NCREIF: Drought sees Australian returns dip in Q1 as annualized returns remain strong

Capital appreciation returns continue to grow in permanent farmland thanks to the rising value of water entitlements – but dry conditions have hurt returns elsewhere.

Australia’s ongoing dry conditions forced growth in income and land appreciation returns to slow during Q1, but the rising value of water entitlements helped appreciation returns on permanent farmland grow by almost 2 percent.

The NCREIF Australian Farmland Index showed asset managers achieved a strong annualized return of 16.2 percent to the year ending March 31, 2019, higher than the 13.8 percent achieved at the end of 2018 and only just behind the 16.24 percent achieved in Q1 2018.

This year’s total return for all farmland comprised a 5.7 percent income return and a 10.2 percent appreciation return.

Permanent farmland (eg, land used for horticulture) continued to outperform annual farmland (used for cropping and livestock), largely driven by strong growth in appreciation returns as a result of rising water entitlement values.

Permanent farmland achieved total annualized returns of 19.4 percent in the year to March 31, comprising 6.7 percent income returns and 12.2 percent appreciation returns. The annualized appreciation returns for permanent farmland in Q4 2018 were lower at 10.4 percent, reflecting the continued rise in water entitlement values since then.

Meanwhile, annual farmland achieved a total annualized return of 9 percent in the year to March 31, comprising income returns of 2.8 percent and appreciation returns of 6.2 percent.

Total returns for the quarter ending March 31, 2019, were 2.5 percent, down from the previous quarter’s 4.3 percent, but significantly higher than the 0.4 percent achieved in the corresponding quarter in 2018.

“The continued drought conditions experienced throughout the eastern seaboard region has had a negative two-fold effect on overall returns during the quarter,” said Rural Funds Management in commentary on the index.

“Operators continue to observe an increase in costs in the price of temporary water and domestic grain required for livestock and cropping operations. The dry conditions have further reduced crop yields in cotton, wheat and grazing, with the latter putting further pressure on cattle and livestock prices.”

The lack of soil moisture on the east coast has also presented concerns for the winter cropping season, RFM said, and has “impacted acquisition sentiment.” Rabobank said last week that it was “against all odds” that the Australian winter crop would achieve five-year average levels.

On permanent farmland, RFM said: “Land for farming and agricultural use continues to benefit from appreciation in the value of water entitlements, due to the drought restricting supply and driving appreciation returns from 10.38 percent to 12.19 percent as at March 31.

“However, this has been offset by lower growth in income returns, again due to the dry conditions, increasing the cost of temporary water. The drier and warmer conditions have also impacted income returns with lower yield on harvests, particularly in the berry industry.”

The Australian Farmland Index is compiled by the National Council of Real Estate Investment Fiduciaries and covers 48 properties totaling more than A$1.06 billion ($729.11 million; €649.99 million) in value.

Annualized returns since the index’s inception in 2015 are 13.9 percent in total, comprising 6.1 percent income returns and 7.6 percent capital appreciation returns.

Businesses currently contributing to the index include AAG Investment Management, Blue Sky Water Partners, goFARM Australia, Gunn Agri Partners, Hancock Agricultural Investment Group, Laguna Bay Pastoral Company and Rural Funds Management.