Rural momentum set to continue into 2021 as demand exceeds supply

General confidence to invest in the rural real estate market heading into 2021 is very positive, in stark contrast to the last three years’ market headwinds.

While the challenges that have been present for some time remain, particularly the uncertainty with environmental planning and bank credit, the market is responding, driven off the back of proven returns.

This is reflected in the significant role our primary sector now plays in New Zealand’s economic recovery, as other export sectors recalibrate post the impact of COVID-19. In addition, very low bank deposits continue to drive investment from the city in favour of the country, notably horticulture.

2021 holds high hopes for the rural real estate market, after a really strong end to the year..

While some of the issues around environmental operating constraints and access to banking credit are still present, our view is that there’s a general understanding around those issues, and the underlying returns are a lot more proven. And that confidence is translating - so we are confident that the market this year is going to be different.

Pertinent themes that we believe will underpin the demand for land this year include:

1. Horticultural investment remains to be an appealing pastoral option. Currently, demand continues to outstrip supply with continued demand for quality horticultural land. Particularly for Kiwifruit Gold, where momentum buying for quality orchards has yet to find a ceiling. Origin Capital Partners went to the market seeking $50 million for kiwifruit investment and now expects to have $80-$90 million. MyFarm had an unprecedented year in 2020 with $185 million invested, most of which was in horticulture. And, as farmers look to reduce their nutrient footprint under new regional controls, kiwifruit crops could provide a high-value, low-nutrient footprint option without requiring an entire farm land-use change.

2. The auction price of carbon will underpin the land market for traditional sheep and beef hill country farms. The carbon market is set to surge in 2021 as analysts maintain that prices may yet move beyond the $50/unit mark over 2021. Currently, at $38 a unit up to $10 on a year ago, and demand for permanent forest land continues to outstrip supply.

3. The Overseas Investment Amendment Bill (No3) 2020 we anticipate will find support, where NZX listed companies will be allowed to go from 25% to 49% foreign ownership and rural lease terms extended from a maximum of three to ten years. Both measures would encourage new investment, retain New Zealand ownership/control and accelerate repayment of New Zealand Agri borrowing.

4. Irrespective of any changes to OIA policy, our view is long-term leasing of New Zealand farms, particularly large-scale dairy farms, will feature more this year than any prior period. The separation of the land-owning entity from the operations makes the land-owning entity more attractive to new city investment, including an outright sale, similar to the commercial sector.

5. Both economically and politically, the tide seems to be changing in favour of our primary sector. Labour has captured a significant share of the rural vote and has the prerogative now to reset the pace of change, with a more measured environmental approach, particularly the timeline to achieve freshwater standards and associated farm practices. This will underpin confidence more generally.

There are always forces at play with commodity cycles. Currently, it’s the exchange rates and the unintended quota consequences with Brexit. However, the biggest and most obvious is the ongoing impact of COVID-19 on our international markets as risks and challenges continue to emerge.

The International Monetary Fund estimates that the global economy shrunk by 4.4% in 2020. The pandemic has not only highlighted gaps and vulnerabilities; it too has highlighted opportunities, shining a light on the food and agri sectors. New Zealand’s primary products have held up well. Following COVID-19, the primary sector will be at the forefront of New Zealand’s export-led recovery, leading the way to a more sustainable economy.

The rural real estate market is resetting as farmers and growers look to expand their businesses sustainably in conjunction with a much stronger emphasis on the underlying cash returns. The dairy sector in 2021 continues to receive favourable feedback on both payout expectations and sustainable food production.

New research shows New Zealand dairy farmers have the world’s lowest carbon footprint – at half the emissions of other international producers.

Commissioned by DairyNZ, the study was released late January, independently produced by AgResearch and peer-reviewed by an international specialist in Ireland.

New Zealand retains its outstanding position in low-emission dairy milk production, with an on-farm carbon footprint 46% less than the average of 18 countries studied.

The Real Estate Institute of New Zealand’s (REINZ) December figures showed that 11 of the 14 regions recorded an increase in the number of farm sales for the three months ended December 2020 compared to the three months ended December 2019. The most notable being Waikato with 42 more sales and Northland with 28 more sales.

As 2020 closed on a healthy note, 2021 certainly presents a fantastic opportunity to acquire quality rural assets, at a reliable cash return. This year is looking positive across the board.

Conrad Wilkshire, General Manager of Rural, Property Brokers