Water is the sinew of Australia’s bidding wars

Down Under, booming institutional interest in irrigated land is largely premised on what happens underground.

For a country used to multibillion-dollar infrastructure privatizations, it may look like a drop in the ocean. Yet those interested in farmland won’t have missed the putting up for sale, just a few weeks apart, of two of Australia’s largest irrigated properties: Southern Agriculture Resources’ 15,000-hectare Gundaline Station and Norman Farming, an 18,000-hectare asset still owned by Aileen and Arthur Norman.

In both cases, institutional investor interest has already proved substantial – at least in the words of CBRE, which is mandated to oversee both auction processes. Gundaline came up for sale after unsolicited bids convinced the vendors to advertize the entire asset; Norman Farming has already received a dozen enquiries, says Danny Thomas, regional director at CBRE. The advisor expects the former to go for A$65 million ($50 million; €43 million) and the latter for A$150 million.

These are “institutional-scale” sums of money, according to Thomas. They are certainly larger than before. Just three years ago, when Southern Ag bought Gundaline Station, the property was priced at A$25 million. What explains the jump in value?

Part of the explanation has to do with improvements at both properties. Since 2014, Southern Ag and its co-investors have expanded Gundaline’s land area under irrigation more than twofold, bolstered storage capacity and water infrastructure, and worked on soil quality. Norman Farming, which the eponymous couple bought in 1981, has since been expanded, notably through acquisitions. There is also the macro picture: North Asia’s rising wealth is translating into a growing appetite for cereals, meat and dairy; as Australia’s exports increase to fill the gap, so do the values of its farms.

But that’s not the whole story. Both properties have something in common: owning them gives access to significant water rights (about 20,000 megaliters in total for Gundaline; 71,170 for Norman). Southern Ag, in fact, is even ready to sell these rights separately from the actual land.

Water entitlements have grown very lucrative of late. Deservedly so: Australia has one of the most transparent water markets in the world, and one in which it is easy to transact. That’s largely because it is highly regulated, providing it with the contract certainty that is often attached to property. It helps that demand for water, of course, is not going down: water prices have grown by a factor of 2.2 times since 2014. Entitlement values have experienced a similar boost.

There is still margin for further growth. In theory, water entitlement prices should not be closely linked to the volume of allocations announced in a given year, which is largely influenced by climatic conditions; they should, instead, reflect the average yield one can hope to receive from selling allocations in the long run. The fact that entitlement prices have, in fact, been significantly correlated with weather patterns of late suggests investor sophistication still has some way to go.

Write to the author at matthieu.f@peimedia.com