VITICULTURE PROPERTY MARKET REVIEW - Colliers …...Colliers International Rural & Agribusiness Viticulture Land Values Review: Marlborough 2018 Sector overview Marlborough region

VITICULTURE PROPERTY

MARKET REVIEW

MarlboroughDECEMBER 2018

Accelerating success.

CRIGHTON ANDERSON PROPERTY & INFRASTRUCTURE LTD.

t/a COLLIERS INTERNATIONAL | RURAL & AGRIBUSINESS VALUATION

DECEMBER 2018

Colliers International

Viticulture Property Market ReviewMarlborough

SECTOR OVERVIEW page 4

MARLBOROUGH REGION page 6

NEW ZEALAND WINE MARKETS page 8

MARLBOROUGH MODEL VINEYARD page 13

RETURNS AND VALUES page 16

VITICULTURE MARKET OVERVIEW page 21

SALES EVIDENCE page 22

SALES MAP page 24 FUTURE OUTLOOK page 27

NZ wine markets Marlborough model vineyard

Colliers International Rural & Agribusiness | Viticulture Land Values Review: Marlborough 2018

Marlborough regionSector overview Sales evidenceReturns and values Future outlookSales map

Hawke’s Bay 4,681 ha total producing area 12% of total viticulture land in New Zealand Chardonnay is the main variety 41,061 tonnes total harvested in 2018 10% of total harvest 22% change in tonnes harvested y/y

Gisborne1,274 ha total producing area 3% of total viticulture land in New Zealand Chardonnay is the main variety 13,000 tonnes total harvested in 2018 3 % of total harvest -20% change in tonnes harvested y/y

Marlborough26,007 ha total producing area 68% of total viticulture land in New Zealand Sauvignon Blanc main variety 296,573 tonnes harvested in 2018 77% of total harvest 4% change in tonnes harvested y/y

Central Otago1,904 ha total producing area 5% of total viticulture land in New Zealand Pinot Noir is the main variety 11,358 tonnes total harvested in 2018 3% of total harvest 36% change in tonnes harvested y/y

North Island7,359 ha total producing area 19% of total viticulture land in New Zealand 2% change in planted area y/y Chardonnay is the main variety 59,554 tonnes total harvested in 2018 15% of total harvest 8% change in tonnes harvested y/y

South Island30,610 ha total producing area 81% of total viticulture land in New Zealand 3% change in planted area y/y Sauvignon Blanc is the main variety 344,843 tonnes total harvested in 2018 85% of total harvest 5% change in tonnes harvested y/y

New Zealand37,969 ha total producing area 3% change in planted area y/y Sauvignon Blanc is the main variety 419,000 tonnes total harvested in 2018 6% change in tonnes harvested y/y

Together, the two main wine regions in New Zealand, Marlborough and Hawke’s Bay, make up 80% of the total of New Zealand producing vineyard area (ha), up from 73% share in 2009.

Over the past 10 years, the total vineyard area in New Zealand has grown from 31,964ha to 37,967ha or 18.8% increase.

Recent surveys by the Ministry of Primary Industries show a potential 20% or approximately 5,000 ha increase in Marlborough’s vineyard area in the next 5 years, increasing production levels beyond 2020 when these areas will mature and drive further export growth.

We have seen strong growth in the wine industry over the last five – six years on the back of increased processing capacity within wineries, stronger demand

from export markets and a lift in the contract grape price paid to growers.

This has resulted in strong increases in vineyard values, which have now plateaued somewhat in the past six months. Annual wine export revenue now exceeds $1.6 billion and grape plantings predicted in coming years reflect ongoing industry confidence.

Figures from New Zealand Winegrowers show 419,000 tonnes of grapes were harvested nationally during vintage 2018. This is 6% up on 2017 and near the record 436,000 tonne harvested in 2016.

Annual wine export revenue now exceeds $1.6 billion and grape plantings predicted in coming years reflect ongoing industry confidence,

Wine Industry Overview

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Source: Colliers International Rural Valuation, Wine NZ, Statistics NZ




The total area of vineyards in the Marlborough region is 26,007 hectares or 68.5% of the national producing area. The average vineyard size in the region has grown to 24.9 hectares with the main varieties grown including Sauvignon Blanc (88%), Chardonnay (5%), and Pinot Gris (5%). Predictions are for the local planted area to increase to 26,693 hectares by 2020.

We have seen continued strength in the Marlborough viticulture market with a number of large scale transactions throughout the district and high investor interest.

2018 HARVESTA warm and dry first half led to rapid early vine development. Great conditions during flowering ensured an excellent fruit set in most vineyards which mitigated widely reported lower bunch numbers.

This strong growth in the early stages contributed to delayed ripening. Many growers invested in shoot, bunch and mechanical thinning to moderate crops to winery yield caps after struggling to ripen large crops in the 2017 vintage.

Harvest conditions were challenging after few rains in critical stages that increased the instances of fungal disease.

This year’s crop had higher brix levels. The Awatere valley growers in the model vineyard achieved an average Sauvignon Blanc brix of 21.7 compared with 20.8 for the Wairau valley growers.

The lower part of the Awatere valley received some 30 mm less rain at the crucial event of the 22-24 March and many blocks consistently have smaller canopies due to soil type and higher wind run. These proved to be advantages in the 2018 vintage as there was such excessive growth on the fertile soils which slowed ripening.

Production yields were 12.7 tonnes per hectare across all varieties and 14 t/ha for Sauvignon Blanc in particular. This is 4% down on 2017 but still higher than the 10-year average.

The New Zealand Winegrowers (NZW) Vintage Survey reported that the total 2018 Marlborough production was around 313 000 tonnes which is 4% up compared with 2017. The Marlborough Sauvignon Blanc total is at 269 400 tonnes – 2% up on last year.

The increase in volume, is largely influenced by the additional 1,553 hectares of Sauvignon Blanc in the vintage survey coming into production with first and second year crops.

NEW INVESTMENT

One of the restrictions on growth is the tightening of the rules of foreign investment in ‘sensitive’ land as outlined in the 2017 announcement of the Overseas Investment Office (OIO).

The sector has been going through a period of consolidation and expansion by larger wine companies and now 17 companies (2% of total number of wine companies in Marlborough) account for 68% of total exports.

This is up from 49% in 2011 and demonstrates the growth of these companies post the Global Financial Crisis (GFC) adjustment period.

The new OIO rules are likely to pose restrictions the multi-national companies that have led the charge on greenfield development post the Global Financial Crisis (GFC) adjustment period. This means other domestic sources of capital will be required to fund new development, succession, productivity improvements, marketing and other investment activity.

For this capital to be raised (for both in development and operating costs), returns for growers need to be attractive enough to encourage investment in the Marlborough viticulture assets.

VINEYARD INCOMES

By global standards Marlborough represents a relatively small growing area, but there is still large variation in both cash and capital returns within the region.

The range depends on factors such as yield history and potential, disease pressures, climatic and soil variations due to locality, irrigation, varietal and clonal mix, age and quality of infrastructure, and reputational attributes of fruit qualities.

Vineyard net cash income is 5% down on 2017 and this season averages at $24,690 per hectare.

The reduction in profit is 14% and is mainly due to decrease in net cash income (because to lower yield) and increased operating expenses.

Contributing to the cost pressures are more spraying and canopy management to control powdery mildew, mealy bug and botrytis. Growers targeting consistency in high yields have also increased fertiliser applications to maintain nutritional inputs. In terms of the total return on capital this has averaged 12.3% per annum post-2012 for a Marlborough vineyard. Of this, 5.6% has been the average cash return and 6.7% - the capital return from increased vineyard values.

Labour typically accounts for 50-55% of a vineyard’s cost structure and sourcing quality labour or contractors has become more of a challenge. For this reason, trends towards mechanisation in vineyard tasks such as harvesting and pruning will continue.

The fall in NZD is positive, but it has largely centred on the NZD/USD so far. Additionally, it seems to be give and take with the marketplace on the currency gains/losses most of the time.

Better revenue outcomes of both higher grape prices and average yields (i.e. productivity improvements through canopy and disease management) will be required to underpin any further increases in vineyard values.

Marlborough region

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Vineyard value increases throughout the first part of 2018 but stabilised in the past six months

Challenging harvest conditions

Good growing conditions

Yields per hactare are down on 2017 but still above 10-year average

Rising operational costs

Lower volume of vineyard sales

Net cash income down




Domestic Market

The domestic market accounted for around a fifth of total supply in 2017. This makes it an important market and particularly so for smaller wineries, which are more reliant on cellar door sales and tourism activities.

This is highlighted by wineries with less than $1.5 million in turnover deriving 54% of their revenue from local market sales.

By all accounts the domestic market has remained fairly stable in recent years, with consumption ranging 90-95 million litres, or 20-21 litres per capita.

Imported product has accounted for anywhere from 35% to 45% of total consumption with Australia the main competition in the reds space.

CONSUMER PREFERENCESAn influential consumer trend is forming around health and wellness awareness, which is leading to more low-alcohol wines and smaller servings.

Legislative changes lowering the alcohol limit for driving has also supported a similar trend in New Zealand bars and restaurants.

These trends, alongside a more knowledgeable consumer, are driving an increase of domestic product sales at the premium end as consumers ‘trade up’.

TOURISMThe other driver is tourism with spending increasing by 50% since June 2014 and 22% of the visiting international tourists are including a winery on their tour down under.

All of these trends are likely to present opportunities for wine businesses of all sizes, but particularly so for smaller producers with a premium and domestic market focus.

These producers generally have lower proportions of export revenue, but also higher price points with better revenue per litre ratios.

Wine Exports

UNITED KINGDOMIn terms of volume growth, the UK lead the way increasing 27% y/y (year on year) to nearly 75 million litres. A big part of this involved bulk wine exports, which lifted 48% y/y to account for nearly 50% of total UK exports. This is likely to have been a deliberate strategy from larger wine companies to minimise the financial impacts of a higher NZD/GBP caused by the Brexit vote, to overcome capacity issues due to the large vintage and earthquake damage, as well as to keep supply chain costs low.

NORTH AMERICAOverall, the standout market remained North America, where total export earnings cracked the $600+ million mark for the first time. Export volumes grew 17% y/y and in-market returns remained stable despite this outstanding growth.

A strong US economy and wine companies marketing investments in recent years are both providing tailwinds. Yet there is scope for more growth from consumers looking for sophisticated foods and beverages, a new generation of younger consumers coming through as well as a trend towards ‘premiumisation’.

Health concerns around the amount of alcohol being consumed are having an impact too. However, many consumers appear to have opted for a ‘quality over quantity’ attitude. All of these trends suit New Zealand’s existing market positioning; however, wineries have also indicated that they see growth opportunities from existing products in new markets.

AUSTRALIA

Rounding out the ‘big three’ is Australia, which despite reaching a more mature stage in recent years, saw volume growth of 13% y/y in 2017. Interestingly most of the growth was driven by a 25% y/y increase in packaged wine exports, whereas bulk wine exports dropped 2% y/y.

Australia was the only major market where bulk wine exports declined in 2017. However, the price outcome (-21% y/y on per litre basis) and stronger NZD completely cancelled out the effect of better packaged sale volumes with total revenue down -2% y/y. There was some salvation with the constrained

bulk export volumes seeing NZD prices lift 25% y/y helping support overall returns. While the retail channel continues to dominate in Australia, times are changing with increased penetration through online channels. Online wine retailers are increasingly stocking premium, niche and independent wine labels that are not available from the major retailers. The major growth is in the AUD10-25/bottle price segment (or NZD15-37/l). Consumers are also attracted by online wine clubs, offering members better deals and the chance to be a part of wine events, creating an immersive wine experience.

OTHER MARKETSThe growth in exports (+15% y/y in volume) to other international markets didn’t quite keep pace with the ‘big three’ in 2017. However, the picture over a 10-year horizon is far more favourable with higher volume growth and better returns helping to compensate for the extra costs associated with market development and distribution. Looking over a 10-year period shows these other markets have grown at 17% per annum compared with the ‘big three’ at 14% per annum. Perhaps even more compelling is the average local returns have been $9.4/l over this period, which was 34% higher than the ‘big three’.

EXPORT FORECASTWine exports are forecast to reach close to $1.9 billion by 2021 as new grape plantings in coming years bear fruit. These plantings reflect the expanding offshore demand for our wines. This is slightly more conservative than the previous forecasts and reflects trade uncertainty in the US and the EU, where protectionist sentiment may affect demand for imported wine.

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NEW ZEALAND WINE SALES 2017Average price per litre

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COMBINED VALUE OF NEW ZEALAND WINE MARKETS

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TOTAL VALUE OF NEW ZEALAND WINE EXPORTS(in millions)

United States

31%of New Zealand total wine exports

2.3% market share

Canada 8% of total exports

2.5% market share

THE REST OF THE WORLD 6%

Germany 1%

UK 23% of total exports

6% market share

Ireland 2%

Top export destinations for New Zealand wine

Netherlands 3%

6.2% annual growth between 2010-2018

total value of exports in 2018

1.6 billion

Singapore 1%

China 2% of total exports

0.1% market share

Japan 1%

Australia 22% of total exports

9.8% market share

Sweden 2%

Denmark 1%

Data source: Colliers International, Statistics NZ, PWC

Hong Kong 1%

Asia0.6% market share

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WORKING TOGETHER TO DELIVER THE MARKET INFORMATION YOU NEED

New Zealand Wine in collaboration with the Ministry for Primary Industries (MPI) produce a Viticulture Model Vineyard Benchmarking Report, which is compiled from the results of data collected from interviews with contract grape growers and winery operated businesses.

Since 2012, Tim Gifford of Colliers International’s Rural & Agribusiness team has provided a market value assessment of the model vineyard in order to analyse value changes and return on capital.

Marlborough Model Vineyard Overview

The Marlborough model remains at 30 producing hectares and for 2018 data was sourced from 47 vineyards. 12 vineyards are located in the Awatere Valley and 35 vineyards in the Wairau Valley.

There are 33 contract growers and 14 winery operated vineyards in the survey group.

14 of the vineyards are 0-10 hectares, 4 are 10-20 hectares, 17 are 20-50 hectares, and 12 are 50 hectares or larger.

Sauvignon Blanc is the dominant grape variety in the model representing 77% of the producing area, followed by Pinot Noir, Chardonnay, Pinot Gris and Riesling. Four vineyards are Bio-Gro certified.

The model vineyard assumes a central Wairau location with an average size modern dwelling, implement shed / workshop and other vineyard improvements. The vineyard details are represented as follows:

PLANTING SCHEDULE The Marlborough vineyard model plantings are summarised as follows:

Variety Block Code Age Area

Sauvignon Blanc A 2006 23 ha

Pinot Noir B 2006 3 ha

Chardonnay - Men-doza & Clone 15 C 2006 1.5 ha

Chardonnay - all other clones D 2006 0.5 ha

Riesling E 2006 0.5 ha

Pinot Gris F 2006 1.5 ha

Total 30 ha

Plantings are assumed to include phylloxera resistant rootstock with a mix of clones selected to suit the characteristics of each block.

Sauvignion Blanc23.00 ha

Chardonay2.00 ha

Pinot Gris1.50 ha

Pinot Noir3.00 ha

Riesling0.50 ha

PRODUCTION: 2015-2018

We have been provided with the past four years’ production records for the Marlborough model vineyard as presented in the benchmarking report.

Variety Area 2015 tonnes

2015tonnes/ha

2016 tonnes

2016 tonnes/ha

2017 tonnes

2017 tonnes/ha

2018 tonnes

2018 tonnes/ha

Sauvignon Blanc 23.00 269 11.70 380 16.52 358 15.60 322 14.00Chardonnay - Mendoza & Clone 15

3.00 13 4.33 16 5.33 14 9.20 20 6.70

Pinot Gris 1.50 15 10.00 18 12.00 17 11.50 17 4.60Chardonnay - all other clones

0.50 6 12.00 7 14.00 5 9.60 14 9.30

Riesling 0.50 5 10.00 6 12.00 4 7.30 4 9.00

Pinot Noir 1.50 16 10.67 26 17.33 21 7.00 5 9.20

Grand Total 324.00 10.80 452.00 15.10 419.00 14.00 382 12.70

The pruning method used is a mix of three and four cane vertical shoot positioning (VSP) style.

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Variety District AverageYield t/ha

Adopted Average Yield t/ha

Sauvignon Blanc 10 – 16 14

Chardonnay - Mendoza & Clone 15 8 - 10 9

Pinot Gris 10 - 12 10

Chardonnay - all other clones 10 - 12 12

Riesling 8 - 12 10

Pinot Noir 6 - 12 10 Yield information

KEY DCF ASSUMPTIONS We have prepared a 10 year cash flow projection for the model vineyard in which we have assumed that the property is sold at the start of the eleventh year of the cash flow. The cash flow has been prepared on an annual basis and is based upon the following assumptions:

• Inflation considerations are based on the New Zealand Reserve Bank consumer price index (CPI) data, which since 2000 has averaged around 2.7%. This compares with averages of 2.4% in the 1990s, and averages of over 11% for the previous two decades. Since September 2002, the inflation target has been to keep inflation within a range of 1-3% on average over the medium-term.

• Production levels are based on district averages for each variety and adjusted for individual property attributes such as soils, climate, planting and management considerations. We have estimated the production levels under assumed average efficient management using long term average data. Actual production levels can vary significantly due to climatic and management influences from season to season. Given the assumed location and production history of the model vineyard we have adopted yield estimates towards the top end of the district average as set out in the following table:

DISCOUNTED CASH FLOW (DCF) APPROACH TO VALUATION

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• Grape prices are based on projections from historically received prices and increased by predicted CPI for the term of the cash flow. It is reasonable to conclude that grape prices may rise or fall at greater levels than those adopted. However, given we are in an active trading period coming off a low base price, we regard CPI to be a reasonably sound basis for cash flow purposes. The table below indicates historical grape prices and the price adopted for the varieties included in our DCF:

Variety 2006-15 ($/t)

2011-15 ($/t)

2015 ($/t)

2016 ($/t)

2018 ($/t)

Budget 2019

Sauvignon Blanc $1,765 $1,490 $1,710 $1,805 $1,845 $1,865

Pinot Noir $3,030 $2,980 $3,220 $3,085 $3,245 $3,255

Pinot Gris $1,815 $1,780 $1,830 $1,885 $1,945 $1,960

Chardonnay - Mendoza & Clone 15

$1,955 $1,950 $2,200 $2,130 $2,375 $2,345

Chardonnay - all other clones

$1,785 $1,715 $1,830 $2,000 $1,915 $1,955

Riesling $1,705 $1,620 $1,785 $1,775 $1,840 $1,830

Weighted Average $1,830 $1,605 $1,810 $1,900 $1,930 $1,960

Summary of Grape Prices

• Total operating expenses for a corporate style vineyard of the subject’s scale would typically fall in a range of $10,000 to $11,000 per hectare dependent on the pruning and harvesting methods and spray / weed management requirements. We have adopted an average rate of $10,500 per hectare for the model vineyard. Operating expenses have also been escalated at CPI for the cash flow period. This allowance does not make provision for significant irrigation capital expenses to the property, hand picking or major infrastructure upgrades.

• The terminal value has been estimated by escalating the assessed market value by forecast CPI. In the absence of any alternative methods of assessment we believe this is likely to be the most appropriate and, perhaps, conservative approach for the subject property given that we have recently been through the bottom of a market cycle.

DCF OUTCOMES Based on the above income and expenditure assumptions, forecast net income has been modelled for the 10-year cash flow period. The graph below summarises the estimated returns generated on a net income basis:

The application of DCF analysis allows a forward looking approach to valuation, rather than relying solely on market comparison with historical sales evidence. We use it to compare the potential returns from a particular vineyard and the price paid in the market. This approach also allows for comparison of vineyard values from differing localities for variation in yields and grape price using financial modelling.

We have tested the assessed capital value of the Marlborough model vineyard derived from the primary method of valuation (direct comparison and summation) through the use of DCF analysis. The DCF approach involves the discounting of the net cash flows predicted to be generated by the vineyard, together with an assumed purchase at commencement and sale on conclusion, to assess the likely return of the investment.

The cash flows are discounted on an annual basis over the assumed cash flow period at an appropriate rate

to reflect the risk of and, therefore required rate of return of the project. The net cash flow comprises the purchase price (outflow), cash inflows (grape sales) less the cash outflows (operating expenses) over the forecast period, with the addition of the terminal value (inflow) in the final cash flow period.

The projected income stream reflects the anticipated growth, or otherwise, inherent in a property investment based upon the physical, tenancy or market characteristics related to that property. The future values quoted for property, income and operational expenses are projections only formed on the basis of information currently available to us and are not representations of what the returns of the property will be as at a future date. This information includes the current expectations as to property values and income that may not prove to be accurate.

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Returns and Valuation Implications

MARLBOROUGH MODEL VINEYARD: FINANCIAL RETURNS

We have used the Marlborough model vineyard monitoring results as comparison for financial returns within the region. The key parameters for the Marlborough model vineyard are summarised in the table below together with the implications on asset values.

For the purpose of the assessed land and vineyard value we assume a well located central Wairau location for the assessed value rates.

Marlborough V2013 V2014 V2015 V2016 V2017 V2018

Producing planted area 30 ha 30 ha 30 ha 30 ha 30 ha 30 ha

Total yield (t) 365 t 439 t 324 t 452 t 419 t 382 t

Average return ($/t) $1,720 $1,730 $1,810 $1,900 $1,840 $1,930

Net cash income ($) $625,800 $763,000 $587,300 $868,800 $781,700 $740,700

Vineyard working expenses ($) $237,600 $289,300 $291,600 $313,300 $323,100 $334,000

Profit before tax ($/ha) $9,800 $11,277 $6,107 $14,823 $11,600 $10,000

Land value ($/ha) $85,000 $85,000 $95,000 $105,000 $120,000

Vineyard value $175,333 $188,000 $218,000 $232,000 $254,000

Summary of key viticulture sector statistics Source: NZ Wine, MPI, Viticulture Model Vineyard Benchmarking Report Marlborough 2018 and Colliers International Rural & Agribusiness

Vineyard profit before tax has decreased from 2016 and 2017 to $10,000 per hectare because of slightly lower production and increased working expenses.

The average fruit price has again been affected by a challenging growing season, particularly with heavy rain prior to harvest resulting in some case in reduces quality, which impacted on growers returns.

Working expenses were higher again this year at $11,135 per hectare, with labour increases, crop manipulation and increased costs of mowing, trimming and disease pressure were cited as having a significant impact on working expenses in Marlborough.

The increased carryover of powdery mildew inoculums between seasons requires many vineyards to shorten the spray interval to prevent economic losses. This issue is likely to continue in the coming seasons.

The graph below plots the analysed land and vineyard value per hectare from sales throughout Marlborough over the past 5 years. The steady increase in vineyard values can be seen, in line with the price paid for Sauvignon Blanc fruit which has also increased over this period from a low point in 2010 post Global Financial Crisis.

The application of DCF analysis allows a forward looking approach to valuation, rather than relying solely on market comparison with historical sales evidence. We use it to compare the potential returns from a particular vineyard and the price paid in the market.

This approach also allows for comparison of vineyard values from differing localities for variation in yields, variety and grape price using financial modelling.

We have examined the assessed capital value of the Marlborough model vineyard through the use of DCF analysis. The DCF approach involves the discounting of the net cash flows predicted to be generated by the vineyard, together with an assumed purchase at commencement and sale on conclusion, to assess the likely return of the investment.

The cash flows are discounted on an annual basis over the assumed cash flow period at an appropriate rate to reflect the risk of and, therefore required rate of return of the project. The net cash flow comprises the purchase price (outflow), cash inflows (grape sales) less the cash outflows (operating expenses) over the forecast period, with the addition of the terminal value (inflow) in the final cash flow period.

The projected income stream reflects the anticipated growth, or otherwise, inherent in a property investment based upon the physical, tenancy or market characteristics related to that property. The future values quoted for property, income and operational expenses are projections only formed on the basis of information currently available to us and are not representations of what the returns of the property will

be as at a future date.

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ANALYSED VINEYARD VALUE PER PLANTED HA - MARLBOROUGH

Marlborough Average Grape Price - Sauvignon Blanc Vineyard Sales / Planted ha

Model Vineyard Value Linear (Vineyard Sales / Planted ha)

Source: Colliers International Rural & Agribusiness Valuation & Advisory

Source: Colliers International, MPI , New Zealand Wine

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MODEL VINEYARD PROFIT PER HA

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MODEL VINEYARD VALUE: IN POSITIVE TERRITORY UP 9% ON 2017

The assessed value of the vineyard equates to $7,610,000 and reflects the following:

Parameters Assessment 2018Internal rate of return 8.12%

Price ratio (Adopted value : gross revenue in year one) 9.91

Direct comparison across net planted area only $253,667 per hectare

Direct comparison across the entire property area $227,164 per hectare

DCF results

Parameters 2016 2017 2018

IRR 9.72% 8.67% 8.12%

Price ratio 8.88 9.07 9.91

Direct comparison across net planted area only $218,000 $232,000 $253,667

Direct comparison across net planted area only $195,224 $208,000 $227,164

Assessed total value of the model vineyard 6,540,000 6,690,000 7,610,000↑↑ ↑

MODEL VINEYARD VALUE: 2016-2018

We have compared the Internal rate of return (IRR) with our analysis of similar vineyard sales. The graph below demonstrates the range of IRR that have been calculated from vineyard sales. The vineyard internal rate of return (IRR) has continued a downward trend with a decrease of approximately 2% over the past five years from around 10.5% in 2013 to 8.12% in 2018. This downward trend is influenced by the high demand for vineyards and subsequent increase in vineyard value, which have

increased at a greater rate than the vineyard operating returns.

Since 2012, the average grower returns in Marlborough have increased by around 40% with lifts to the average fruit price and favourable growing conditions. Vineyard operating expenses have risen over this time at an equal pace. Increased labour, crop management and spraying costs have seen per hectare net returns dependent on crop levels throughout recent years.

Marlborough Model Vineyard:key performance indicators

EXPORT MARKETS AND TRENDS

Its provenance story, combined with best practice canopy management, world class winemaking and sustainability efforts continue to see Marlborough wine,positioned as a high quality, proprietary branded wine in major established markets.

Another emerging trend that is in play is “the less is more” approach to consuming alcohol and the rising preference for lower alcohol and low-calorie wines.

We also observe a growing uncertainty currently affecting global trade. The Brexit deal will complicate trade negotiations along the way as well.

Source: Colliers International Rural Valuation


0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

ANALYSED SALE INTERNAL RATE OF REUTRN

IRR Expon. (IRR)

Source: Colliers International Rural & Agribusiness Valuation & Advisory

Analysed Sale Internal Rate of Return


1918

Profit before tax$10,000 /ha

14%→

Income$24,690 /ha

5%

→

Working expenses$11,135 /ha

3%→

Productionaverage yield

12.7 tonnes/ha

9%

→

ProductionSauvignon Blanc yield

14.0 tonnes/ha

10%

→

Contract priceSauvignon Blanc

$1,825 /tonne

4%→

Model vineyard value ↑ 9 %




Rapaura & Lower Wairau$250,000 - $300,000 vineyard value per ha

Wairau & Southern Valleys$175,000 - $250,000 vineyard land value per ha

Awatere & Upper Wairau$125,000 - $185,000 vineyard land value per ha

Marlborough has long been recognised as the centre for wine production in New Zealand.

With over 26,000 hectares of planted vineyards and a limited amount of land remaining for future expansion, the regions vineyards have continued their trend of increasing value during 2018.

There are estimates of only 5,000-6,000 hectares of suitable land left for vineyard development and water is over allocated in many of Marlborough’s sub-catchments.

This means the sector may need to rely on other regions and varietals for further growth.

The volume of vineyard sales in Marlborough has decreased over the past year to around 14, compared to around 25 in previous years, but still well above of previous lows in 2008-2011.

The number of transactions is often a good indication of market sentiment, and indicates there maybe a disparity between vendor and purchasers price expectations in the market at present.

Our analysis shows that values appear to have stabilised throughout the second half of the year with

extended sales periods for smaller and higher valued vineyards. Premiums are still being paid for strategic purchases in prime locations.

Two large scale vineyard sales of note have occurred - the Altimarloch and St Lukes vineyards. They are both located in the Awatere Valley, where investment returns are seen to be slightly more favourable at present.

Both properties sold to New Zealand buyers and demonstrate that despite restrictions on overseas investors, there remains a market for large scale horticultural assets suitable for vineyard development and New Zealand based buyers are active in the market.

Currently we are seeing vineyards in the prime Lower Wairau and Rapaura locations are selling at between $250,000 - $300,000 per planted hectare. Blocks in the central Wairau with good production at between $175,000 - $250,000 per hectare and vineyards in the Awatere and upper Wairau are achieving sale prices between $125,000 and $185,000 per hectare.

Vineyard market overview

2120

Source: Colliers International Rural Valuation, Core Logic

0

5

10

15

20

25

30

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

MARLBOROUGH NUMBER OF SALES 2004-2018NUMBER OF VINEYARD SALES – MARLBOROUGH 2004-2018




ADDRESS LOCALITY SALE DATE SALE PRICEAREA in

HA

PLANTED

AREANSP/HA

VINEYARD /

Planted haIRR

92 Cable Station Road Awatere Nov 2018 $2,400,000 50.29 ha 10.85 ha $47,721 $146,083 7.04%

85 Bedford Road Renwick Jun 2018 $8,875,000 60.07 ha 30.78 ha $147,740 $231,870 5.46%

160 Jones Road Rapaura Mar 2018 $7,525,000 26.31 ha 25.70 ha $286,013 $261,766 11.18%

57 Selmes Road Rapaura Mar 2018 $3,300,000 9.47 ha 7.60 ha $348,454 $294,343 8.48%

Mahers Road Kaituna Valley Feb 2018 $2,950,000 13.84 ha 12.60 ha $213,127 $219,853 9.98%

191 Jones Road Lower Wairau Feb 2018 $2,365,000 9.47 ha 7.50 ha $249,847 $279,625 10.65%

84 Higgins Road Awatere Dec 2017 $4,576,640 35.07 ha 21.00 ha $130,500 $168,486 7.22%

671 New Renwick Road Fairhall Dec 2017 $2,400,000 8.00 ha 6.10 ha $300,000 $232,869 6.65%

74 Fareham Lane Renwick Dec 2017 $5,000,000 24.00 ha 20.70 ha $208,333 $193,150 8.88%

112 Vickerman Street Grovetown Nov 2017 $2,990,000 8..84 ha 6.75 ha $338,251 $292,381 8.24%

2216 Awatere Valley Rd Awatere Valley Nov 2017 $31,500,000 319.67 ha 194.14 ha $98,539 $150,205 10.29%

877 Waihopai Valley Road Waihopai Valley Nov 2017 $5,500,000 38.99 ha 25.16 ha $141,062 $175,271 10.72%

5824 State Highway 1 Seddon Oct 2017 $19,000,000 365.79 ha 130.00 ha $134,038 $125,615 9.11%

Key sales in the past 12 months


Marlborough Viticulture Sales Evidence

2322

ADDRESS DETAILS

92 Cable Station Road, Awatere

Developed vineyard with approximately 10.85 hectares of plantings with scope for further development holding 25 Blind River Irrigation shares with onsite storage dam. Four bedroom modern dwelling plus garaging and other sheds.

85 Belford Road, Renwick Seresin Estate vineyard located on Bedford Rd, near Renwick. An organic vineyard with high density plantings developed mainly in the mid 1990s with Sauvignon Blanc, Chardonnay, Semillon, Pinot Gris, Pinot Meunier and Pinot Noir varieties. Older vines with low production and likely redevelopment with further plantable areas that could be planted in vines. Winery sold separately.

160 Jones Road, Rapaura Situated at the end of Jones Road Grovetown this 10.4 ha property sold in conjunction with the adjoining 15.9 ha on what appears to be one sale apportioned.

57 Selmes Rd, Rapaura

A 9.4704-hectare lifestyle property located on Selmes Road in the highly regarded Rapaura location. Improvements on the property include a superior size very well-appointed dwelling and garage, along with a 7.6-hectare vineyard planted in 2015/16 in Sauvignon Blanc vines. The property has attractive landscaping and supporting implement shed. The land is of flat contour and has water rights for irrigation. Overall a well-presented property.

ADDRESS DETAILS

Mahers Rd, Kaituna

A mature Sauvignon Blanc vineyard located at Kaituna. No buildings with improvements limited to single frost fan. A mid-tier productive block which sold well.

191 Jones Rd, Grovetown A contracted Sauvignon Blanc vineyard on heavy productive ground in the Lower Wairau area. No buildings or other improvements.

84 Higgins Rd, Seddon

A medium-scale vineyard located on Higgins Road on the southern side of the Awatere Valley in Marlborough. The block comprises an area of 35.0700 hectares with approximately 21 hectares planted in Sauvignon Blanc and Pinot Noir variety grapes. The remaining area comprises headlands, steep terrace faces, lower terrace flats and non plantable land. Buildings on the property include a well-appointed modern four-bedroom dwelling, pool house, implement shed and cottage / sleepout. The house surrounds are very well developed with a high level of landscaping and site development. Overall an appealing and productive vineyard property.

671 New Renwick Road, Fairhall

A lifestyle and vineyard property featuring a very well-appointed residence set amongst mature and well-developed grounds in the Fairhall locality. 6.1 hectares of vineyard including Sauvignon Blanc and Chardonnay plantings.

74 Fareham Lane, Renwick

A 24.0000-hectare vineyard and lifestyle property located on Fareham Lane, west of Renwick in the Wairau Valley and is held in three titles. Buildings on the property include a modern two level, four-bedroom dwelling with double garage, studio building previously used as wine tasting, three bay implement shed and large workshop / staff quarters. The land is of flat to gently undulating in contour with approximately 20.7 hectares planted in Sauvignon Blanc (9.6 ha), Pinot Noir (6.3 ha), Chardonnay (3.2 ha), Gruner Veltliner (1.0 ha), Riesling (0.3 ha) and Gewurztraminer (0.3 ha). Sold to a MyFarm syndication with lease to local wine company in place.

112 Vickerman Street, Grovetown

A very well-located property being a short distance from town includes approximately 6.75 hectares of Sauvignon Blanc vines along with modern dwelling, garage and outbuildings. Very well-presented property located at Grovetown on heavy productive soils with low climatic risk.

2216 Awatere Valley Road Altimarloch Vineyard located in the Awatere Valley with a total planted area of 194 hectares in predominantly Sauvignon Blanc with a small area (4.68 hectares) of Pinot Gris. Approximately 14 hectares of potentially plantable land and the remainder steeper terrace faces and non-utilised land. Sold to NZ Super Fund.

877 Wahopai Valley Road, Waihopai Valley

Ants Nest vineyard located in the Waihopai Valley occupying an upper terrace of undulating contour. 25.26 hectares planted in 2004 comprising 24.5 hectares Sauvignon Blanc, 1.6 hectares Riesling and 1.6 hectares of Pinot Gris. Superior size two level five bedroom dwelling built in 2000 plus freestanding double garage.

5824 State Highway 1, Seddon

St Lukes Vineyard located at Blind River / Tetley Brook near Seddon. 130 hectares of vineyard development on a mix of flat and easy undulating contoured land. Blind River Irrigation Scheme water with storage dams. A large-scale vineyard which sold to a local wine company.

COLLIERS INTERNATIONAL VITICULTURE MARKET DATA SERIES

COLLIERS INTERNATIONAL RURAL & AGRIBUSINESS | VALUATION SERVICES

Data source: Colliers International Rural Valuation, Property Guru, REINZ

KEYTotal area in hectaresPlanted area in hectares

NSP Net Sale Price

$/haNet sale price per hectare

Analysed vineyard value per planted hectare

Tim Gifford+64 27 460 0371 [email protected]

57 SELMES ROAD PAPARUAMar‘18 $3,300,000

ha 9.47 ha

7.60 ha

$/ha $348,454

$294,343

IRR 8.48%

MAHERS ROAD KAITUNA VALLEYFeb‘18 $2,950,000

ha 13.84 ha

12.60 ha

$/ha $213,127

$219,853

IRR 9.98%

191 JONES ROAD LOWER WAIRAUFeb‘18 $2,365,000

ha 9.47 ha

7.50 ha

$/ha $249,847

$279,625

IRR 10.65%

84 HIGGINS ROAD AWATEREDec‘17 $4,576,640

ha 35.07 ha

21.00 ha

$/ha $130,500

$168,486

IRR 7.22%

671 NEW RENWICK RD FAIRHALLDec‘17 $2,400,000

ha 8.00 ha

6.10 ha

$/ha $300,000

$232,869

IRR 6.65%

74 FAREHAM LANE RENWICKDec‘17 $5,000,000

ha 24.00 ha

20.70 ha

$/ha $208,333

$193,150

IRR 8.88%

92 CABLE STATION RD AWATERENov‘18 $2,400,000

ha 50.29 ha

10.85 ha

$/ha $47,721

$146,083

IRR 7.04%

160 JONES ROAD RENWICKMar‘18 $7,525,000

ha 26.31 ha

25.70 ha

$/ha $286,013

$261,766

IRR 11.18%

877 WAIHOPAI VALLEY ROAD, LOWER WAIRAUNov‘18 $5,500,000

ha 38.99 ha

25.16 ha

$/ha $141,062

$175,271

IRR 10.72%

2216 AWATERE VALLEY ROAD, AWATERENov‘17 $31,500,000

ha 319.67 ha

194.00 ha

$/ha $98,539

$150,205

IRR 10.29%

85 BEDFORD ROAD RENWICKJun‘18 $8,875,000

ha 60.07 ha

30.78 ha

$/ha $147,740

$231,870

IRR 5.46%

112 VICKERMAN STREET GROVETOWNNov‘17 $2,990,000

ha 8.84 ha

6.75 ha

$/ha $338,251

$292,381

IRR 8.24%

http://colliers.co.nz

mailto:Greg.Petersen%40colliers.com?subject=

https://www.linkedin.com/in/tim-gifford-889a2345/




We are anticipating grape prices to remain at similar levels for the coming vintage, and depending on climatic conditions, volumes are expected to be up around 6% based on new plantings coming into production and long-term average yield estimates.

The underlying industry confidence remains strong with strong grower and winery relationships at present.

At the same time, there are several issues the industry continues to face including labour shortages, increased operating expenses, climate change, biosecurity and succession. Disease, pest and weed control continues to increase in both importance and expense.

A number of growers are concerned that prices are remaining static, yet costs are going up reducing profitability and leaving increasing yield as the only way to maintain or improve returns. Increased yield can only be achieved if within winery limits.

This affects grower morale, also partly due to going through a second wet and difficult vintage in a row as well as static prices and increased costs.

Another upward pressure to vineyard operation costs is the increase of minimum wage and the subsequent flow on effects to other better paid staff wanting increases as well.

The recent lift in vineyard prices we’ve experienced was triggered by larger wineries looking to secure supply for their marketing programmes. This has now started to erode cash returns to a less comfortable level once again. This could be of some concern if costs are to increase without any upward movement in grape prices, and/or vineyard productivity. LEASING

Leasing will continue to be a good option for land owners as provides ongoing return without carrying additional risk and they can still bank on capital appreciation later on. Leasing is increasingly part of succession planning for many vineyards owners in the region.

Due to strong increases in vineyard values, rental levels (which are usually based on a percentage of underlying capital value), have reached a point where it may not be economically viable to operate the vineyard from the lessee (usually a wine company)

perspective. This may create issues for future rent review negotiations, particularly in higher valued localities.

WINE SALES

New Zealand Wine Growers report that markets in the United States and Canada continue to grow but the Australian market is down slightly. With a total 2018 vintage production of 419 000 tonnes, against the pre-season vintage survey anticipating 450 000 tonnes, it is expected that some wineries will be short of wine against potential sales.

Marlborough Sauvignon Blanc will continue its efforts to maintain and grow its premium positioning in international markets, avoiding commoditisation and limiting bulk sales.

WATER Marlborough District Council’s Marlborough Environment Plan which includes future water allocation was notified on 9th June 2016 and was closed for submissions on 23rd June 2017. For new and renewed water resource consents, monthly limits using Aqualinc’s IRRICALC calculation tool have now been imposed which some growers are concerned about and have put in opposing submissions. Hearings for water allocation and use are scheduled for December 2018.

We are noticing increased investment in water storage and irrigation efficiency to improve water security on existing vineyards.

LAND DEVELOPMENT

There has been a resurgence of greenfield vineyard developments over recent years with expansion into areas previously deemed unsuitable for vines due to climatic risk.

There are a number of further bare land blocks which have sold or have been earmarked for vineyard expansion and will be development over the next couple of years. This expansion demonstrates the confidence within the industry but also presents risk of oversupply if not carefully managed.

The limited supply of suitable land, water and capital restrictions, will limit long term expansion within the region, and the sector may look to other growing locations and varietals for future growth.

Outlook

2726

About the author

Tim GiffordDirector

+64 27 460 0371 [email protected]

Tim has over 15 years property valuation experience and is based in our Blenheim office. Tim offers excellent technical skills and market knowledge, together with a sound appreciation of both private and public sector imperatives.

Tim’s client work has a focus on viticulture, high country tenure review valuations, pastoral valuations, specialised asset valuations and compensation for various infrastructure projects nationwide.

Over the past years Tim has completed numerous valuations of vineyards for financing, sale and purchase due diligence and rental negotiations. Tim is frequently engaged to provide valuation advice for financial reporting as well.

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+64 21199 4599 [email protected]

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VITICULTURE PROPERTY MARKET REVIEW - Colliers …...Colliers International Rural & Agribusiness Viticulture Land Values Review: Marlborough 2018 Sector overview Marlborough region