End of Australia’s ‘liquidity squeeze’ could lead to a slowdown in land price growth

Although weather conditions in eastern Australia remain challenging, to put it gently, the country’s farmland has continued to deliver strong capital growth for investors.

Several real estate agents and fund managers whom Agri Investor has spoken to in recent months have expressed a mixture of surprise, delight and relief over the fact that land prices have remained solid. This sentiment is nevertheless tempered by cautious optimism about the future.

It was always likely that the effects of drought would be felt in this area sooner or later. And now Rabobank is shining a light from the end of the tunnel on the issue.

In its annual Agricultural Land Price Outlook, published this week and entitled More Smoke, Less Fire, Rabobank said land price growth would begin to slow in the next 18 months following several years of strong results.

Land prices have increased at a compound annual rate of 7 per cent over the past five years, the report said. Growth accelerated in the past two years, just before dry conditions began to set in. A series of strong seasons propelled this growth – which has continued in Western Australia and some areas of South Australia, where the weather has remained good.

But there has been a divergence on the east coast. A shortage of available properties there has helped to keep prices high during the dry spell, in what Rabobank called a “liquidity squeeze”. The bank’s data showed that land sales were down by more than 50 percent over the last five years in the drought-affected states, while land prices had risen by 14 percent in both New South Wales and Queensland.

This liquidity squeeze is likely to come to an end as the drought continues or even as it breaks. Up until now, investors have been buoyed by strong commodity prices and low interest rates, which have prompted investors or landowners to keep faith with the properties they have been holding.

But as the dry conditions continue – and they don’t look set to dramatically improve anytime soon in the eastern states – some investors will begin to lose patience and look to cash in while prices are still good.

Chinese-owned Rifa Salutary placed its beef portfolio on the market last week, for example, and though many of its assets are in areas where drought has been less of a factor, some are in areas that have been badly affected. The firm and the selling agent both stated clearly that the sale was not due to drought. Yet it’s hard not to connect the dots when Rifa Salutary’s recent financial accounts show that profits have been down as a result of the dry conditions.

In that sort of situation, why not strike while the iron is hot and make sure to lock in your capital appreciation through an asset sale before prices soften?

We are likely to see more of this in the coming 12-18 months. There may be an increase in available properties as a result, especially from less-experienced investors who will be less familiar with the Australian market.

It will offer an opportunity for those agricultural investors who know Australian farmland well to pick up good assets that may not have been available. Patience will be rewarded.

As Michael Blakeney, new managing partner at Riparian Capital Partners, told us this week: “Our experience has been that relationships and reputation, and the ability to be nimble and flexible, become much more important in these times.”