Forum: Farmland valuations outdated, but can present opportunities

The age-old method of valuing farming properties based on comparisons with neighbouring sales can help managers find undervalued acquisition opportunities, investment managers argued.

The method of valuing farmland based on comparing the price of neighbouring properties is here to stay despite being an outdated method, argued farmland fund managers, estate agents and investors at Agri Investor’s recent Australia Forum. But the age-old method can help managers find undervalued acquisition opportunities.

Speaking on the institutional investor panel, one panelist said that there were three main challenges to investing in agriculture, one of them being the method of valuing farmland.

“Land values are still created on a per unit basis rather than discounted cashflow (DCF) which would take the actual productivity of the land and what it can generate into account,” they said.

But comparables are here to stay, argued another farmland fund manager speaking to Agri Investor earlier in the week. Farmland prices are completely down to the buyer involved on that day, he argued. “Beauty is in the eye of the beholder,” he said. “What one man pays for a property could vary widely from the value another sees in it.”

A real estate professional in the audience said that comparables would always be the standard and that it was like a “chicken and egg situation, where one sale might involve DCF and earnings comparables and then itself become a comparable for a later sale”, he said. “But you will always get a variation in what people think a property is worth.”

Liam Lenaghan, director at GoFarm Australia, a farmland investment manager, said he understood the limitations of comparables where valuers effectively price a property based on what one down the road sold for, but that it also presented some opportunities.

“I like them. This blanket approach brings noise in the market that we can discriminate better from and find undervalued opportunities. That sort of blanket approach brings opportunity as a buyer,” he told delegates.