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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