ETS policy settings and associated forestry land use options for qualifying pastoral land. This ETS scheme has profoundly impacted the valuations of extensive pastoral land across the country; you have to go back to the mid-'70s and early '80s of the Muldoon era to find a comparable period of upward rural land revaluations. Back then, it was Livestock Improvement Schemes and Land Development and Encouragement loans, compounded by Supplementary Minimum Price Schemes, all of which was collectively capitalised into forward pricing of rural land that saw farm production assets grow at 20%+ pa. Noting inflation was running away at double digits over that period too. The salient lesson for today is 1984, when the then Labour government deregulated the market almost overnight, rolling back all farm support, floated the dollar, and let farm interest rates rise to 20% p.a.

Consequently, pastoral valuations crashed by 1987. It was not until the government offered significant tax incentives in the early 1990s for new production forestry that pastoral farm valuations began to recover. Post-2000, it was the million hectares converted to dairy that had the most significant impact on sheep and beef land. Again, the DIRA Act of 2001 was the catalyst, resulting in the formation of Fonterra. On-farm sheep production has improved significantly since, and we export almost the same volume of lamb today (90%), with two-thirds fewer sheep compared to the 1980s.

Forestry, it could be argued, has not been the enemy many perceive of pastoral farming as the competition for rural land underpinned farm valuations for decades, keeping loan-to-value ratios in check. All ships rise on the incoming tide, and this current ETS policy has been a game changer for hill country farm valuations nationwide. But realistically, how long do we think this can last?

The ETS scheme is the most significant market distortion in 40 years, and it's not going to last forever. The reason we can be so confident of this is quite simple: it was a government policy that created the ETS, and it will likely be a government policy that drastically alters it. We've seen signs already this year, as policymakers initially sought to make changes to various ETS forestry settings, particularly around permanent forests, which was then followed by a backdown.

Mainly because the property rights associated with carbon sequestration are now much better understood by landowners, notably Iwi, who would have been significantly impacted, given the scale of their land holdings and the long-term stewardship view of their whenua. However, the political drivers for a change in ETS policy have not gone away, and momentum appears to be building for a change from the current “plant and pollute” policy, as recently described by Climate Change Commissioner chair Rod Carr.

Our view is the same as last season; this is a short-term ETS window for pastoral farmers and for those looking for a farm exit; the inevitable correction is likely to be significant; however, it probably won't be a crash in values like 1987.

Instead, there will be an adjustment where the volume of farm sales reduces significantly. It could take several seasons before vendors are prepared to meet the market again. Nothing really drops, given a robust commodity cycle and improved production but equally, very little sells unless there is a genuine motivation to do so.

Pastoral sheep and beef farming is in good heart, generating record export receipts; none of this has come easy. Long run, these properties will continue to grow in value, but those contemplating an exit in the next 2-3 years might want to bring the family conference forward. This is the same advice as we offered up last year, but probably don't wait for Christmas. Much of this will come down to confidence in the home team running the farm, labour constraints, and general frustration with bureaucracy and central government policy red tape. Recent hill country capital gains are without precedent. However, the current cost of borrowing will be a much more significant factor weighing on farmer purchase decisions. So, if forestry conversion slows as many anticipate it will, farmer-to-farmer transactions will have to reflect the significantly higher cost of borrowed capital.

All indications are that ongoing banking support for new rural loan applications continues, and the deleveraging of recent seasons, particularly our dairy sector, places our farmers and growers in a much stronger position compared to the last decade. Interest rate hikes will continue to bite, and some farmers I have spoken to recently are now paying double the interest costs compared to the same time last year. These interest costs, combined with double-digit on-farm inflation, impact the market. As of August, farm sales are back 30% on the same time last year, and the rolling 12-month average is back 220 farm sales to 1349 farms sold. Rural values, however, are holding up well, with the market overall up $486m to $4.5b, the best overall rural market result in the post-GFC era despite reduced farm sales activity.

Government policy constraining RSE schemes has hit horticulture production hard and hopefully will improve soon, but it all appears very slow with more cost and red tape. Kiwifruit orchard sales are likely to come off recent seasons 'momentum buying' as returns moderate and the real costs of operating rise. However, we continue to see genuine buyer interest for horticultural production systems but expect to see some adjustment in valuations on last season to complete sales.

This season the geopolitical risks, knock-on impacts on supply chains, and an international energy crisis all speak to strong inflationary pressures continuing, not to mention pulling back record monetary policy stimulus packages in response to the global pandemic. While inflation is never welcome, historically, our farming sector assets have performed well over these periods; the real value of the debt is devaluing, and the 'cost of food indexes' tend to follow the inflation cycle. Hence farmgate returns tend to track up, and inevitably these returns are capitalised into farm asset values over time.

In closing, our business takes great pride in maximising the full value of our farmer and grower assets. This current season the discipline of anticipating buyer information requirements will be a prerequisite to concluding contracts, ensuring they have complete confidence in the representation of the property.

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