Thursday, February 22, 2024

Getting dairy farmers onto the property ladder

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New lease-to-buy model proposed by Property Brokers.
Data modelling by Figured shows the effect the fall in the forecast milk price will have on New Zealand dairy farm debt levels.
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Dairy farm owners who aren’t under pressure to sell their property can follow a new lease-to-buy model to secure capital gain on their properties and help other dairy farmers onto the rural property ladder at the same time.

General manager for rural at Property Brokers Conrad Wilkshire said there has been very little capital gain on dairy properties for the past decade.

“There’s been some revaluations season on season, and some capital freeing from banking credit availability. But ultimately from 2014 to 2024, especially looking at what people have had to invest in their businesses to keep them compliant, you would struggle to build the case that there’s been significant revaluations,” he said.

“Especially compared to the residential market or the sheep and beef market.  It’s a very strong investment story but it just hasn’t had that growth element to it. It’s been a value story about retained earnings.”

Wilkshire said Property Brokers is investigating lease-to-buy options that benefit both dairy farm owners who want to sell but aren’t under financial pressure and are willing to wait to get the price they want, and also benefit established dairy farmers who have not been able to buy a property.

There is a notion out there that there isn’t young talent in the market that can step up and run these larger sophisticated dairy systems, he said.

However, there are many young farmers who own a herd, have money in the bank and are actively looking at investment options, Wilkshire said. 

A Property Brokers newsletter announced the company’s intention to actively seek out both sellers and potential buyers.

“The target market are vendors who have very little if any debt who own Tier 2 or Tier 3 dairy farms, typically less than 200 hectares, with potential to run as a fully self-contained business with nominal additional labour over and above the owner/operator themselves and support staff.

“The vendor is the bank. The vendor typically receives a deposit and potentially a full settlement on part of the farm but the balance is leased with a compulsory date for purchase set for a future date, which can often be two, three and sometimes out five years out,” the newsletter says.

Getting these farmers who have money, have a herd and are proficient at running a business, onto the rural property ladder has been hard, because the “weight of money in a dairy asset” is large, Wilkshire said.

He said a deposit with a lease for the balance, and a set settlement date two, three or five years down the line is the way to go.

This model also means a dairy farm will not be de-converted into, for example, a sheep and beef farm, he said.

Some dairy farmers have enough savings to put down a 20% or more deposit on a property, but need a different model to those that involve a bank loan to enter the market.

Staged settlements of, for example 50% of the property value at a fixed date and 100% at another date is one way of protecting the seller, he said.

Such a deal requires that both the seller and buyer’s advisers, such as accountants, sit down around a table and agree what the future of the farm is and who manages what aspect of it, he said.

“The trusted advisers of the vendor, the trusted advisers of the purchaser are around the table and talk about the objectives, what people need out of it, what’s realistic, how will the property be run, who will be actually running it, who’s putting the cups on.”

The seller is further protected because the title remains in their name until the sale is settled, and they “remain in control of the asset”, he said.

Wilkshire said the seller needs an established relationship with a buyer they know and whose reputation they trust.

The transaction is flexible, with the buyer either involving the bank through a loan, or paying off the farm with their earnings, Wilkshire said.

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