A ‘new lease on land’ – leasing of ag land on the rise
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Rabobank
 

A ‘new lease on land’ – leasing of ag land on the rise

 

 

Leasing land is set to become increasingly common in the Australian agricultural sector, as farmers seek to expand in an environment of limited purchasing opportunities, according to a new industry report.

In its research report A New Lease on Land, agricultural banking specialist Rabobank said the incentives for leasing agricultural land were becoming more compelling for both ‘tenants’ and ‘landlords’ alike.

Report author, Rabobank analyst Wes Lefroy said leasing land provided the opportunity to “unlock scale for a growing number of farmers” in an environment where there were limited properties available for purchase.  And at the same time, it offered farm operators the option to adopt alternative business models and ownership structures.

While land owners, the report said, were increasingly likely to lease out property, as agricultural land became a more attractive investment class and with leasing offering a flexible option for succession planning.

And while leasing would continue to be more common among certain farm types and sizes – particularly larger farms and cropping enterprises – Mr Lefroy said it was important that all farmers considered the value of leasing land as part of their expansion strategies.

“The incentives for Australian farmers to lease a share of their operated area are already strong,” he said, “with our recent research indicating 28 per cent of farmers across the country lease some proportion of their operated area. And of those, 11 per cent had increased the area of land they lease in 2019.*

“Over the next two years, we see the motivation for both current and prospective tenants and landlords to lease to become even stronger.

Current leasing levels

 On a state-by-state basis, the percentage of farmers currently operating leased land varied considerably, the report said, with differences primarily driven by structural factors, including farm size and production type, but also by market dynamics, such as price growth and property availability.

“For example, leasing is more common in South Australia and Western Australia, where there are many large grain producers.  In those states, our research showed 45 per cent and 38 per cent of farmers respectively lease some area of land they operate,” Mr Lefroy said. “This is in contrast to New South Wales, where a greater proportion of livestock producers are located, and only 17 per cent of farmers lease land.”

Farm growth opportunities

The report said leasing was an option that enabled farmers to expand operations either as a permanent alternative to buying land or as a pathway to buying in the future. It could also overcome a lack of purchasing opportunities.

Mr Lefroy said the number of agricultural properties offered for sale in Australia had fallen between 40 and 50 per cent in all states from 2014 to 2018.

“While we expect the number of properties on the market to increase slightly in 2020, it will remain near historically-low levels,” he said.  “Farmers looking to expand may be forced to turn to leasing, unable to buy the right property at the right price.”

In addition, the report said, leasing instead of purchasing land provided an option for farmers to adopt non-traditional business models, such as sale and lease-back or equity partnerships.

“This can assist farm businesses to direct capital towards other assets, such as infrastructure, instead of land,” Mr Lefroy said.

Leasing also had a role to play in mitigating risk, the report said.

“This is both by enabling farmers to expand without taking on debt for land purchase, and also by acting to mitigate the impact of weather on profit variability by diversifying the locations in which they farm,” Mr Lefroy said. “With the growing focus on managing climate volatility, we expect an increasing number of farmers will employ leasing of land as a means to mitigate prominent weather risks, such as frost and drought."

Increasing availability

The report predicts an increase in the amount of Australian agricultural land that will be available for lease, driven by improved investment returns and an acceleration of farmers retiring from the industry.

“Agricultural land will become even more attractive as an investment class,” Mr Lefroy said.  “We expect capital appreciation of ag land to remain healthy across many regions in Australia over the next three years, while it is also not as volatile as a number of other assets, which is valued by investors.”

In addition, with 2020 expected to see an increase in the number of farmers choosing to leave the sector, for lifestyle reasons, especially in drought-impacted regions, more land may be offered for lease.

“The option of leasing out land enables exiting farmers to achieve a lifestyle change while still waiting for the drought to break before selling, if at all,” Mr Lefroy said.

The suitability of leasing rather than buying was not for all though, the report said, and varied depending on production types and individual circumstances.

Global experience

 While the increase in the number of farmers leasing land in Australia had taken place against a backdrop of rising property prices and very limited opportunities to buy, the report said, international experience showed leasing could also increase in a depressed property market.

“During the US farm crisis of the 1980s and subsequent drought, land prices in Iowa fell by more than 50 per cent in real terms from 1982 to 1987. During that five year period, the area of farmland under lease increased from 21 per cent to 27 per cent,” Mr Lefroy said.

“Where farmers did not have to sell to meet debt obligations, leasing rather than selling enabled Iowan farmland owners to achieve lifestyle changes and avoid selling in a low market."

*Rabobank Rural Confidence Survey December 2019

Rabobank Australia & New Zealand is a part of the global Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has 120 years’ experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and operates in 38 countries, servicing the needs of approximately 8.4 million clients worldwide through a network of more than 1000 offices and branches. Rabobank Australia & New Zealand is one of Australasia’s leading agricultural lenders and a significant provider of business and corporate banking and financial services to the region’s food and agribusiness sector. The bank has 93 branches throughout Australia and New Zealand.


Media contacts:

Denise Shaw
Head of Media Relations
Rabobank Australia & New Zealand 
Phone: 02 8115 2744 or 0439 603 525 
Email: denise.shaw@rabobank.com  

Skye Ward
Media Relations Manager
Rabobank Australia & New Zealand 
Phone: 02 4855 1111 or 0418 216 103 
Email: skye.ward@rabobank.com