A lack of buying opportunities due to the drought and the desire for scale in sectors such as cropping is expected to drive a surge in farmland leasing in the next two years, according to rural lender Rabobank.
The bank’s inaugural A New Lease on Land report found that nationally more than a quarter (28 per cent) of farmers already leased a portion of their operating land.
This was as high as 45 per cent in South Australia and 38 per cent in Western Australia, because these states have larger numbers of big farming enterprises operating in sectors such as grain production where leasing makes it easier to achieve economies of scale.
By contrast, only 17 per cent of farmers lease land in NSW, due to the greater proportion of them being small livestock operators where achieving scale quickly is not as important as investment in stock and infrastructure.
According to Rabobank, 11 per cent of farmers who lease land increased the area they leased in 2019.
With listings down between 40 and 50 per cent between 2014 and 2018 due to the drought, Rabobank 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.
For vendors, leasing offered the ability to generate an attractive return as well as provide a solution to succession planning,
“The incentives for Australian farmers to lease a share of their operated area are already strong,” said the report’s author, Rabobank analyst Wes Lefroy
“Over the next two years we see the motivation for both current and prospective tenants and landlords to lease to become even stronger.”
Mr Lefroy said rents were typically calculated at 4 to 6 per cent of the value of the property on a per hectare basis, with lease terms ranging from three to five years.
Last year, fund manager Stafford Capital launched a $150 million to $200 million Australian fund that will acquire and lease out productive farms. It is targeting returns of 8 to 9 per cent.
While the number of farming properties coming on to the market is expected to increase slightly in 2020, Mr Lefroy said they would remain near historically low levels.
“Farmers looking to expand may be forced to turn to leasing, unable to buy the right property at the right price,” he said.
While the reasons for leasing will become more compelling, Rabobank warned its suitability relative to buying can vary according to individual circumstances.
For example, some farm businesses valued the long-term security of a land purchase, which enabled them to invest in the land for the long term without the risk of losing the lease.
Also, rather than a cash-lease arrangement, which is the most common, some farmers may prefer a share-farming arrangement, which can offer tax benefits.
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