Soaring demand for Australian land ‘to keep driving prices higher’

High demand from farmers and investors is set to continue pushing up Australian land prices, according to Rabobank.

In its latest Agricultural Land Price Outlook, the lender finds that the median land price in Australia had reached A$2,278 ($1,636; €1,406) per hectare by the end of 2017, with a compound annual growth rate of 2.5 percent over the past 10 years.

Each state also had a positive compound annual growth rate over the past 10 years, with Tasmania leading the way on 4.9 percent, Victoria close behind on 4.1 percent and New South Wales on 3.1 percent. Western Australia and Queensland lagged, but still had a CAGR of 0.7 percent and 0.3 percent over the decade.

Wesley Lefroy, the report’s author and agricultural analyst at Rabobank’s RaboResearch Food & Agribusiness, told Agri Investor the primary driver behind rising land prices was an increase in farm operating profits, itself underpinned by positive macroeconomic conditions such as strong commodity prices, high production levels and low cost of funding.

“From that macro perspective, we do expect those fundamentals will weaken slightly, mainly because the cost of funding is set to rise,” he said, adding that poor seasonal conditions in NSW and Queensland at the moment are also likely to negatively affect production levels. The report also identified the ongoing trade war between the US and China as a potential downside risk.

Still, Lefroy expects land price growth to continue over the next 24 months, albeit at a slower rate than in the past five years, thanks mainly to sustained demand for land from farmers and investors.

“We did a survey of 1,000 farmers across Australia and asked if they intend to purchase more land in the next five years,” he said. “When we looked at those results this year in the second quarter vs the second quarter of 2016, the number across Australia was actually the same. So we do expect that really high level of demand to be sustained.”

Lefroy said the influential role played by operating profits showed how importante it is for investors to make sure farms are run well.

“[It shows] the importance of [having] a well-set-up business to achieve potential operating profit and then capital appreciation is extremely important,” he said.

Rabobank’s findings also demonstrated the need to take a careful approach to investing in agriculture, Lefroy said.

“We’re really trying to encourage a data-driven approach to property purchasing, so [buyers should] look at productive capacity rather than just buying on price per acre or price per hectare.”

Considering regional diversification as much as possible was also key, he added, with Rabobank’s findings identifying highly variable land prices not only between states, but also between regions within states. For example, NSW’s Central Tablelands achieved a five-year land price CAGR of 14.5 percent by the end of 2017, while the Northern Tablelands achieved just 3.5 percent.

The report is Rabobank’s inaugural examination of land prices in Australia.