Good seasons and good commodity prices are a big help, but cheap debt is the real deal maker driving Australia's booming rural property market.
Agricultural property marketing identity Danny Thomas says not only are interest rates still extraordinarily cheap, despite borrowing costs recently creeping upwards, but $3 billion-plus in unspent investment funds remain on the table after many potential buyers missed out on farmland acquisitions last year.
Potentially, another $2b in fresh (mostly foreign) funds had already been added to that buying pool for 2022, according to the senior director of the LAWD rural property marketing group.
"There's no doubt about it, this market is absolutely red hot across all geographies, and showing every sign of continuing," Mr Thomas told NSW Farm Writers' lunchtime forum last week.
Despite speculation about how long the sector could sustain the farmland market's bull run, he believed the depth and strength of buyer interest, particularly for grazing and cropping country, would remain strong and even strengthen this year.
Horticulture, new nut plantation developments, timber and the white meat production sectors were also attracting unusual levels of investment interest.
A key factor supporting the surging market was that most borrowers still had access to funds at remarkably cheap interest rates, starting from lows around 1.5pc to 2.9pc - well below the 4pc-plus rates of three to five years ago.
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Farmers' appetite for borrowing money had also been bolstered by a doubling in their grazing and cropping land values in the past five years, plus big post-drought productivity and price gains.
Overseas investor activity continued to be very solid, but Mr Thomas noted some larger farm family partnerships were doing their sums and committing to spending $20 million, $50m or even $100m.
One multi-generation family patriarch he sat down with recently talked about borrowing more than $200m.
Borrowing capacity
There was "an amazing amount of debt they are able to sustain" thanks to current financial, market and seasonal fundamentals.
Despite the eye watering prices being paid above current book values for some holdings, many producers were assessing their buying options as not just a once in a generation chance to significantly expand and future-proof their farming capabilities, but possibly the best time in three generations.
At current rates, on an interest-only basis, they're calculating they'll be only paying $15,000 to $25,000 a year for every million they borrow
- Danny Thomas, LAWD
"At current rates, on an interest-only basis, they're calculating they'll be only paying $15,000 to $25,000 a year for every million they borrow," he said.
"Last year they were even locking in their loans for new property at record low rates for up to 10 years - or maybe five-year terms today.
"That's given them plenty of time and confidence to make the most of their investment before the repayment arrangements change."
Throwing rule book away
Mr Thomas said while he was occasionally accused of embellishing the property story, it was relatively easy to rationalise why nearby and adjoining owners were "throwing away the rule book" on established land prices and bidding up district values to unprecedented levels.
He pointed to LAWD's recent sale of the US-owned Corinella Group's portfolio of about 50 Victorian and South Australian properties covering more than 22,000 hectares.
Individual farmers or farmer syndicates seized the chance to grab the lion's share of the 27 transactions involved.
In the case of one parcel, boardroom bidding from three different family groups hit a district record of $14,820/ha ($6000/acre), then jumped another $2000 to eventually reach $18,525/ha.
Two of the bidding parties had eventually opted to team up so they could clinch the deal.
The entire Corinella portfolio had gone to market with a $280m book value, but family farmers were so keen to buy it actually sold for $390m.
Foreigners outwitted
Overseas buyers were still active investors, too, but they were often now outwitted by determined locals.
"Demand from local families is exceptionally strong," he said, noting sometimes they secured a purchase before the property officially hit the market.
"They've done their homework, they're ready with the banker funds lined up to complete deals on cash terms, quick settlement periods, and light touch warranties and contracts.
"And they don't need to wait around for Foreign Investment Review Board approvals.
"Large institutional investors are finding it hard to compete in these circumstances."
However, Australia still represented good value to overseas buyers without the sovereign risk challenges of political instability and the rule of law, title risk and due diligence uncertainties which were realities in other agriculturally appealing geographies in Africa, South America or parts of Europe.
Mr Thomas, who previously made his name in rural property with US commercial real estate giant CBRE before joining newcomer LAWD last year, said he knew one investor who added West Australian property to a global portfolio which also featured significant and productive Black Sea region holdings.
"Unless you want to grow missiles, I'd doubt the good soils, good climate and double cropping opportunities in Ukraine look so appealing these days."
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