September 7, 2016

The Delusion And Gall That Has Gripped The Market

A report from the Australian. “Australia’s biggest apartment builder, Harry Triguboff’s Meriton, is expecting more buyers to forfeit their deposits and fail to ­settle off-the-plan units, saying the strong rate of settlements so far had been underpinned by two years of ­surging prices. The rapid price growth, largely in Sydney and Melbourne, had now come to end, said the founder of apartment builder Meriton Group and Australia’s richest man. ‘The ones who are settling now have made a lot of money; building on those apartments started two years ago,’ Mr Triguboff told The Australian, noting the contract price was struck at that time. ‘We read every day how prices in Sydney have gone up by 10 per cent in the last year. They have not gone up in the last six months.’”

“It was the next wave of apartment development, at a time of waning price growth, that carried the real risk of settlement defaults, Mr Triguboff said. Chinese buyers in particular are being challenged as banks tighten funding and the Chinese government restricts money flowing out of the country. ‘Let’s face it, they (local and mainland Chinese) are the only buyers.’”

The Telegraph on the UK. “Lincoln Plaza, a 31-storey block of luxury flats near Canary Wharf, has been named Britain’s worst new building in the 2016 Carbuncle Cup. While its designers describe it as a ‘prestigious and sophisticated landmark,’ Building and Design, the magazine that launched the annual prize in 2006, wholeheartedly disagrees.”

“‘Were anyone in any doubt as to the delusion and gall that has gripped London’s luxury housing market, then this asinine quotation should settle the matter once and for all,’ it says. ‘Lincoln Plaza is a putrid, pugilistic horror show that should never have been built. In its bilious cladding, chaotic form, adhesive balconies and frenzied facades, it exhibits the absolute worst in shambolic architectural design and cheap visual gimmickry.’”

“The dressing-down continues: ‘Essentially, this building is the architectural embodiment of sea sickness, waves of nausea frozen in sheaths of glass and coloured aluminium that, when stared at for too long, summon queasiness, discomfort and, if you’re really unlucky, a reappearance of lunch as inevitably as puddles after a rainstorm.’”

From Bloomberg on Brazil. “Brazilian investors, seeking an alternative to their country’s risky real estate market, are returning to Florida to invest in property and establish a source of income in dollars. Back in Brazil, the economic crisis and rising unemployment have sent rents down 5.2 percent in the past year, and it’s difficult and time-consuming to remove tenants who can’t cover their leases. In the U.S., ‘if one of these families stop paying, you have legal support to enforce the contracts,’ said Fernando Fiuza, managing director of TRX Residential, which is looking for wealthy Brazilian individual investors to help TRX almost double its $140 million portfolio in the U.S. ‘In Brazil it is the end of the world to evict someone.’”

“The decline in rent, coupled with inflation of about 9 percent in Brazil in the past year, resulted in a 4.4 percent rate of return, an all-time low, according to data compiled by researcher FIPE and real estate website Zap Imoveis. ‘Everybody is renegotiating rental contracts down and not up’ in Brazil, said Alessandra Ourique, a partner specializing in real estate at Hesketh Advogados law firm in Sao Paulo. ‘Not to mention defaults.’”

The Vancouver Courier in Canada. “I return to the city five weeks after Christy Clark’s 15 per cent tax on real estate sales to foreign buyers in Metro Vancouver went into effect to find a once buoyant market in serious decline. The populace of buyers and sellers has been consumed by a certain fear and loathing driven by the premier’s clearly knee-jerk act.”

“For months, if not years, Clark and Finance Minister Mike de Jong refused to do anything about the impact foreign buyers were having on housing affordability. They argued that they didn’t want to tamper with people’s retirement nest egg wrapped up in the value of their homes. In the end, after a couple of weeks, and with David Eby on the opposition NDP benches leading the charge that would hinder a Liberal victory in the approaching election, Clark tossed concerns about retirement nest eggs and laissez-faire markets aside. Instead she hoped to hobble Eby and his party by announcing this new tax — to say nothing of raking a few bucks into the provincial treasury.”

“What you should know is that even before Clark imposed the tax, the heat was coming out of the market. For months, sales have been declining to what the Vancouver Real Estate Board in a release last Friday called ‘more historically normal activity.’ And here is a not uncommon tale: An acquaintance of mine tells me that literally hours before Clark made her tax announcement, a person confirmed a deal to buy his East Side condo. That person was planning on selling their suburban townhouse to eliminate a lengthy commute time getting to work. The closing date for the deal was Oct. 1. The buyer put down a $35,000 deposit.”

“My friend, like many in his position, fully expects that deal will now fall through. That person in the burbs is apparently getting zero interest in their townhouse. At best they will be forced to accept a low-ball offer and stretch themselves even further, if that is possible, to buy the East Side condo. It is either that or give up the $35,000.”

“And let’s not forget the background to this: a real estate industry that for more than a decade under the provincial Liberals had been self-regulating, that allowed a number of unscrupulous agents and agencies to profit mightily by ’shadow flipping,’ that regularly failed to report foreign purchases by concealing the buyers’ country of origin and that failed to report money transfers to the federal body monitoring money laundering.”

“Meanwhile the provincial oversight agency for the industry was being strangled by vacancies in their ranks by government caps on salaries. That point was made by the province’s auditor general Carol Bellringer at the same time Clark was announcing her new tax. Bellringer said: ‘It’s like having a smoke detector in your house, but not buying the batteries.’”

“It is a point B.C.’s Superintendent of Real Estate Carolyn Rogers said she had been making for the past three years. But then there was no election on the horizon.”

There May Be A Blowout Looming

A report from the Corn and Soybean Digest. “One critical aspect of this economic downturn in agriculture is the possibility of increased risk with larger farms. The financial plight of many larger producers is not measured by acreage or livestock numbers, but by farm net income. My good friends at University of Minnesota’s Center for Farm Financial Management provide excellent analysis of their FINBIN database. The main concern for lenders and regulators is the concentration of debt with fewer producers. Data suggests that 10 to 12 percent of U.S. farms and ranches carry 63 percent of farm debt, which has increased dramatically in recent years. Many of the larger farms have significant equity in the form of farmland. However, even strong equity does not change the fact that only profits and cash flow pay the bills, not dirt.”

“According to FINBIN data on 2015 net farm income of larger operations, both crop and livestock, there may be a possible blowout looming. In the database, all farms with more than $2 Million in gross revenue generated a median net farm income of just over $126,000. The top 20 percent of farms generated slightly over $579,000. However, the median net farm income for the lower 20 percent was $-332,000. Losses of this size are unfortunately, sometimes an ugly reality of larger operations.”

The Farmers Exchange. “Grain farmers and agriculture businessmen and women gathered last Wednesday for the annual Pinney Purdue Field Day at the Pinney Purdue Agricultural Center in Wanatah. More than 150 individuals attended the event to listen to educators and specialists about corn, soybeans and other topics that farmers are dealing with. Jason Henderson, associate dean and director of Purdue Extension, gave his answer to the question, ‘Will the cash crunch in agriculture turn into a farm bust?’”

“In discussing this, he referred to the tough times that agriculture and farmers dealt with during the 1970s and 1980s, and that many farmers today are feeling some of the same rhythms from that time. ‘We are on the downturn now, we’re filling the cash crunch, but will this turn into a bust? In my opinion, I think the answer is no. I don’t think the farm economy is going to go bust if agriculture remembers the biggest lesson of the 1980s: Don’t leverage the farm,’ said Henderson.”

From “With $3 corn and $9 soybeans, it’s easy to see why farmland values are declining. But don’t take our word for it. There are scads of reports from industry experts. In the Washington County, David Klein, managing broker and auctioneer with Illinois-based Soy Capital Services says farmers bought most of the tracts. This continues to be the case in most sales, although we’re seeing more investor action in some of the sales we’ve tracked. ‘People are trying to make the case that outside investors are propping up land values,’ says Steve Nicholson, analyst with Rabobank Financial. ‘However, farmers are still buying the majority of the land. Are there outside investors? Yes. But it’s not the majority.’”

“Farmers are facing tougher times for the foreseeable future. ‘The majority of the farmer-buyers are using some form of leverage, and we are watching that closely,’ Klein says. ‘Farmland will not cash-flow when you borrow too much money. We like to get three quarters of the purchase price as a down payment, either with cash or pledging more farmland.’ The mid-year survey conducted by the Illinois Society of Professional Farm Managers and Rural Appraisers, released September 1, suggests that 80% of the farmland sales conducted in that state so far in 2016 featured some sort of borrowing.”

“For farmers, financial stress is setting in. ‘Farmers are illiquid. They need cash to pay the bills. We’ve seen some farmers sell land to generate cash, and we expect we may see some more of that this fall,’ Nicholson says. If raising cash is necessary, this strategy makes some sense. ‘Would you rather sell 600 acres now and right the ship a bit, or wait two to three years down the road and lose the whole business?’ Nicholson asks. ‘I’m trying to get folks to think a bit differently.’”

The Des Moines Register. “Getting started in farming has always been difficult, but the recent collapse in corn and soybean prices makes it that much harder, experts say. Corn and soybean prices are as much as 60 percent below their peaks in 2012. It’s an important issue in Iowa, an ag powerhouse. The state had about 132,000 farmers in 2012, 4,500 fewer than five years earlier, mirroring declines in the number of farms, based on the 2012 U.S. Agriculture Census. They’re also getting older, with the average age of farmers climbing nearly five years to 57 over 15 years.”

“‘In this environment, it’s tough to be a beginning farmer or an experienced farmer when production costs exceed revenue,’ said Steve Bruere, president of the Peoples Co., a farm management and real estate brokerage in Clive. ‘It’s tough for everybody.’”

From Radio Iowa. “Rex Wilcox, a farm management specialist with Stalcup Ag in Storm Lake, says after three years of losses, operators need cash rent concessions to shrink operating costs. Income has been falling, he says, while input costs remained steady. ‘Farm operators are in a position financially where they’re looking for the rents to come down,’ Wilcox says. ‘In some cases, their loan officers are putting pressure on them to have the rents come down. The cash flow is just not there anymore and they have to have some break on the rental rates.’”

“Wilcox says some landowners have been adjusting rents downward the last few years with lower commodity prices. However, with a bumper crop expected and corn prices very low, they may need to lower rents again for the year ahead.”

“‘We’ve seen some decreases of around 10% since 2013,’ Wilcox says. ‘So, 2014 was 10% less than 2013 and 2015 was 10% less than 2014 and it might take that kind of decrease to make things work again.’ Many multi-year leases will expire this year, which may mean some ground will see new renters. He’s also hearing about some operators trying to break long-term arrangements.”

“‘I think you’re going to see more terminations of farm leases by operators this year than we’ve seen in a long time,’ Wilcox says. ‘That’s the indication I’m getting from talking with attorneys. They say they’re doing a lot of business with farm operators that are coming in and asking to produce a termination to send to their landowner.’”

From Beef Magazine. “A new report from Rabobank says farmland rent values must drop to meet lower commodity prices and it’s highly probably all land values will fall, too. ‘If rental costs remain sticky at unsustainable levels through the 2017-18 growing period, individual land assets face the threat of much deeper devaluation, as nutrient and crop protection programs are cut and abandonment (usage changes) increases,’ says Sterling Liddell, Rabobank Food & Agribusiness Research and Advisory service analyst.”

“Even with a decline in rental values, farmland acreage contraction will still likely be needed before commodity prices reach a sustainable level in the long term, Rabobank analysts say. This should mean a return to grass and forage crops. To balance supply and demand at a sustainable breakeven price, Rabobank analysts estimate that 3-5 million acres will be forced out of corn, soybean and wheat production over the next three years. This is about a 2% decline from the five-year average of total farmland.”

From Bloomberg. “Total farm debt in Canada, the world’s largest canola grower and one of the biggest wheat exporters, will rise at a slower pace in 2017 as gains cool for the value of agricultural land. Canadian farmers took on more debt in the past 15 years as low interest rates prompted them to buy more land as incomes soared. Between 2001 and 2015, farm debt jumped by 126 percent and the value of farmland rose by 211 percent, according to the report. Now, cooling gains for land, which accounts for about two-thirds of farm assets, may make growers more hesitant in taking on loans, especially amid a prolonged slump for commodity prices.”

“Land values are ‘clearly coming down, and that is going to have an impact on farm debt,’ J.P. Gervais, the chief agricultural economist at Farm Credit Canada, said in a conference call before the report’s release.”