How has increased regulation affected farm values?

Over the past few years, farmers have faced an influx of new regulations.

These regulations, like the Essential Freshwater Package, land use consents and effluent compliance, have created an extra layer of fixed costs and put pressure on farmers.

But what impact has all of this had on farm values?

Rural valuer Rowan Cambie explains the impact of increased regulation on farm values and shares his thoughts for the future.

Non-compliant farms are paying the price

At this stage, none of the regulations have encroached enough to have a negative effect on values, as long as your farm is considered generally compliant.

But if we’re valuing a farm where the effluent system, for example, isn’t quite up to specification and that property is going on the market, the farmer will have to make a measurable discount to compensate. It might only be a difference of $100,000, but buyers aren’t prepared to overlook non-compliance anymore.

A few years ago, things like this didn’t really matter – buyers were essentially just purchasing the land. But now, we’re seeing it reflected in the purchase price.

Buyers are more aware of compliance issues and usage rights

Buyers have become much more aware of the nuances of compliance and the exact bundle of rights they’re purchasing.

Possibly, this is due to the way we’re marketing properties now, as real estate agents need to provide full disclosure to buyers.

In the past, you could put a farm on the market and just tell buyers the location and number of acres for sale, but it’s much more complex now. The property listing has to have a lot more detail (e.g. fertiliser inputs for the last three years).

Division in the farming community

About a decade ago, most farms were fairly run-of-the-mill. There were ‘good’ farms and ‘bad’ farms, but mostly we saw a big chunk of ‘average’ farms in the middle. Most farmers were just farming away and doing a good job – nothing too out of the ordinary.

However, the introduction of more regulations, particularly the environmental ones, has really split farmers into two groups:

The majority of farmers have embraced the regulations and everything on their farm is very much up to spec – for example, everything's fully fenced and planted, and they've got bridges across all the waterways

At the other end of the spectrum, there’s a small minority of farms that haven’t kept up with the regulations and are in danger of losing their consent

Because of this divide, it’s now very evident which farms are compliant and which aren’t.

If a farm loses its consent, whoever purchases it would need to renew the consent, which is a hassle and comes with the cost and time of bringing everything up to the required specifications.

This would definitely have an impact on the farm’s value, if presented in a non-compliant state. It would also limit the number of potential buyers, as many buyers wouldn’t be willing to take the required risks and time to effectively re-establish the farm as a compliant operation.

Historical use now plays an important role in value

Highest and best use (i.e. what type of farming a particular block is most suitable for) has always been an important element of rural valuation. But some of the new regulations are changing our perception of highest and best use.

For example, if a piece of land hasn't been used for dairy and it comes up for sale next to a dairy farm, that dairy farm can't automatically expand onto the land anymore unless they get resource consent, because the property being sold doesn't have existing use rights for dairy.

So highest and best use is now limited by how the land has been used historically, which has a potential impact on its future value.

Smaller farms are selling for less per hectare

In the past, smaller farms typically sold for a higher price per hectare than larger farms (the rationale being that the total sale price was relatively low, so buyers could afford to pay a little more).

But what we’re seeing now is that there's a cut-off point, where smaller farms (say under 100 hectares) are actually selling for less per hectare than larger farms.

This could be due to the fact that the new regulations have lifted fixed costs, which is putting pressure on smaller-scale farms and ultimately pushing their values down because they’re not as economically viable as they used to be.

For example, it might cost $150,000 to upgrade your effluent system, regardless of how big your farm is. For small farms, that’s a big cost. You need to have a certain level of income and plenty of cash flow to cover all those fixed costs, which is a struggle for small farms.

And for larger farms, the opposite is happening. The increased regulation is driving values of larger blocks up slightly. If everything is compliant and has been brought up to spec, the scale of the farm helps to pay for the additional fixed costs.

The changing landscape of farm valuation

At the moment, we essentially value a farm based on its land value rate.

So if you've got a nice flat dairy farm, you analyse comparative sales and you look at improvements, then you value it based on a rate per hectare. And that that rate generally encompasses all the potentialities of the property, regardless of highest and best use. So if it's got a cow shed on it and good infrastructure, our view is that it can be operated as a dairy farm.

But in time, the right to farm will likely be part of the value. Farm values won’t only be based on the land and infrastructure, but also:

• Existing use rights
• Compliance
• Resource consent

So we may see farm values become much more compartmentalised. We might start with a base land rate and then have all the rights adding value on top of that.

And those farms that tick all the boxes will be worth a lot.

The silver lining

While the regulatory environment for farmers is ever-increasing, there’s light at the end of the tunnel.

I think we’ve reached a turning point, in the sense that most farms have been brought up to spec and are still making a profit while farming within the environmental constraints, so farmers can start to feel good about all the work they’ve done.

The farms that have navigated these changes successfully will reap the rewards, as they’ve protected the future value of their farm.

And there’s a silver lining, as the New Zealand farming industry will be viewed in a more positive light in the future, both at home and globally.

How we can help

If you’re concerned about the impact of increased regulation on the value of your farm, get in touch with one of our rural valuers.

We have 18 registered rural valuers located throughout New Zealand, so we have the expertise and regional knowledge to help you make a plan for the future of your farm.

Get in touch with a rural valuer today