Tuesday 27 September 2016

Farmland is still a safe haven for investors despite current slump in sales

Published 24/08/2016 | 02:30

Irish land doesn't change hands too often
Irish land doesn't change hands too often

'How much is land making around here", is a question many Irish people ask when they travel to another part of the country. But of course, the unique selling habits of Irish farmers actually make it very difficult to interpret very much at all about the underlying value of land in a particular county or region.

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Irish land doesn't change hands too often. And when it does, an individual farmer who really wants a particular property, might be willing to pay a price well above the underlying economic value.

Headline figures show how land prices nationally have been falling. They dropped by around 9.9pc on average last year to €8,914 per acre. It was the sixth year in a row that the national average failed to break the €10,000 per acre level.

These falls might convince some people that farm land is a "buy" right now, especially when you consider that it was making in the region of €20,000 per acre back in 2007.

But just like buying a house in Ireland today, forget about what it was valued at in 2007 because it was probably never really worth that at all.

The value of something at a moment in time is what somebody is willing to pay for it. The long term economic value is something entirely different. And the wider figures would suggest that land prices in Ireland may well have further to fall.

If you look at the Revenue Commissioners' figures for farm income in 2014, filed this time last year, an interesting pattern emerges.

Bearing in mind that the figures do not take account of what type of farming it involves, average incomes in Waterford were the highest in the country at €38,115 that year.

Farmers in Tipperary and Kilkenny accumulated average earnings of €33,000.

In Laois the figures was €26,408 and the lowest in the country was in Leitrim at just €10,823.

Factor in the average farm size in each county as determined by the Census and you get an average income per acre in Waterford of €340, €177 in Leitrim, €305 in Kilkenny, and €336/ac in Tipperary.

Land in Kilkenny is making €10,883 per acre or an investment yield of 2.8pc per acre. In Tipperary the investment yield is about 3.2pc and in Leitrim it is about 3.6pc.

These figures might even be a bit optimistic due to the fact that the average income figures do not include all costs, with the result that the investment yield can often be zero.

Pressure on farm incomes from the likes of low milk prices has taken some of the sheen off an expected boom for the sector. It has sapped away some of the confidence, especially among dairy farmers.

So, fewer land transactions are taking place and those that are, have tended to be at lower prices.

Some farmers who inherit are availing of tax breaks from leasing land rather than just selling up. The relatively small number of transactions makes it all the more difficult to assess the underlying value of land, given that individual deals can skew figures.

Taking a short or even medium term view, the outlook for farm incomes relative to land prices doesn't fully stack up.

But people can buy for lots of different reasons. Some can afford to pay cash, perhaps having sold land for sites in the boom and managed to avoid sticking the proceeds into AIB or Anglo Irish Bank shares.

Others are looking at buying land for totally different reasons, and just a handful of these transactions can really appear to bolster prices.

For example, there are very wealthy multi-millionaires with huge money to invest right now.

They cannot get a return on their bank deposits. They cannot get a return on bonds as the bond market is completely skewed by Central Bank bond-buying programmes. Some government bonds are in negative yield territory.

They are worried about a bubble in the stock market on the back of political and economic uncertainty abroad from Brexit to Syria.

They may well decide that buying up some farm land in Ireland is a safe, reliable long term use of their money.

Unlike a typical farmer, they don't need to make a living from it and they don't even need to get an attractive annual investment yield.

In times of wider economic uncertainty, wealthy professional investors will look for safety and stability over return, especially when returns in so many other assets classes are low. Land can tick a lot of those boxes, especially where the market for leasing farms is beginning to open up a little more in Ireland and they can simply rent it out.

Rumours that some rich investor has paid a lot of money for a farm isn't necessarily a sign that land is undervalued.

A few rich investors can really skew the market and farmers should always look to whether the underlying financials of the deal stack up for them.

Just like buying houses, don't be fooled by comparing recent land price falls with meteoric prices of the boom and assume that land automatically represents a bargain.

Indo Farming

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