Australia’s ongoing dry conditions have ensured that water entitlements remain very highly valued in the southern Murray-Darling Basin, the country’s main water market. But does it also mean some new entrants might be taking a look at those high prices and wondering if there is potentially more value elsewhere in the country?
Future Fund director John Poynton popped up recently to discuss water in the Australian Financial Review, in a story revealing that he has joined the advisory board of Perth-based agri consultant Alterra.
Poynton was arguing that water in Western Australia is undervalued and represents an opportunity for investors should the state government there seek to unlock that value by developing a functioning water market.
WA currently presents a challenge on the policy front when it comes to water because it is lagging behind other regions in implementing the recommendations of the National Water Initiative. Namely, it hasn’t yet unbundled water entitlements from land and given them perpetual status, as has happened in the eastern states.
“The change has been on the cards for a long time over there, so it may represent an opportunity from some perspectives to get in ahead of the game, but it also poses some risk as well,” says Chris Olszak, director of consultancy Aither, which produces the Aither Water Index.
The risk, of course, pertains to the uncertainty over whether those changes will be made any time soon. That’s not to say they won’t – Riparian Capital Partners managing partner Nick Waters tells us it would be a “pretty significant development” if they ever happen – but Poynton’s view of the opportunities should perhaps be approached with some caution.
That doesn’t mean there aren’t opportunities outside the southern Murray-Darling Basin, elsewhere in the eastern states. Waters said as much when speaking with Agri Investor at the time of Riparian’s launch this month. He pointed out that the arrival of high-value agriculture, like horticulture, in other parts of northern New South Wales or Queensland could make water there a more investable proposition.
“We see those opportunities emerging mostly off the back of long-run productivity gains in those areas that haven’t necessarily been reflected in water values [yet]. But there are also some changes in development patterns where we’re seeing the arrival of developments of permanent high-value ag in certain areas where it hasn’t been discussed before,” he says.
Investors should probably not get carried away, though. The opportunity set is likely to be much smaller outside the Murray-Darling Basin, and, as Olszak puts it, any investments will be much more “piecemeal” and done on a case-by-case basis.
In particular, he says, it will be harder to find the scale required for institutional investors outside the Basin: “There won’t be another southern Murray-Darling Basin that’s another natural place for everyone to go.”
The political sensitivity around water use in the region has also put some investors on notice, Olszak says. But this is less of a factor in prompting them to cast an eye over opportunities elsewhere than the general heat of the market.
The message from all investors involved in water that we have spoken to is the same, though: there are still attractive opportunities available in the Murray-Darling Basin, if you know where to look.
That’s worth keeping in mind as investors wait for other markets to open up and reach a certain scale.
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