Rising investor appetite buoys Australian water prices to record levels

Annual returns for entitlements clocked in at 2% last year as wet weather dampened allocation prices.

Long-term interest from financial investors and corporate agricultural enterprises pushed Australian water entitlement values to new highs last year, according to specialist advisor Aither.

While the increases were modest, with an index compiled by the firm gaining 4 percent over the period, they came on the back of three years of consecutive growth, meaning values are now more than double what they were in 2013. Prices had jumped 46 percent in 2015 alone.

“After three years of rapid price growth, the limited growth in 2016-17 reflects market sentiment, with many buyers considering higher reliability entitlements to be close to or fully valued, despite the additional horticultural development under way,” Aither said in a report.

Entitlements continued their climb despite a very disappointing year for allocation prices, which started 2016 at A$170 ($134; €113) per megalitre to finish at about A$40 per megalitre. Aither attributed the fall largely to climatic conditions, 2016 having been a particularly wet year.

The poor performance meant entitlements returned only 2 percent over the period, during which about A$612 million was traded. Aither estimates the market at about A$14.5 billion.

The firm said it did not expect prospective buyers’ interest for entitlements to dampen, however, as higher allocation prices feed into higher returns, boosting investor confidence.

“Aither’s view is that the next few years will be modest under most scenarios but that returns to entitlement holders could increase and stabilize as large agricultural enterprises seek enhanced supply security through leases, forwards and carryover products,” it noted. “We expect the level of sophistication in approaches to water trading continue to increase.”

Aither’s index covers trading in the southern Murray-Darling Basin, which accounts for 95 percent of the volume of all water traded in Australia.