Easing entry to ownership

Equity partnerships and vendor finance may be ways to help young sharemilkers ease into farm ownership, Anne Hardie reports.

Three million dollars can buy a range of dairy farms around the country for first-farm buyers, but most need a helping hand to get over the line, leading to suggestions the industry needs to consider a resurgence in equity partnerships and vendor finance.

Shari Ferguson from Bayleys on the West Coast says the industry needs a new model that enables retiring dairy farmers to exit the industry and a younger generation stepping into farm ownership. Fewer sharemilkers are around on the Coast to take that step and she suggests it’s time to renew interest in equity partnerships.

In Canterbury, Gareth Cox from Property Brokers has been encouraging first-farm buyers to consider cheaper farms on the West Coast and took a group there in February, with another tour planned through the east coast of the South Island and lower North Island.

First-farm buyers have often built up a couple of million dollars in equity, but also have half a million dollars or so in debt, giving them total assets of about $1.5 million and that leaves them short when they’re looking at farms on the market for $3 million or more, he says. Family members are a source of finance for some but not all, so another solution is vendors leaving $500,000 in the property at say 2.5% interest to get the property sold and the next generation following into the industry.

‘Vendor finance was around in the 80s and 90s but as the bank industry released the shackles it went out of fashion.’

“Those sorts of things are going to become more and more real as we move forward and people want to get some sales. That’s not just the Coast, but anywhere. Vendor finance was around in the 80s and 90s but as the bank industry released the shackles it went out of fashion.”

With today’s tighter lending criteria, it could be time for vendors to think seriously about leaving finance in the property, he says.

A few vendors in Taranaki this year agreed with that line of thinking which enabled first-farm buyers to step on to the ownership ladder with the help of favourable interest rates on the finance left in the property.

While in Northland, one of the cheapest places for first-farm buyers to shop, those buyers have been scarce. Bayleys has sold one farm to a first-farm buyer this year – a 226-hectare farm with a milking platform of 150ha that sold for $2.5 million pre-auction – which was achieved through the creation of a family company with parents. General manager for Northland, Tony Grindle, says the lack of first-farm buyers in the market is largely due to the banks becoming increasingly risk adverse.

Tararua, also a cheaper region, has attracted little interest from first-farm buyers and John Arends from Property Brokers can’t remember the last time he sold a farm to one and he also blames the tougher lending criteria. Yet there are dairy farms in Tararua close to $20,000/ha and producing 700-800kg MS/ha that are now grazing beef cattle. Pay a bit more and for $3 million ($30,000/ha), buyers can get 100ha milking 240 cows and producing about 90,000kg milksolids, with one home and modest infrastructure.

However, in Waikato, the next generation is stepping into farm ownership, with Bayleys overseeing several of those sales this year. In the main it was sharemilkers or contract milkers, sometimes with family assistance, ranging from $1.7m for 60ha to $3.5m for 156ha milking about 300 cows.

Back on the West Coast, Ferguson says the entire dairy property market ground to a halt as Westland suppliers debated a Yili takeover, with vendors hanging on to their shares in case the deal went through.

Most vendors on the Coast are retiring farmers, so those properties will be back on the market though and she says another wave of retiring farmers will follow suit in the years to come, with a dearth of young farmers looking at farm ownership in the region.

She has several investor buyers watching property values on the Coast which shows there is capital out there to invest in rural property, but they need a return on assets and that would mean paying between $18,000 to $20,000/ha for properties in good locations. Investors ideally prefer sharemilkers on properties, but they are few and far between which is why she suggests equity partnerships as another option.

Cox says he showed first-farm buyers West Coast properties on the market for $23,000-$24,000/ha but did the figures with accountants and DairyNZ which showed the values needed to drop to about $20,000-$21,000/ha to produce 6% return on their capital investment.

“We met with a couple of banks also which were pretty loud and clear they want any debt paid over 20 years with principle and interest terms. So we need 6% to really achieve that and some farms need a bit of capital – some have deferred maintenance. That’s the Achilles heel going in there and buyers discount that from the price now which means there’s a disconnect with prices.”

He says there’s great potential for first farm buyers on the West Coast but acknowledges it’s not for everyone. It’s smaller-scale units, less staff and refreshingly about being a good farmer, but it also has the challenge of recruiting staff, weather and miles from anywhere.

“The big thing is the perceived isolation and climate. And in my experience it’s not for everyone.”

Most first-farm buyers have been building up equity on large-scale farms and usually, those farms have all the bells and whistles. That can make it hard to look at the cheaper farms on offer in their price range.

That’s what Alan Duncan from Colliers International has found in the central North Island. He says first-farm buyers sometimes don’t want to make that move and he has had two this past year opt out of the industry after deciding they didn’t want what was on offer.

“The first-farm buyers are becoming fussy – the home or shed isn’t good enough. They come out of a nice rotary or nice herringbone to an older shed and it’s a big difference. They’ve usually had a brand-new house and when they’re looking at a 1950s home and a shed that’s just as old but upgraded and only 20-aside, it’s hard for them to get their head around that to what they can afford.”

Then there’s the problem with smaller farms in the region that potentially could have been first farms in the past but often have compliance issues these days, with the cost too great to make the required improvements.

Southland’s dairy property values may be more expensive than some regions, but in the past 12 months PGG Wrightson has sold about five properties to first-farm buyers, usually with assistance from family or as an equity partnership with the farm owners.

Andrew Patterson says both equity partnerships and the number of sharemilkers dropped off through the years of low payout, but farm owners keen to protect their businesses are increasingly providing opportunities for their young staff to become shareholders. Whereas in the past it may have been 10 or more equity partners, it’s now two to three owners in the business.

“We went through a dull patch, but there’s a bit more life there now and investors are looking positively at working with young people who have a record of production behind them.”

If they’re going into an equity partnership, he says they need a decent percentage to give them the ability to grow their shareholding and for that reason, some financial assistance such as family gets them maybe 30% equity in the business.

It is possible to find Southland dairy farms below the $3m mark or just over and they usually come with reasonable infrastructure and production. On the market is a 114ha rolling-contour farm milking 320 cows for 152,000kg MS, for sale at $2.99m. Another example is 94ha milking 240 cows through a 24-bail rotary with a production of 98,500kg MS that is for sale at $3.2m.

Patterson expects a resurgence in sharemilking also which will provide opportunities to build equity again.

“There’s young people coming through the system who see a big future who will be aiming toward sharemilking. It will be the upper end of them that get that opportunity.”