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Cream rises to the top in dairy property sector

Last financial year, Bayleys transacted over 100 dairy property deals – more than one-third of the total dairy farms sold nationwide.

In releasing the report, Bayleys’ national director rural, Nick Hawken said REINZ figures show the total value of dairying land sold across New Zealand exploded in the 12 months from 1st April 2021-31st March 2022, to $1.524bn – more than double the value sold in the 2020-2021 period.

“In total, 40,958ha of dairying land was sold nationwide in 2021-2022 according to REINZ.

“Bayleys’ transactional data shows traditional dairying areas like the Waikato continue to dominate, however Southland and Canterbury have seen a surge and are now a significant part of the national picture,” Hawken said.

“Higher dairy prices in the commodity market have actively improved farm profitability which in turn has increased the appeal of dairy land for buyers, including investment entities and private investors that have diversified their portfolios to include dairy assets.”

Hawken said confidence is back in the market from both an investor and lending perspective, with sophisticated market fundamentals coming into play.

“The dairy industry was starved of liquidity for many years, but has seen solid returns since 2019 largely because of elevated commodity prices, but underpinned by the wider intelligence of the industry.

“Dairy farmers today have a far better understanding of how their day-to-day operations can influence the supply chain.

“When multinationals like Nestlé double-down on responsible sourcing programmes prioritising carbon neutrality and an ethically-produced ingredients policy, it is clear that the game is changing and farm owners and investors recognise this.

“Those investing in the dairy sector continue to chase solid commodity prices and returns, but are also increasingly attracted to the underlying fundamentals of the industry, understanding that they are investing in a high-value nutrition market that has longevity.

“As a result, there have been increased levels of capital flowing from both the debt and equity markets into dairy.”

From an investor and lender standpoint, the spotlight remains focused on the dairy industry’s environmental impact and Hawken said proven stewardship is currency in the property market.

“Come transaction time, those dairy farms with a well-documented track record of environmental stewardship and with a sound carbon philosophy are likely to reap the rewards,” said Hawken.

“As buyers become increasingly cautious about environmental standards, saleability increases for farms with A-grade environmental audits and/or are on track to meet long-term targets, with banks supportive of well-capitalised dairy businesses with sound supporting data.

“Dairy property as an asset class requires full stakeholder buy-in, with banks signalling that a farm environmental plan to underpin lending will become mandatory within the next couple of years as sustainability-linked lending benefits become more prevalent.”

Hawken said strong cash yields in the dairy sector have enabled capital investment on-farm, seen some farm owners on the acquisition trail for neighbouring properties to improve efficiencies and assisted in reducing the burden of environmental compliance.

“However, we need to acknowledge that while farm gate returns are looking rosy, there are challenges in the broader market given inflationary headwinds, rising operating costs, staffing shortages interest rate uncertainty.

“The emphasis on the Future Maintainable Production Equation (FMPE) continues as margins are squeezed, but for now, it seems there is some freeboard above the waterline for most operators.”

Click here to read the full report.

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