Australian farmland value gains may be starting to moderate

A couple of intriguing data points have emerged in the last few weeks to suggest that the impressive upwards trajectory of Australian farmland values may have slowed.

First was the rather confronting figure presented by the latest edition of the ANREV Australian Farmland Index at the beginning of October, which found that Australian farmland returned 2.01 percent on a 12-month annualized basis to the end of June 2023 – the lowest annualized return since the inception of this index in 2015.

Capital growth over that 12-month period held up reasonably well but there are hints that this may change soon. The quarterly figures showed that annualized return for both row and permanent cropping land experienced negative capital growth of -1.62 percent and -6.17 percent, respectively – both also the lowest figures on those metrics since the index’s inception.

Now, the results of one index should always be taken with a pinch of salt. After all, no matter how good the dataset it can never be fully comprehensive. And any farmland asset manager will tell you that it is long-term returns that matter in this asset class, not quarterly or even annual ones.

But still – capital growth has now declined for two quarters in a row, and given we are living in a higher-interest-rate world, you would be brave to predict a reversal.

Not long after this, we broke the news that asset manager Growth Farms is to wind up its closed-end Australian Agricultural Lease Fund four years early, on the manager’s recommendation.

Why has it recommended this? As Growth Farms senior portfolio manager David Sackett told us, land values have increased so much since the fund launched four years ago without farm profitability being able to keep pace, that it can no longer achieve its target gross rental yield of 4.5 percent.

Sackett added: “We also don’t think we’re going to continue seeing very strong increases in capital growth over the next three or four years, over the second half of the fund’s life. That’s because land values are driven by a combination of interest rates and farm profits, and we think values are likely to be a bit flatter, or see smaller increases for the next few years.”

So that’s effectively one asset manager calling something like the top of the market, for a few years at least. The result being that it’s better to sell its fund portfolio now than take a chances in four years’ time when values may potentially not have grown anything like they have in the last four years.

It remains to be seen if this prediction will be borne out and certainly not everyone agrees.

And while there is no suggestion here or anywhere else that asset values are about to go into a major reversal, the prevailing economic conditions, higher interest rates, and the drop in farm profitability that would come with a significant dry period in Australia, may see the country’s farmland value surge slow down for the first time in a few years.