Financial models understate rural risk, valuers warn
Australian Financial Review Jul 9 2017 6:10 PM
Larry Schlesinger
Investing in the rural sector based purely on financial modelling presents "inherent risks", valuers Herron Todd White have warned.
The warning comes as a wave of investment capital pours into sectors like beef, cotton, horticulture and nuts, driving up prices as investors and operators compete for a limited pool of assets.
"As specialist agricultural property advisors we are seeing buying decisions made solely on financial modelling however the ground truth of the model is not always done. This presents inherent risks," wrote Herron Todd White valuer Angus Shaw in the firm's latest rural market report.
Mr Shaw said as the agricultural market approached 11 to 12 pm on the property clock in some parts of Australia or some sectors (meaning values are close to peaking) after strong seasonal conditions, it was critical that buyers and sellers make decisions after taking into account "all the available data and do not just rely on financial models or assumptions provided".
"The problem is that many of the numbers provided by the vendors and agents are often not actual numbers specific to that property or region or are not validated and purchase decisions are being made based on these assumptions. Buyers beware and vendors take note," he said.
Research compiled by Bendigo and Adelaide Bank's Rural Bank show the national median farmland price increased 9.3 per cent in 2016 up from 5.3 per cent in the previous year.
This momentum has continued into 2017 with industry veteran David Goodfellow, the CEO of Chinese-backed beef producer Rifa Salutary, remarking last month that cashed-up local farmers were back competing for rural property and driving up prices at the smaller end of the market.
HTW's Mr Shaw warned that the level of operational returns from Australian agriculture can "vary significantly year in, year out depending on a number of factors but largely impacted by management, cost of production (and purchase price or debt leverage cost) and seasonal conditions".
"With billions of dollars currently earmarked to be invested by local and international investors and funds into Australian agriculture, the current challenge for most investors is understanding the expected operational and investment returns by the specific class of asset intended for investment.
"In depth due diligence and research can help to illuminate investment risk, poor investment decisions and ultimately poor returns from ill-informed buyers presented with hypothetical financial, crop or cost data. Investors should be seeking advice and vendors should be keeping robust records," he said.
Tim Lane, national director for rural at HTW said the firm wanted to call out the fact that there was a general lack of data in the farming sector and that the level of due diligence undertaken varied from "none, to quite detailed".
When it came to relying on financial models, Mr Lane questions some of the assumptions used to prepare them, who was preparing them and the data used to make them.
"Where is the data to verify input costs for land? Where is the data to validate long term yields? One season is not a trend."