Sunday 9 October 2011

NAMA land sales offers farmers a chance to expand

As NAMA embarks on selling off some of the thousands of acres that it currently holds in its loan book, a golden opportunity could be presenting itself for farmers with expansion on their mind.

Global trends, such as the growing world population and the emergence of Asian and developing economies, are fuelling growth in the demand for Irish agricultural produce.

The Irish agricultural and food sectors have the quality, brand and reputation to compete globally. However, a major constraint to growth will be the ability to expand, as there is limited availability of additional land.

NAMA presides over one of the largest property portfolios in the world. To date, the State agency has been engaged in a process of reviewing borrowers' business plans, agreeing property strategies for the assets held, and agreeing borrowers proposals for managing the properties and disposals. With the business plan process coming towards an end as this year draws to a close, the next phase of actively managing asset sales will begin to take off.


While NAMA's property disposal strategy is expected to span a number of years, it is likely that land available for agricultural use will come to the market in the next 12-24 months. To date, NAMA has appointed receivers over several borrowers, and the agency recently published a list of 850 properties that it intends to sell as soon as possible, probably via the auction process.

During recent years, there was a significant reduction in the price of agricultural land changing hands -- the average price paid last year across the 32 counties was around €8,700/ac. This represents a drop of 57pc since 2007 and a reduction of 14.5pc on 2009.

Land held for property development has taken a massive tumble in value during the same period, with values having dropped well in excess of 90pc since peak and some commentators indicating the drop could be as much as 97pc in some instances.

This presents an opportunity for farmers looking to expand, as many of the future sales of former development land are likely to be pitched at agricultural value.

In contrast with the Irish situation, the recent global focus on the food sector has had an impact on the transactions in land internationally.

Productive farmland is becoming more recognised as a valuable commodity by investors, and the World Bank estimated that in 2009 foreign investors bought more than 100m acres of land in the developing world, a 10-fold increase in 10 years.

However, here in Ireland, in the current year, estimates suggest that agricultural land values may have bottomed out or even increased.

One report suggested that average prices for agricultural land increased by 9pc during the first half of this year to around €9,500/ac. Some industry commentators have attributed this recent rise to growth in agricultural production and the resulting expansion of farm holdings, as producers seek to capitalise on the recent rise in the values of farm produce.

For any farmer planning to expand via land acquisition, the price to be paid and funded is one of the most important considerations.

It is vital for any farmer that the price to be paid is based on the financial return that will be generated from agricultural use of the land. The value should be weighed up as a business decision, and the valuation outcome should consider factors such as the additional level of livestock or tillage that can be produced and the additional income, but you must also factor in the extra costs of operating the larger holding.

Funding availability -- or lack of it as the case may be -- has been another major constraint to farm expansion in recent years. During the boom years, when many other industrial sectors were performing strongly, lending to the farming sector did not rank as highly in banking priorities as many other sectors.


More recently, access to credit has been difficult for virtually every business sector.

However, there has been some recent positive developments in this space, with the Government announcing earlier this year that agriculture will be one of the sectors where it will actively encourage lending from the banks.

Bank of Ireland's €200m agri investment fund, launched last July, is a good example of a recent initiative in this area. At the time of its launch, the bank said there had been a recent increase in the amount of credit allocated to the agricultural sector, which was attributed to an increase in the number of land transactions and the number of farmers looking to xpand.

Arranging bank funding is a crucial step in the land purchase process and requires careful consideration and handling.

It is in the farmer's best interest to seek independent advice from an experienced and trustworthy adviser as there are several key issues to be considered, including:

The ability of farm earnings to cover both the bank repayments and also provide a sufficient income for personal and family costs;

The security over any other assets such as other land or family home that the bank is seeking. Farmers should be fully aware of the risks that additional requests such as personal guarantees can bring;

The level of interest or other costs that are being charged. If the interest is variable, then the repayments could increase in the future.

A detailed business plan should be prepared for the purchase. Not only will this present the farmer in a professional light to the bank, but it is also an invaluable tool for the farmer.

A business plan should set out the farmer's intentions for maximising usage of the new land and include cash-flow projections setting out the estimated financial return to be gained.

The cash-flow should show how the bank repayments will be met, and what level of cash will be left over afterwards.

This is invaluable information for the farmer in planning for the future, and assessing the value of the land. Therefore, it is vitally important that the farmer is realistic when preparing the assumptions for the cashflows.

Anthony O'Boyle is a director in corporate finance in Grant Thornton. Email:

Anthony O'Boyle
Irish Independent

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