Earnings call for farm value

17 Mar, 2014 06:00 AM
The earnings capacity of a property needs to be the new focus rather than comparative ­property analysis, says BDO.
If they don't change, they just won't get the capital ...
The earnings capacity of a property needs to be the new focus rather than comparative ­property analysis, says BDO.

A DEBATE is brewing over whether a new way of valuing Australian farms is needed in order to attract institutional investment in agriculture.

Corporate finance firm BDO, which has represented several institutional buyers in Australia, is leading the debate by saying the earnings capacity of a property needs to be the new focus rather than comparative ­property analysis.

BDO executive director Margaux Beauchamp warned those seeking ­capital that without a new focus on earnings, investors would not be as ­willing to provide the $400 billion that ANZ has forecast will need to flow into ­Australian agriculture by 2050.

"If they don't change, they just won't get the capital," Ms Beauchamp said.

"The comparable sales methodology is not the valuation methodology expected to be used by sophisticated investors," she said. "Instead, they are more likely to adopt an income approach when valuing agricultural businesses for acquisition, divestment and general reporting."

BDO partner David Krause said the firm had observed a trend towards the adoption of the earnings approach to valuing agricultural businesses.

"Apart from the value added to investment decisions, the trend is also resulting in improved ongoing ­management of businesses," he said.

Unlike commercial property, rural property is inherently part of the farm business and, for many years, farmers have not kept equivalent institutional grade accounting for their businesses.

CBRE valuer Danny Thomas ­supports a move towards an earnings approach for farm valuation.

However, he said it was unlikely to happen.

"As long as a farmer keeps getting the debt to buy a property, the comparative sales valuation will continue," he said. "There are a lot of farmers in the Riverina who are buying land because they think they will change the use of the property to cotton and make more money than the property has done before. So, in a way, the valuer's job is to understand the motivation."Comparative analyis current standard

Under current valuation standards outlined by the Australian Property Institute, rural land values should be determined by comparative analysis.

"Generally, most agricultural property is valued based on comparison with sales evidence, however, in some cases, the past and/or current trading performance may be relevant in determining the market value of specialised agricultural enterprises," the institute said. "Where the net profit is used to determine the market value, the valuation will represent the value of the enterprise as a going concern."

Macquarie Agricultural Funds ­Management executive director Tim Hornibrook said the future of valuing farms would be determined by banks.

"We would love to see methodology based on an income approach but most farms are bought and sold by farmers, so most will be valued by comparable sales analysis," he said.

"The only way I think it will change is if the banks insist on it because the banks are valuers' biggest customer."

Several banks contacted on the issue have declined to comment.

So, too, have some of the major ­valuers for fear of having to conduct ­valuations with little available data.

Real estate agents believe the ­earnings approach will never be the main methodology.

"They will never be valued on ­earnings or multiples," Ray White Rural's Andrew Adcock said.

He said the vagaries of drought and the volatility in earnings, as well as the traditional way farmers had expanded, meant it was to difficult to do so.

The move towards a more earnings-based approach may be driven by ­agricultural fund managers whose remuneration is trending towards being one based more on performance fees instead of acquisition fees.

Laguna Bay Pastoral fund manager Tim McGavin said the methodology needed to change soon in order to attract the capital required for farming.

"From an institutional point of view, there is really no other way to do it. I think a lot of the industry insiders know that," he said.

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17/03/2014 11:18:20 AM

The valuation system will never change. I was gobsmacked to hear one of the big 4 banks tell me that no valuation on rural property was required for purchase. It's about time banks insisted on valuations based on earning potential. How can we invest in productivity with an insane bi-annual interest bill?
17/03/2014 2:10:35 PM

Nice idea, but it could never work.....results from farm to farm with differing management styles create massive income variances and results etc. fairly arrogant reply from Macquarie though about farmers....especially considering their method of valuing their Ag investment performances
17/03/2014 4:58:14 PM

This is te most ridiculous article I've read in a long time. The idea that somehow a different valuation methodology might affect an investors expected return is overly simplistic. Agriculture is a tricky asset for an investor and it's only when the risk and liquidity adjusted returns become compelling that they will put money into it. With the AUD on the back foot and world equity and bond markets yielding better than they have since 2009 I don't see Australian agriculture shaking much money from these investor's pockets for now.
17/03/2014 8:54:33 PM

The underlying value of any asset must be dictated by reasonably anticipated future returns. It can be difficult to assess what those future returns will be, but the fundamental principle remains and is absolutely inescapable. You’d expect estate agents like the one quoted to be off with the fairies, but traditionally you could expect banks to err on the side of conservatism. Bankers have been too willing in recent times to roll the dice knowing they’ll get away with it long enough to get their bonuses and cash in their options.
18/03/2014 8:20:24 AM

Would be a nice thing as my unimproved value of land is up from 71k to 92k this week with overall earnings for the last to years of start up costs at 6.5k so in all it is 4 times the earnings in value increase. and i can now sell it for $100k less than when purchased. Would love to see how all this is worked out all because the next door was sold out under cost due to draught so my value increases.
Bushie Bill
18/03/2014 9:10:16 AM

Hey Pete, the answer is very simple, even for a head-in-the-sand agrarian socialist from RARA (there's that mysterious word again, daw). It is your responsibility to not enter into "insane" deals. That way you do not end up with an " insane bi-annual interest bill". Get it?
19/03/2014 8:35:52 AM

Hunter, why do you say the AUD is on the back foot?


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