ANREV: Australian farmland returns flat in Q3 2022 at 10.32%

Australian farmland recorded a ‘solid’ annualized return for Q3 2022, but returns on a quarterly basis fell to just 0.1% as both income and capital growth stall.

The total annualized return for Australian farmland up to September-end 2022 was 10.32 percent, barely changed from the previous quarter’s annualized return of 10.21 percent.

The previous figure for Q2 2022 was itself one of the lowest recorded by the ANREV Australian Farmland Index since its inception in December 2015, with income returns continuing a small downward trend while capital returns bounced back slightly.

The annualized return for Q3 2022 of 10.32 percent comprised an income return of 5.81 percent (down from 6.32 percent in Q2 2022 and from the 6.38 percent recorded in the equivalent quarter in 2021) and capital growth of 4.32 percent (up from 3.70 percent in Q2 2022 but significantly down on Q3 2021’s 6.38 percent).

On a quarterly basis, ANREV recorded an income return of 0.69 percent and capital growth of -0.59 percent, leading to a total return of 0.10 percent for Q3 2022. This is down from the Q2 2022 total return of 4.54 percent.

Growth Farms Australia, one of the contributors to the index, said that the results showed “solid” income returns that were only slightly below the 6.2 percent income return recorded since the index’s 2015 inception. The firm said capital growth was also below the annualized 6.6 percent recorded since the index’s inception, arguing this was expected given the strong gains in farmland values seen over the last three to five years.

“Whilst accurately predicting the direction of land values is fraught with uncertainty, despite the plethora of predictions we hear about, it is probably a reasonable view to think that the recent increase in interest rates will likely be a dampener to further short-term rapid rises unless we see income returns jump again,” Growth Farms said.

“Again, we think this is unlikely in the short term because of the cost increases which are constraining profits we have seen across the agricultural sector over the last six to 12 months. This leaves as the only possible factors likely to boost profits, and subsequently land values, are a further increase in commodity prices or widespread above-average seasons. We cannot count on either of those.”

Annual cropping continues to outperform permanent farmland in the index, with permanent farmland recording annualized growth since inception of 6.2 percent while annual cropping farmland has recorded a 10.7 percent increase in capital growth alone since inception, with income returns increasing the gap further.

Growth Farms said: “One possible explanation for the difference is that the annual index has a much greater exposure to land, often around 80 percent of the total investment, and it would have benefited greatly from the recent rapid increase in land values. By comparison, the permanent index has less exposure to land because generally there are significant other capital investments required in items like trees and irrigation infrastructure.

“In many cases, the component of capital invested might only be 20-40 percent, so any change in land values does not feed through as strongly to the returns in the permanent index.

Normally, lower exposure to land in permanent cropping investments is offset by higher income returns, Growth Farms said, but this was not showing up in ANREV’s income return since inception: 5.0 percent for permanent farmland vs 6.9 percent for annual farmland. The firm said this was likely down to unusually high income returns seen in many annual cropping and livestock sectors since the index’s inception in 2015.

The Australian Farmland Index tracks the performance of 63 farmland properties with a market value of more than A$1.96 billion ($1.38 billion; €1.27 billion), of which 46 percent are in the permanent cropping sector and 54 percent in annual farmland (cropping and livestock). Data is contributed by Argyle Capital Partners, Aware Super, Growth Farms Australia, Gunn Agri Partners, Manulife Investment Management Timberland and Agriculture, Riparian Capital Partners, Roc Partners and Rural Funds Management.