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Bayleys targets a minimum of NZ$250,000 from up to 25 investors for Canterbury dairy farm syndicate

Rural News
Bayleys targets a minimum of NZ$250,000 from up to 25 investors for Canterbury dairy farm syndicate
<p> 170 hectare dairy farm near Hawarden in North Canterbury</p>

Bayleys Real Estate is seeking up to 25 investors to stump up a minimum of NZ$250,000 each into the syndication of a yet to be developed Canterbury dairy farm offering the carrot of pre-tax cash returns of more than 8% per annum.

Bayleys says a 170 hectare dairy farm near Hawarden in North Canterbury has been conditionally purchased by farm investment company MyFarm. Currently operating as a dairy support block, the real estate agency says the farm is fully irrigated from a "cheap and reliable" water source. After development to a "very high standard" it will be established for a price of just over NZ$30 per kilogram of milksolids.

"More than 80 percent of the investment will be in land and Fonterra shares - with forecast cash returns averaging in excess of 8 percent per annum pre-tax," says Bayleys, which is marketing the investment opportunity to the public.

Punters would actually be investing in Peaks Dairy Ltd, which according to the Companies Office website is a reserved name.

"Investment parcels start at NZ$250,000 and can be increased by multiples of NZ$50,000. Bayleys senior sales executives David Gubb and Bill Whalan expect between 15 and 25 investors to take up the opportunity," says Bayleys.

The real estate firm describes the offer as a prime opportunity for investors to own part of a commercial dairy farming operation they might not have been able to afford on their own, at a time of increasing demand for New Zealand dairy products.

Farm sales and prices weak

However, the offer comes at a time when the volume of farm sales, especially dairy farms, are very low and prices weak. The latest Rural Market Report from the Real Estate Institute of New Zealand (REINZ) showed just 53 farms sold during September with just one a dairy farm changing hands. In the three months to September just 12 dairy farms were sold, compared with 10 in the same period last year and 55 in the same period of 2008. Over the previous four years the total number of farms sold during September has averaged 127, more than double the number sold last month.

REINZ said the median farm price for the three months to September was NZ$1,012,500. Although up 15% from NZ$877,500 in the same period of last year, it was 39% down on the median price of NZ$1,672,500 in the same period of 2008.

MyFarm's website says its directors Cliff King; Andrew Watters and Grant Rowan are experienced rural funds managers with deep links into farming, agribusiness and the rural sector. MyFarm says in 2009 it placed 45 investors into six properties in New Zealand and two in Australia with a net asset value of about NZ$65.7 million. The company manages 31 farm companies with 26,000 cows on 13,160 hectares in New Zealand and Australia.

Under the heading The only way is up! MyFarm says on its website the one key question investors are asking right now is: How can we be sure that farm prices are not going to fall? It then gives 10 reasons why farm prices can only go up.

1. Land prices have already fallen by 25% to 30% on the peak of two years ago.  Recent sales in Southland are 5% up on the trough in the market.

2. The Milk price is high – at 6.10/kgMS last year and forecast at $6.60 for the current season.

3. Current returns from dairy are well in excess of bank deposits. Cash returns on good commercial farms with moderate debt are forecast at 7 – 9% per annum.

4. Dairy is one of NZ’s few internationally competitive industries – with distinct advantages in costs of production, vertical integration and proximity to (Asian) markets.

5. Dairy products are subject to the strong ‘Mega-trend’ of a growing world population and an increasing middle class seeking high quality dairy products.

6. Other dairy producers, featuring stall fed dairying, are facing higher feed costs due to bio-fuels and grain and corn shortages

7. There is a short supply of farms on the market.  Although there is a group of farmers with high levels of debt they have good cashflows and many are ‘farming their way out’.

8. Corporate sales like CraFarms and SCF’s ownership of Dairy Holdings are likely to be settled ‘off-market’ with non-traditional owners taking up these assets.

9. Good land is a limited resource.  The much quoted ‘they aren’t making any more of it’ and ‘town gets closer every day’ are truisms that create value.

10. Rural land was noted as the 7th safest investment in New Zealand by the August 2010 NZ Investor magazine.

No prospectus required; Securities Commission warning

The promoters of property syndicates aren't required to register offer documents meaning it's hard to accurately determine how big the property syndication market is. However, over the last decade some estimates suggest property syndicates have raised up to NZ$2 billion from investors.

The Securities Commission is believed to have started focusing more closely on property syndicates early last year resulting in several being pulled.

Securities Commission general counsel Liam Mason told interest.co.nz Bayleys had told the commission that the Canterbury dairy farm offer was available to people described as "eligible investors" under section five of the Securities Act, or those who aren't considered members of the public under section 3 of the Act.

"This is the basis on which other MyFarm syndicates have been offered," Mason said. "We are informed that this is made clear in the offering memorandum, though we haven't seen a copy of that."

"On the basis that it is not a public offer, no prospectus would be required," Mason added.

The commission warned investors last year that property syndicates could be risky. The commission said such schemes, where ownership of a property is split into equal shares with individuals buying one or more shares each, aren’t required to produce a registered prospectus or investment statement. Instead, they must provide a disclosure document, called an “offeror’s statement”, and an independent registered valuer’s report – before signing up investors.

“These schemes work differently to other kinds of investments, and their risks need to be understood,” the commission said.

The regulator also cautioned that investors need to think about how to get out of a scheme.

"Given the lack of a formal market, it might be difficult to on-sell your interest, particularly if the scheme isn't performing well. Find out how it will eventually be wound up. Some schemes continue indefinitely until investors vote to wind up. In this case, you need to understand how many votes are needed - if a majority vote is enough, the scheme might be wound up against your wishes."

And the commission also said those investing in a property syndicate could end up sharing its debts.

"Someone investing in this type of property syndicate may also be agreeing to share its debts and liabilities, jointly or severally. This means that if the syndicate can't pay its debts or fund repairs, investors may have to make up the shortfall. In fact, each investor may be liable for the whole amount. You may end up owing money to the syndicate."

Some of the key players in the sector do, or have, included Commercial Investment Properties Ltd, Radius Properties whose directors include ex-South Canterbury Finance CEO Sandy Maier, St Laurence, KCL, SPI Capital, Augusta Funds Management whose directors include Mark Francis the managing director of the NZX listed Kermadec Property Fund, Oyster Group, CIPL and IPT Bayleys.

Changes are afoot. From December the Securities Commission says all firms running property syndicates will be deemed to be providing a financial service and must register on the Financial Service provider register.

'Growing in popularity'

Meanwhile, Bayleys says property syndication is growing in popularity. It  says it has sold about NZ$66 million worth of syndicated buildings in Tauranga, Manawatu, and Auckland, featuring long term tenants such as Countdown supermarket, Repco motor supplies, Coca Cola, Billabong beachwear and a shopping mall.

“I believe this type of shared ownership of a farm such as Peaks appeals to many sectors of the investment market – from city investors looking to invest in a sector with a strong history, through to retired farmers who have sold off their own properties and have capital to invest, but still want to retain an interest in the primary production sector,” says Bayleys' Gubb.

Peaks Dairy is structured as a private company with a manager or sharemilker, potentially a co-investor in the business, running the day-to-day activities.

MyFarm is proposing a three year asset management contract. MyFarm's Watters says between 1990 and 2008 MyFarm delivered an average return to investors of 17% per annum, during the life of the investment.

“Since 2008 there has been a correction in the rural property market but MyFarm syndicates have come through that period with strong balance sheets and cashflows,” Watters says.

(Update adds comments from Securities Commission general counsel Liam Mason).

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17 Comments

The returns won't eventuate. May as blow the money having fun.

As George Best said

I spent 90% of my money on women, drink and fast cars. The rest I wasted.

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Don't know if any of you guys have noticed but dairy is bigger than the capitalisation of the sharemarket, current profit margins are around 50% (got down to 30% in 2009) and the industry is benefiting from a commodity boom that is also the reason for NZD strength (OK falling USD too).  Yes in some areas land is still overpriced (hence the no offers at Auction) but in the South Island where dairy is growing (now 40% of NZ milk) the market is quite active with sales prices at $35K per hectare in Southland and above $30/kgMS in Canterbury.  And yes there is still alot of debt but provided this one isn't overgeared it could be worth a look.  Personally I'm doing well out of dairying.

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auction yerterday for a dairy farm couldnt get a bid.one next week has been pulled.myfarm have a lot to lose if land value continue to fall

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$30/kgms seems expensive in this market.

Add to that a liquidity discount 20%

Add to that a minority shareholder discount 25%

Less being skeerewed with management fees, directors dinners

Less poor performance by a sharemilker who know he/she is not under too much pressure

Less Fonterra shares tanking

Less Fonterra actually charging a fair breakdown for transport (Hawarden is miles from Clandeboye)

When the business is valued at $20kgms maybe it would beat not being in blue chip equities

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This is like the guy who has a book on the sure way to make money.....if it was that good he wouldnt tell anyone, now would he?

This is a good way for you the mug to bail out the cretin that paid 80% too much (or more) what the true worth was of the farm.......

Are there really that many ppl that dumb to buy in now?  I hope not....looking at the lack of residential sales......there will i hope be few.

regards

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Are there really that many ppl that dumb to buy in now?

Sadly, yes.

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"the only way is up" ...... reminds me of that 80's pop hit .....kiwis are just so gullible.

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I find it amazing that ppl who according to the likes of GBH are asssts to NZ becasue they are rich and indeed with this sort of $ to invest they jsut must be bright sods so how can they be be potentially so stupid as to look at this?

Personally I would work on the land being worth 40% of what they think its now worth and start from there for a fair return....but I wouldnt invest in anything I either didnt control or couldnt get out of quickly, easily and cheaply.........

regards

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I never said that " ppl " are " asssts " to NZ " becasue " they are rich ........ nor that they " jsut " must be bright sods .

Bzzzzzzzzz ! Wrong again , steven . .......... But hey , no one goes away a loser at interest.co.nz . Take a free   spell-checker for your blogs ........... Have a nice day , y'all !

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Well...going by the comments above it looks like another successful enterprise in taking money from fools.

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10 reasons why farm prices will probably continue to fall:

1) Farming sector is over geared leading to many farmers needing to sell with few being interested and able to buy.

2) Government's are looking to tighten controls on foreign investment e.g. Australian response to Singapore's bid for ASX and Canadian decline of BHP's offer for Potash. NZ Government are sensing NZ's growing disquiet with farm sales to foreign investors. This will mean more scrutiny by OIO and tigthening of rules. If there are fewer foreign buyers then prices will fall.

3) Bank credit remains tight.

4) Increasing volatility in international commodity prices including dairy and farmers realising the risks of being too highly geared in a down cycle.

5) South Canterbury Finance are in receivership. Pressure on farmers to refinance or sell properties and DHL shareholding is up for sale.

6) Risks associated with converting to a dairy farm (significant cost overruns are common) as well as risks in actually achieving budgeted production and costs structure. Majority of farming budgets are too optimistic and rarely achieved.

7) Strong NZD will likely take at least $1 off next season's payout if it remains at current levels.

8) NZ has lost its low cost status due to inflated land prices.

9) Fonterra is helping the Chinese to master dairy farming techniques. This will probably lead to rapid production increases in China as they replicate the model and reduced demand for NZ produced dairy commodities. The Chinese will sort out their problems and NZ will be left searching for other markets to sell milk powder to.

10) Interest rates will begin to rise next year forcing more farmers into action to sell their farms as their debt servicing ability falls.

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11 ) NZ's flock of farmers is aging . As many approach 65 , their farms may be on the block for sale .

Hey : If rural land is only ranked NZ's 7'th safest investment , what are the other 6 ? Anyone got a copy of " NZ Investor " mag ? ( sitting in CEBU Airport , no NZ magizines here ....... oddly enuff )

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Good question GBH. I'll keep an eye out for the magazine.

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The last one is the killer punch Micks. The banks will be forced to dump the basket cases on the market as well. Balance sheet blood coming.

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Given that there's probably only about 7 types of investment available in NZ, being No7 on the list doesn't promise too much for rural land, eh!

These guys are probably competent operators, but the sales talk is bringing back all kinds of echoes.

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We must have just about reached the point where it's ok to start up a lotto company and invite investors to buy $100ooo shares, which the director (me) will buy the tickets with, using a secret inhouse computer programme and the share holders will share the winnings which could be as high as 30 million dollars.......and I can take my directors fees from the pot...a modest 500 thousand plus 10% of any winnings of course.

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Do you guys ever look at the world and what is happening in it???? Surely you must be aware that the number of people in the world is growing the amount of land is proportionately reducing. Not only is the land being used to house people it is also being diverted into energy use (growing crops for fuel). With the huge demand on food production production at the moment you would think that an investment in productive rural land would be a good one - especially in Dairy.

Whats more if you dont have the nouse to do it yourself I would think going with a company that, on paper, look to have achieved what they have forecast (myfarm) and have been around for a long time (20yrs). That is of course unless you are looking for the fast fix, quick buck! In which case I would say good luck.

 

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