Pastoral Lease Rent Rises Reflect Land Market

4 May 2007

Pastoral Lease Rent Rises Reflect Land Market Movements

Land Information New Zealand (LINZ) has notified new and revised rents for 65 of 260 Crown pastoral leases in the South Island high country.

As well as reflecting land market movements during the previous 11 year rental period, rents now also reflect amenity values - which include inherent and locational values and natural characteristics - if present on a property.

Rents are set by the Land Act at 2.25% (2% if paid on time) of the value of the land excluding improvements. The rents are reviewed every 11 years on a rolling basis.

The rent increases notified this week vary from property to property, LINZ spokesman Brian Usherwood said today. The 65 leases range in area from 744 hectares to 31,800 hectares and are located between Marlborough and Southland.

The average annual rent for all 260 pastoral leases is currently $0.95 per hectare. The average rent for the 65 leases being notified will be $6.47 per hectare. The average rent will increase by $31,511 a year, from an average of $5125 per lease to $36,636 per lease.

Capital values (land value plus improvements) of the 65 leases range from $240,000 to $10.6 million and the average capital value is $3.4 million.

"Land values in New Zealand have appreciated considerably in the last 11 years. Quotable Value figures for this period show that values for farmland have increased by over 300%. Land values in the South Island high country have appreciated even more because of the premium the market places on amenity values such as location, landscapes and views, and the pressure on land for development," Mr Usherwood said.

Twenty-four of the notifications are 11-yearly rent review notices due to take effect from 1 July 2007, while 41 notifications are revaluations of earlier notified rents which lessees have asked to have set by the Land Valuation Tribunal.

The 24 rent review notices were due to be notified in September 2006, but were postponed to allow consultation on the implications of the government's preliminary response to the High Country Pastoral Leases Review.*

Given the delay to notification, the Commissioner of Crown Lands has decided the new rents will not take effect until 1 February 2008, or nine months from now.

The government's preliminary response outlined that the Land Act requires amenity values to be included when leasehold land is valued. In the past some rental valuations included amenity values and others didn't and a consistent approach was required.

Mr Usherwood said the government had stated it did not want to make rents unaffordable. The government has consulted with leaseholders on ways to achieve outcomes that are fair and reasonable for both parties and durable. LINZ is currently preparing a report on these issues.

Also LINZ and lessee representatives have agreed that judicial determination could be sought to resolve the issue of correct rental valuations through the LVT.

If a lessee disagrees with a rent notice, they can elect to ask the Land Valuation Tribunal to set the rent.

*The Preliminary Government Response to the Report of the High Country Pastoral Leases Review was released in October 2006. For more information go to: http://www.linz.govt.nz/home/news/items/20061310-valuation-review/index.html

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Questions and Answers - Release of Pastoral Lease Rent Reviews

What is a pastoral lease?

The Crown owns approximately 2 million hectares of South Island high country land, located from Marlborough to Southland, which is leased or (in a few cases) licensed for pastoral farming. Pastoral leases were established under the Land Act 1948 (Land Act), although land in the South Island high country has been licensed or leased since the 1850s.

Much of the high country land is environmentally sensitive (i.e. prone to soil erosion, pest incursion and natural fire spread). The Land Act was drafted with the intent of giving leaseholders an incentive to manage environmental values in an appropriate manner (i.e. to act as stewards of the land).

The Land Act granted leaseholders secure rights to the land, namely perpetual right of renewal and exclusive occupation of the land, and the right to use the land for a limited purpose, namely pastoral farming. Of the 304 leases that existed before tenure review began under the Crown Pastoral Land Act 1998, there are 260 remaining. Fifteen of these leases are in the final stages of tenure review.
How often are pastoral lease rents reviewed and how are rents set?
Rents are reviewed every 11 years on a rolling cycle. Rents change to reflect changing land values over the 11 year period. Leaseholders pay an annual rent which is set at 2.25% (2% if paid promptly) of the land value exclusive of improvements (LEI).

What is the LEI?

LEI is the value of the underlying, unimproved land. The value of "improvements" includes visible improvements to a property such as houses, other buildings and structures like fences, tracks, bridges as well as less visible improvements that improve the fertility and productivity of the land such as scrub clearing, grass sowing and fertiliser application. Combining the LEI value and the value of improvements provides the capital value of a property, i.e. the price a property would be expected to sell for if put on the open market.

Who reviews pastoral lease rents?

The Commissioner of Crown Lands (the Commissioner) is required by law to ascertain the value of a lease for rental purposes. The Commissioner engages registered valuers to undertake the valuation work which involves physically visiting the property and assessing the value of the improvements and the LEI to assess the current market value of the lease. Once the valuation has been provided to the Commissioner, the rent is set based on the formula set out in the Land Act of 2.25% of the LEI value.

How does this latest rent review differ from previous reviews?

The Preliminary Government Response (Response) to the Report of the High Country Pastoral Leases Review (Review) released in October 2006 noted that section 131 of the Land Act requires amenity values to be taken into account in rental calculations, as part of the value of the LEI.

As a result, new 11 year rents for 24 properties have been calculated to take into account amenity values (factors such as location, landscapes and views, and natural characteristics).

What about cases already before the Land Valuation Tribunal (LVT)?

In the case of 41 previously notified rent notifications currently before the Land Valuation Tribunal (LVT), rental values have been reassessed to include amenity values (see next question on role of the LVT). This revaluation has occurred because many of the original valuations undertaken for these rental assessments did not fully take amenity values into account. The revaluation exercise has provided evidence of past inconsistency in valuation practice. The Commissioner intends to introduce these revaluations as new evidence to the LVT.

What right of appeal do leaseholders have? What is the role of the LVT?

When a lessee receives a rental notification, the lessee can accept the notification and pay the rent, or elect, pursuant to section 132 of the Land Act, to require the rental value to be fixed by the LVT.

Land valuation tribunals are constituted in accordance with section 19 of the Land Valuation Proceedings Act 1948. Each tribunal consists of a chairperson, who is a District Court Judge, and two registered valuers. The LVT is a specialist tribunal that deals with matters arising from a number of Acts, including matters to do with land valuations and title.

Is the government looking into rental affordability?

Following consultation on the Response to the Review, Land Information New Zealand (LINZ) officials were directed to report back to Cabinet on a policy approach for addressing rental affordability issues. This report is currently being prepared.

Is the government committed to high country farming?

The government is committed to high country farming that is environmentally sustainable and economically viable, and values its contribution to the New Zealand economy and South Island rural communities.

The government has stated that it does not intend to make high country pastoral rents unaffordable. The government has consulted with lessees on ways to achieve outcomes that are fair and reasonable for both the Crown and lessees and durable.

Will the Crown insist on the 24 lessees paying big rent increases from 1 July 2007, when they have been given only two months notice of them?

No. As lessees normally have nine months notice of rent reviews, the Commissioner has decided that the 24 new rents will not take effect until 1 February 2008.

The rents for these 24 leases are being set for the 11 year period from 1 July 2007. These rents were due to be notified to lessees last September.

It was agreed with lessee representatives that the notifications should be delayed until after submissions had been received on the implications of the Response to the Review.

Lessees have three months to elect to have the rental values set by the LVT.

Does a lessee have to pay rent at the new rate while their case is before the LVT?

No. During the period in which an application is before the LVT, lessees are only obliged to pay rent at the previous rate. If the LVT determines in favour of the Crown, lessees will have often had a considerable period to prepare for the new rent, though they will have to pay any back rent fixed by the LVT.

Will a judicial determination be sought on the approach to rental valuations?

There is disagreement between the lessees and the government over whether the law says amenity values should be included in rental valuations. There is an understanding between LINZ and lessee representatives that the issue of the correct approach to rental valuation will be resolved by judicial determination through the LVT.

The Minister for Land Information, David Parker, has given lessees a public assurance that the government would not legislate to overule the outcome of a judicial determination, and has confirmed that the government will abide by the decision of the courts.

How much have property prices risen in the past 11 years?

The following table is based on statistical information supplied by Quotable Value (QV).

Average Property Prices: 1995-2006 / 1995 / 2006 / % increase
House prices / $ 152,779.00 / $ 349,060.00 / 228%
Section prices / $ 58,146.00 / $ 186,748.00 / 321%
Fattening farmland / $ 953,245.00 / $ 3,109,622.00 / 326%
Grazing farmland / $ 809,327.00 / $ 3,242,631.00 / 401%
Total farmland / $ 756,917.00 / $ 2,430,683.00 / 321%

Comment: QV statistics do not specifically record South Island high country properties as a separate item. However, values for these properties have appreciated even more over the past 11 years because of the value that the market places on amenity values.

Facts and figures:

- Across the 65 leases, the average rent will increase by $31,511 per year, from an average of $5125 per lease to $36,636 per lease. This reflects increases in property values over the previous 11 years. (The range of rent increases is from $4012 to $134,925 per lease.)

- The average rent per hectare per year for all 260 Crown pastoral leases in the South Island high country, as at 19 February 2007, is $0.95c. The average new rent per hectare per year for the 65 leases, taking amenity values fully into account, would be $6.47. (The range is from $1.87/ha to $19.66/ha per year.)

- Capital values (i.e. land value exclusive of improvements plus the value of improvements) of the 65 leases range from $240,000 to $10,630,000. The average capital value is $3,413,169.

ENDS

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