NCREIF: Income drives modest Q3 farmland return

Though a spike in Southeast appreciation raised questions for many, market participants tell us the report generally accurately reflects current conditions across US farmland markets.

Modestly stronger income drove a total return of 1.29 percent across US farmland markets during the third quarter, according to the National Committee of Real Estate Investment Fiduciaries.

In its third-quarter farmland index report, NCREIF wrote that 1.06 percent earnings income and 0.22 percent appreciation during the third quarter combined for growth that outpaced both the 1.13 percent recorded last quarter and the 1.02 percent growth during the third quarter of 2017.

“Third-quarter income return for the Total Farmland Index was 28 basis points lower than last year, when the third-quarter income return was 1.34 percent,” NCREIF wrote in its report. “Farmland values continued a marginally positive trend in the third quarter, posting appreciation of 0.22 percent after registering appreciation of 0.48 percent in Q2.”

There were positive returns across all eight regions in the the third quarter, led by 3.22 percent growth in a Southeastern market that includes Alabama, Florida, Georgia and South Carolina. That growth was comprised of 0.79 percent income and 2.43 percent appreciation during the period, according to NCREIF’s index.

John Dean, principal land broker at Mississippi headquartered Dean Land Mart, told Agri Investor there have not been many sales recently and he is not aware of developments that could be driving sharp appreciation in the Southeast.

“The things that a lot of times drive the Southeast – particularly Georgia and Florida – are transitional real estate and development. Everybody knows that the economy has come back very strong in those areas,” he said. “You have to always figure some of that in, in addition to pure agricultural land appreciation.”

Gladstone Land president David Gladstone, who often highlights urban development as a key factor supporting land values, told Agri Investor that, while he is also unaware of any specific transactions that would have driven the third-quarter appreciation, sentiment among appraisers has improved.

Florida land has gone up pretty regularly, so it [Southeast appreciation] might be driven mostly by Florida,” said Gladstone. “There’s been some movements all around the country – even in places where you wouldn’t expect there to be movement, there’s been movement, because people have to do something with their land.”

Asked about conditions in the Southeast, Farmland Partners chief executive Paul Pittman stressed to Agri Investor that NCRIEF’s readings provide only a limited view of even the small portion of US farmland under institutional ownership. Pittman was among many who highlighted that the quarterly reading for appreciation in the Southeast suggests a 10 percent annualized figure out of line with his view of the current market.

“I own a lot of land in the Southeast, I sure wish it was true, but I just know it’s not,” he said. “I’ve been doing this for 40 years, there’s probably been one or two years where you got low double-digit farmland appreciation.”

‘Just checking in’

Dean said that a recent softening in rental rates for higher-end properties in the Southeast has limited returns available to investors, adding that the slow pace of activity in the market has also inspired some institutional buyers to “back off” slightly, though they continue to monitor the market.

“They still call all the time, just checking in,” said Dean. “They know that there’s nothing out there but want us to know they’ve still got the money but can’t just be foolish with it. They are kind of waiting, I guess, for that pie in the sky good property: 1,500 acres or better that they can buy at a 4 percent cap rate.”

As a result of that slow pace of activity, Dean estimated that a property coming on to the market now could fetch as much as 5 to 10 percent above what a comparable property might have sold for a year ago.

“That’s because of the extreme scarcity, not because of the immediate return you’re going to get,” Dean explained. “In a real market, you would have more of a softening in farmland values, but because there’s nothing on the market, you don’t.”

Keeping pace

In the Corn Belt, NCREIF reported third-quarter appreciation of just 0.09 percent, with income of 0.70 percent making a larger contribution to overall returns.

Doug Hensley, president of real estate services at Iowa-headquartered land broker Hertz Real Estate Services, told Agri Investor that rising interest rates and weak commodity prices have created headwinds limiting farmland appreciation in the Corn Belt.

“Income is where the return is for a lot of these institutional folks right now,” he said.

Though his firm conducts only limited business in the region, Hensley said recent conversations have revealed an even greater degree of pressure in the Southern Central Plains region of Nebraska, Kansas and parts of Colorado.

In States including Minnesota, Wisconsin and Michigan, Hensley said, some of the strength in land values between 2012 and 2014 was the result of producers switching from wheat into then-booming markets for corn and soybeans. In addition to the fact that some of that momentum has since dissipated, he said, wheat producers in the region have been challenged in export markets by resurgent wheat production in Russia.

Though states in the Central Corn Belt have also experienced such deflation in values, Hensley said, it happened much quicker and preceded a slight uptick during the time since. Hensley said institutional buyers remained active in the Corn Belt during the third quarter, when tight margins continued to encourage more producers to consider sale/leaseback transactions that present opportunity for well-capitalized buyers.

“When everyone else is running, the funds walk,” he said.  “When everyone else is walking, they run.”

That activity was reflected in NCREIF’s numbers, which, in addition to 24 properties in the Delta States and smaller additions elsewhere, revealed that 30 Corn Belt properties had been added to the index between the second and third quarters of 2018.

On its third-quarter earnings call earlier this month, NYSE-listed Farmland Partners revealed that, after executing its first farmland sale in July, the REIT executed $29.9 million in sales in the third quarter.

Though a market source told Agri Investor they understood Corn Belt properties to be among those sold recently by FPI, Pittman said the company’s properties were not those that showed up in the NCREIF index for the first time during the third quarter.

“We didn’t sell to anyone that is reporting [to NCREIF],” said Pittman.

Increasing expectations

On the West Coast, Adam Woiblet, president and designated broker at Walla Walla, a Washington-headquartered Agribusiness Trading Group, told Agri Investor that NCREIF’s readings of flattening appreciation in the Pacific West and Pacific regions reflects the recent market accurately.

“That appreciation definitely follows commodity prices,” he said.

Despite that flattening, he said, there continues to be strong interest among institutional investors in Western farmland markets, especially for irrigated properties.

“They [institutional buyers] certainly are not buying things at quite as low a cap rate as they have been,” he said. “I think their cap-rate expectations have increased slightly, which is driving prices down a bit as far as what things are trading for.”