Capital gains propel Australia’s permanent ag to the top of the crop

The latest NCREIF Australian Farmland Index, which splits annual and permanent cropland for the first time, shows ag returns Down Under continuing to outperform the US.

Australian agriculture has continued to generate significantly higher returns than farmland in the US, according to the latest NCREIF Australian Farmland Index.

The index found that one-year total annualized returns on Australian farmland to June 2018 were 11.64 percent, down from 18.16 percent in the year to June 2017, but higher than the US which recorded a total return of 6.55 percent for the 12 months to June 2018.

Despite the strong performance, total farmland returns in Australia have been on a downward trend since Q2 2017, according to NCREIF. In particular, capital appreciation on an annualized basis declined to 7.01 percent in Q2 2018, down from 11.86 percent in Q1 2018 and 10.50 percent in Q2 2017 a year earlier.

The Australian Farmland Index compiles data from 67 properties at a market value of A$1.31 billion ($954.8 million; €810.6 million). Contributors include AAG Investment Management, Blue Sky, goFARM Australia, Growth Farms, Gunn Agri Partners, Hancock Agricultural Investment Group, Laguna Bay Pastoral Company and Rural Funds Management.

For the first time, the index was able to show the split between annual farmland (e.g. crops and livestock), which represents A$530 million of market value across 29 properties and 41 percent of the index by value, and permanent farmland (e.g. horticulture), which represents A$761 million across 38 properties and 59 percent of the total.

Data showed that the one-year return for annual farmland was 6.53 percent compared with a return of 15.66 percent for permanent farmland.

In a commentary on the index, Laguna Bay Pastoral Company said this disparity reflected “a large decrease in the appreciation rate for annual properties compared with permanent, which had a small appreciation increase.” This was consistent with performance in the US, it said, where permanent properties have outperformed annual properties by 2 to 3 percent over the long term.

On capital returns, data showed that capital appreciation rates contributed 68 percent of the total return in Q2 2018, compared with a rate of 52 percent since the index’s inception in March 2015.

“It is hard to see how capital growth rates can continue to maintain a significantly higher rate than income returns over the long term; income needs to trend higher to maintain such strong capital appreciation rates or appreciation rates will start to revert to longer-term levels below 7 percent,” Laguna Bay said.

The full impact of the drought in New South Wales and Queensland is not reflected in NCREIF’s figures yet, with the effects of deteriorating conditions set to appear in the results for Q3 and Q4 2018.

A fall in income could lead to softening capital appreciation, Laguna Bay said, but is likely to be at least partially offset by continuing strong demand for Australian farmland from both domestic and foreign investors and continuing low interest rates.

Since inception in 2015, the Australian Farmland Index has recorded total returns of 14.69 percent, with income returns of 6.55 percent and capital appreciation of 7.81 percent. This compares with total annualised returns in the US index since inception in 1990 of 12.19 percent for permanent properties and 10.37 percent for annual cropland, respectively.