Hall and Hall

by: Jim Taylor

Some years ago, Hall and Hall coined the term “investment quality rural real estate” (IQRRE) and defined it in a previous newsletter article. We have believed in it as an investment class asset for many years. Farmland has been accepted for a very long time, but ranchland and retreat-type properties have tended to be considered more “lifestyle” purchases than investments. If there is a major trend that we can identify right now, it is that the market is beginning to recognize that this entire class of real estate deserves to be considered an investment class asset.

This change in thinking has been driven by a number of factors. The first one is that people watched entire blue chip companies disappear and become valueless in the debacle of 2008. Without the major intrusion of the government it was pretty obvious to anyone close to the situation that many more highly regarded companies would have gone down the same path.  Visible investors like Ted Turner who converted a portion of his net worth to ranchland looked pretty smart compared to stock market investors. He still looks smart today despite the ups and downs of our real estate market over the period.

The second factor is that the bar for cash return on investment has been dramatically lowered. When a government guaranteed short term investment yields close to zero, the very modest returns for an operating farm or ranch begin to look pretty good, and of course those returns have actually improved dramatically with commodity prices going up. Even a retreat type property that only has psychic returns and enormous appreciation potential because of its uniqueness becomes an acceptable investment asset – particularly if one can acquire it at a discounted purchase price.

O’Dell Farms is a 2,417± acre farm being offered at auction in 23 tracts and combinations just NE of Kansas City on Wednesday, June 19th, 2013, 10:00 A.M. CST.

This brings me to a short discussion of the market for 2012 as we saw it. We think that our focus on investment quality rural real estate and in particular upon those qualities that make our listings investment class has worked to our benefit. Last year was another record year for us with our transaction volume approaching $400 million for the first time driven by our auction sales and a resurgence in the market for retreat properties. The underlying theme in virtually every transaction was investment quality and value.

IQRRE comes in three basic flavors: roughly defined as farms, ranches and rural retreats. We will review the market for each.

Farms – The upward trend in prices continued even though there are more people warning that we are near a peak. A few savvy investors have chosen to lighten up their allocation to this class. As with all classes, the imminent loss of the 15% capital gains tax rate drove some year-end deals.

Ranches – The figures are not all in because of the year end capital gains driven rush, but it seems that operating ranches were in increasing demand and prices continued to move up. Again it appears that capital gain considerations drove some year-end sales that might have come in at slightly lower levels than one would have expected. Even so this segment of the market is strong and, if higher cattle price trends continue, the lack of supply of ranches for sale will likely put upward pressure on land prices in this market niche.

Rural Retreats – This is the area of the market that took the biggest hit when the world, as we knew it, changed in 2008. Last year was marked by a renewed interest in this asset class for the first time in 4 years. We think the bottom was finally defined over this past year. With an enormous inventory available buyers were looking for value. Many were looking for quality homes that were included for substantially less than their replacement cost, and they were looking for places that had some potential to actually earn some income.

Winding Stair Ranch, being one of Oklahoma’s largest contiguous ranches consisting of 44,688± acres, is located in the southeastern quadrant of the state.

In closing, this was another year where very large transactions were once again the norm, but there were also lots of smaller transactions which is what pushed us over the top for another record year in sales volume. There continue to be pockets of wealth from Wall Street to Silicon Valley to the Oil Patch – to use some figurative terms – that are looking for a safe home. We also believe that, as savvy U.S. investors have recognized the role of investment quality rural real estate as a legitimate investment class, so too will the rest of the world, and there are certainly some significant pockets of wealth building up there as well.