How does a third-party lease (or part lease) affect the value of your property? - Will McLay

Will McLay (Director - RQ, AAPI - Certified Practising Valuer) -  Heron Todd White,

To get his take on third party leases over rural properties and their effect on the value of your property. Heron Todd White Website

Will McLay, Heron Todd White:

It’s very specific to the individual property and the terms of the lease agreement. Ultimately it is important that the income from the lease is enough to offset a reduction in market value created by the existence of the infrastructure and associated activities. Some agreements offer larger payments upfront; others extend the income stream across the life of the project. Income might also be linked to the performance of the project (ie how much the wind blows or sun shines). If the project’s footprint is small and the income received well exceeds your primary production activities, there might be a positive impact to the property's market value. The opposite could also apply.

Is there a type of lease structure that you would recommend for third party leases?

Generally, an ongoing income stream for the life of the project would be better than taking a 'front loaded' payment. Ongoing income from the project would support the property's value and market appeal (assuming the 'rent' is at market). There also needs to be an indexation mechanism within the lease agreement. Consider also, there’s some risk that over the term of the 20 or so year lease this mechanism may not maintain relativity with the value of the asset. For example, CPI averaged 2.7% P.A. between 2000 and 2022 while the Queensland rural land index grew at a rate of 9% P.A. over the same period.

Is the sale price of a property affected by a third-party lease over the land?

There aren’t many recorded sales of rural land sold with renewable leases in place. It’s likely this market will become more defined in the short term with the expansion of the renewable industries. One market example is Dubbo Station (Darling Point NSW) which sold in 2021 it was a 14,875ha rural property with a 593ha solar farm development and the lease was for 35 years. If you break down the sale, there was a discount rate applicable to the income stream (in isolation to the property value) that was around 9%. That’s broadly in line with regional commercial investments with a comparable risk profile at the time.