As we move into the holiday season, the global economy continues to face headwinds.
Russia’s invasion of Ukraine, rising energy prices, commodity price inflation, the tail end of the Covid-19 pandemic, and slower economic growth across the G20 have all contributed to increased levels of uncertainty.
When it comes to investment decision making, investors are taking stock of their options in an increasingly dynamic market with rising interest rates.
James Nilsson, National Director of Rural & Agribusiness at Colliers, says New Zealand’s strong primary industry and export focus, renewable energy resources, and food production ensures we are much better positioned than other comparable markets.
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“The perpetual question is where can investors find opportunities to generate the greatest return while interest rates are still on central banks’ agendas?,” Nilsson says.
“With both the property market and share market being impacted by interest rates it’s a tough time for investors chasing yields.”
History suggests even when we finally have our first rate cut, that’s when the share market starts to fall away. In the meantime, most people need to search for some sort of return. So, the question is: ‘What to do with your money in the meantime?’
When it comes to shares, investment advisors are warning of a potential 15 per cent fall in the market next year if a serious recession eventuates.
Given property and share markets have experienced volatility this year, some investors are trying to figure out whether now’s the time to pick up some bargains before the cycle turns upwards again.
As it’s almost impossible to pick the top and bottom of a market cycle, diversification into property sectors like agribusiness can allow an investor to pick up business yields as well as long-term capital gains.
With international market interest starting to come back again there are opportunities for local investors to climb into agricultural sectors within New Zealand where export earnings and farm gate commodity prices are strong and forecast to continue performing on the global stage.
Nilsson notes that an in-depth analysis of the returns on the two main pastoral sectors provides an insight into the level of returns for the sheep and beef sector and the dairy sector.
“Yields for sheep and beef properties tend to be lower across the country when compared to dairying. Sheep and beef yields also have a greater uniformity indicating that land values are more representative of their underlying carrying capacity compared to dairying.
“Traditional regions such as the Waikato and Taranaki, which have smaller sized farms with a greater land use change potential, tend to have higher land values compared to their productive capacity. The difference in dairy yields between the regions is also interesting as they indicate the level of climatic and production risk associated with regions such as the West Coast of the South Island, providing for a much higher yield.
“A review of the returns in the viticulture sector provides an interesting insight as we see the recent lift in vineyard prices was triggered by larger wineries entering the market.
“Since 2019 we have seen the Internal Rate of Return (IRR) continue to tighten from an average of 8 per cent down to the current average of 5.33 per cent for 2022 because of the lift in vineyard prices. In saying that, the properties with a lower IRR are generally smaller blocks with a higher proportion of non-productive assets or unplanted land, which is not generating a return.”
The world stage and the macroeconomic factors are in a relatively tumultuous phase. But New Zealand’s strong primary sector and the agribusiness opportunities available do afford viable investment alternatives, which over time can deliver both capital gains in land ownership as well as realised yields from an operating business.
Whether looking at sectors within agribusiness, viticulture, or forestry, the demand for these asset classes remains strong, especially for those seeking returns through agribusiness in a volatile market.
- Article supplied by Colliers
