Valuations of Rural Leasehold and Licensed land in Victoria

Australia

Simon A. de Garis

Senior Lecturer

School of Property Construction and Project Management,

RMIT University

Melbourne, Victoria,

Australia

Where are we?

Gippsland

Barwon South Western

Gram pians

Loddon Mallee

Hum e

M ildura

Sw an H ill

Gannaw arra

Buloke

Yarriam biack

H indm arsh

M oira

Cam paspe Loddon

Greater Bendigo

CentralGoldfields

N orthernGram pians

H orshamW est W im m era

Southern Gram pians

M oyne

Pyrenees

Ararat

Corangam ite

W arrnam bool

G lenelg

Colac-O tw ay

Q ueenscliffe

Greater Geelong

M oorabool

H epburn M acedon Ranges

M itchellM ount A lexander

Greater Shepparton W angaratta Tow ong

W odonga

I ndigo

M ansfield

W ellington

East G ippsland

La Trobe

South G ippsland

Unincorporated Vic

Bass Coast

M urrindindi

Strathbogie

Ballarat

Baw Baw

Alpine

Golden P lains

Surf Coast

Benalla

Gippsland

Barwon South Western

Gram pians

Loddon Mallee

Hum e

0 50

Kilometres

100

M etropolitan m ap

including Departm ent of Hum an Services regional boundariesand Local Governm ent Areas

Departm ent of H um an Services regional boundariesbased on Local Governm ent Areas

Australian Standard Geographical Classification 1 J u ly 2004H ospitals current at 26 August 2008

Regional Victoria

Victoria

Melbourne RMIT

Hume Dam Study Area

4 Hour Drive NE of City

Valuation of less than freehold

• Little Research

• Paper seeks a dialogue with some practical outcomes

• Paper Key areas

• Market rental valuations of rural land

• Valuation of land held under lease

• Native Title issues

Area of leased and licensed land in Victoria is small.

• 43,689 government tenants occupy 1,064,000 ha

• Private leases numbers are unknown

• Number to increase due to demographics and economics

Rural Settlement Post 1825

• Landed squatters held large tracts

• Power of squatters gained by wool boom

• Victorian legislation of 1869 freed up land

• Settlers gain leasehold & freehold

Native Title

• Crown Land

• Extinguished by Freehold Grant

• Basis - Traditional Laws & Customs

• Native Title Act 1993

• Mabo v State of Queensland

North East Victoria

Lake Hume Study Area

• Upstream of Albury/Wodonga

• Rainfall 715mm

• Average Maximum Temperatures– Summer 31.8oC– Winter 12.6oC

• Valleys - Murray, Kiewa & Mitta

• Diverse Soils - Vertosols & Shallow

Literature Review

• Eves Study 2002

• NSW 1990-2000 Income & Capital Land Value - Annual Average Weighted Return

• Rural & Other Investments

• Rural - 10.75%

• Shares - 12.72%

• Bonds - 11.3%

• Property - 5.2%

Bullivant v Minister 1936

• Flooding - Compensation - Hume Dam

• BFSL 100% Loss

• Peak Flood Area 33% Loss

• Higher Level 10 % Loss (blot on title)

Case Study Area

• NE Water Resources - GM Water• Operates over 68,000 Ha - Controls 835

licences • Hume Dam Capacity 3,035,500 Mgl• Surface Area 20,000 Ha• Licensed Land around Edge of Lake Hume • 84 Licences Area 2-300 Ha• 2 Arms Murray / Mitta

Rentals - Traditional Methodologies

• Percentage of Market Rental

• Agistment Rates

• Productive Value

• Gross Margin / Income Approach

• Analysis of Productive Value is Preferred

• Little Market Evidence

• No Organised Leasing Market

Analysis of Recent Sales & Transactions

Freehold Land $2,030 - $6,200 per Ha

Freehold LeasesDistrict Leases $67 - $284 per Ha

Study Area Average $93

Rental Returns Historically 6% of M.V.

Agistment Rates Cow & Calf $5 / head / wk - Up to $9

G.I. per Year Cow & Calf $500

1 Cow & Calf = 15 DSE

G.M. Per Ha $ 140

Application of Methodologies - Data

Rental Returns6% = $370 / Ha

3% = $185 / Ha

Agistment $130 / Ha

Productive Value $500 = $250 / Ha @ Rental of 50% = $125/Ha

Gross Margin $140 / Ha @ 50% Rental = $70 / Ha

• Land Value of $6,200 / Ha• 1 Cow & Calf = 2 Ha

Methodologies Summary

• Significant Variation

• Land Value - Lifestyle Options - Rural Use

• Capital Gains - Value

• Agistment - Seasonal / Short Term:– Owner Responsible for Maintenance, Capital

Expenditure & Overhead Costs

• Productive Method Favoured by Farmers Over G.M. Approach

• Productive Method Ignores Lessor Overhead Costs

Farmer Interviews • Agistment Not Realistic• Production or G.I. Approach • Cow & Calf Gross Income - $440-$500 / Year• 1 Cow & Calf to 2 Ha• Rentals $110 - $125 / Ha• G.M. Approach too General - Data Not Available• Alternative Approach - Assess DSE / Ha 7.5

x $16 DSE = $120 / Ha

Crown Land Rentals - Methodology• Productive Capacity - DSE / Ha

• Multiplied $ Rate / DSE

• Equals $ / Ha Rent (Forest Leases $/Head)

• 33% of Total Productive Capacity Used as Basis for $ Rate / DSE. This is due to the following factors– No Exclusive Possession

– Lessees Pay Rates & Provide Benefit to Crown

– Lessee Has to Manage Pests Etc. & Non-Productive Areas

Goulburn Murray Water• Some Conditions - Crown Leases Also Present

• Conditions of Licence Include:– Restricted to Grazing– Flooding & Weed Infestation – No Fertiliser– No Exclusive Possession

• Requires Reduction in Rental Rate / Ha

Leases Other Issues• Terms & Conditions

• Rental Review

• Impact of Terms on Rental

• Valuation of Leasehold Interest - Capitalisation of Profit Rental

Conclusions• Uncertainty for Practitioners as to Correct Approach to

Assess Market Rental

• Impact of Terms & Conditions Significant

• Market Place Indicates the Productive Capacity Multiplied by a $ Rate per Unit

• Lessees Reluctant to a Lease Agreement Indicating a Commercial Return to Capital

• Return on Capital is Low Compared to Other Investments

• Further Research Needed.

Valuations of Rural Leasehold and Licensed land in Victoria

AustraliaSimon A. de Garis

Senior Lecturer

School of Property Construction and Project Management,

RMIT University

Melbourne, Victoria,

Australia