Valuations of Rural Leasehold and Licensed land in

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?

Victoria Hume Dam Study Area 4 Hour Drive NE of City Melbourne RMIT

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 715 mm • Average Maximum Temperatures – Summer 31. 8 o. C – Winter 12. 6 o. C • 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 Leases District 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 • Land Value of $6, 200 / Ha • 1 Cow & Calf = 2 Ha Rental Returns 6% = $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

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 Australia Simon A. de Garis Senior Lecturer School of Property Construction and Project Management, RMIT University Melbourne, Victoria, Australia