A DEBATE is brewing over whether a new way of valuing Australian farms is needed in order to attract institutional investment in agriculture.
Corporate finance firm BDO, which has represented several institutional buyers in Australia, is leading the debate by saying the earnings capacity of a property needs to be the new focus rather than comparative property analysis.
BDO executive director Margaux Beauchamp warned those seeking capital that without a new focus on earnings, investors would not be as willing to provide the $400 billion that ANZ has forecast will need to flow into Australian agriculture by 2050.
"If they don't change, they just won't get the capital," Ms Beauchamp said.
"The comparable sales methodology is not the valuation methodology expected to be used by sophisticated investors," she said. "Instead, they are more likely to adopt an income approach when valuing agricultural businesses for acquisition, divestment and general reporting."
BDO partner David Krause said the firm had observed a trend towards the adoption of the earnings approach to valuing agricultural businesses.
"Apart from the value added to investment decisions, the trend is also resulting in improved ongoing management of businesses," he said.
Unlike commercial property, rural property is inherently part of the farm business and, for many years, farmers have not kept equivalent institutional grade accounting for their businesses.
CBRE valuer Danny Thomas supports a move towards an earnings approach for farm valuation.
However, he said it was unlikely to happen.
"As long as a farmer keeps getting the debt to buy a property, the comparative sales valuation will continue," he said. "There are a lot of farmers in the Riverina who are buying land because they think they will change the use of the property to cotton and make more money than the property has done before. So, in a way, the valuer's job is to understand the motivation."ComparativeAuthor: MATTHEW CRANSTONSource: Queensland Country Life