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Australian farmland returns hold steady but capital gains continue to fall – NCREIF

Capital appreciation remains low following years of growth, but another quarter of strong income returns saw annualized returns hold up well during the beginning of covid-19.

Returns for Australian farmland held steady during the first few months of the coronavirus pandemic and were slightly higher than in the same period in 2019 on an annualized basis, new figures from the NCREIF Australian Farmland Index show.

Returns on an annualized basis for the quarter ending June 30, 2020 stood at 12.81 percent, higher than for the quarter ending June 30, 2019, which were 12.49 percent.

This year’s figures, though, showed a reversal with regards to the source of returns, with the majority in 2020 coming from income, compared with most coming from capital appreciation in 2019.

The annualized return to Q2 2020 comprised an income return of 8.79 percent and capital appreciation of 3.73 percent, while the figures up to Q2 2019 showed an income return of 4.12 percent and capital appreciation of 8.14 percent.

This shows a continuation of a trend that began in Q1 2020, when capital appreciation hit its lowest level on an annualized basis since March 2016.

The quarterly return for Q2 2020 stood at 2.83 percent, comprising 1.46 percent income returns and 1.37 percent capital appreciation.

There is still “considerable uncertainty” about the long-term impact of covid-19 on agriculture but macroeconomic fundamentals “remain strong” for now, goFARM Australia said in commentary on the index.

Improvement in seasonal conditions across Australia’s eastern seaboard had dramatically improved winter crop production prospects, while also increasing the confidence of livestock producers to rebuild herds, goFARM Australia said. Further rainfall would still be needed in coming weeks, particularly in Western Australia, for crops to reach their full potential.

“The drivers of farmland values are different from many other asset classes and, so far, the sector has largely avoided the economic fallout of covid-19,” goFARM Australia managing director Liam Lenaghan said.

“We are seeing widespread interest from institutional investors attracted to farmland’s defensive characteristics. Many investors also recognize the considerable upside in returns that can be achieved from transformational investments in underutilized and undercapitalized assets.

“Over the coming year the sustained growth in farmland values may be challenged by the headwinds of slowing global economic growth and rising trade tensions. Nevertheless, the agricultural sector has a strong track record of delivering competitive returns during periods of wider market volatility, with investments in farmland providing an excellent natural hedge against inflation and uncorrelated returns to other asset classes. The long-term outlook for Australian agriculture remains very positive.”

The Australian Farmland Index will switch management to Hong Kong’s ANREV, from US-based NCREIF, for the September 2020 quarter.

The index covers 40 properties worth more than A$979 million ($701 million; €598 million), of which around 69 percent are permanent horticultural crops. The balance of properties in the index are annual farmland enterprises including grains, oilseeds, pulses and livestock.

Contributors to the index include Argyle Capital Group, Aware Super, goFARM Australia, Gunn Agri Partners, Hancock Agricultural Investment Group, Laguna Bay Pastoral Company and Rural Funds Management.