Beware of Over-Capitalization of Farm Land

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April 9, 2020
  • As a professional Valuer for many years I have frequently encountered unhappy farm owners, because the money they have “invested” in structural improvements are not fully reflected in the market value of our reports.
  • On the other hand one should respect the fact that it is logical to deem money spent on improvements to contribute towards increasing the market value, but on the other hand one has to understand that not all improvements contribute towards the main use of a farm.
  • What is important is to understand market value is determined by the perceived contribution, in the mind of the potential buyer, the features of a farm makes towards the main purpose of the farm.
  • State of the art horse stables, built at very high costs on a 300ha citrus farm will have very little impact on the value of the farm if the potential core of buyers are mostly interested in the quality of the orchards and the allocated water rights.
  • Farm buyers consider the agricultural potential of the farm and will have very little consideration for aspects such as tennis courts, built in saunas, gymnasiums and indoor swimming pools.

My conclusion is; if you consider structural improvements on your farm, with the view of improving market value, make sure it is something that has a direct impact on the productivity of the operations. Any improvements not directly related to the main agricultural activities could be considered irretrievable expenses.

Deon Van Onselen

Professional Valuer – Spectrum Valuations & Asset Solutions