Difference between prices not necessarily profit

A Canterbury farm bought for $5 million 14 years ago sold for $65 million last week.

Ealing Pastures was purchased in 2000 by a farm partnership made up of former South Canterbury Finance boss Alan Hubbard, Perth-based investment company Pullington and New Zealand-based couple Andrew and Rachel Morris. . .

          Today’s sale is a whopping 1300 percent profit. The farm had an estimated value of $60 million. . .

The difference between the purchase price and the price the property sold for is $60 million but that is very unlikely to be all profit.

The property was a Landcorp finishing farm might when it was bought and millions of dollars would have been spent in the conversion to dairying and other improvements.

It is probable the sale realised a considerable profit but it would not have been the $60 million difference between the purchase and selling prices.

10 Responses to Difference between prices not necessarily profit

  1. petermsalmon says:

    The on going failure of media and others to understand what constitutes ‘profit’ is extremely concerning, especially in an instance such as this. This ‘news’ may have caused many claimants on Hubbard’s monies to assume their chances of recovery had improved, when that may well not be the case.

    Other instances include politicians and others, including media, ‘confusing’ revenue with margin. There is, as well, the error made in assuming margin is profit as well.

    I am afraid that I have come to the conclusion that much of this ‘confusion’ is wilful and deliberate, rather than just ignorant.

    Like

  2. Dave Kennedy says:

    I accept the fact that the investment into the property after the initial purchase needs to be taken into account as well other costs. Ele would you or any who comment here be able to further a rough guess on the what the actual return at the end would be? $40 million?

    Also what tax would be paid on the final profit?

    I am genuine in my questions as I am aware that farm prices have increased in a similar way to our residential property and am also looking at the impact of overseas investment. It is becoming clear that nonresident investors have probably had a large part in the high cost of property in Auckland and I am aware that one of the largest owners of farms in Southland are German investors.
    http://www.radionz.co.nz/news/national/78965/german-company-to-buy-sixth-southland-farm
    http://www.radionz.co.nz/news/rural/92603/german-buy-up-of-southland-dairy-farms-continues
    The Crafar farms were sold to Chinese investors and Solid Energy are likely to sell off their Southland farms to the highest bidder (most likely foreign). This is excluding many New Zealand residents from owning a farm.

    Like

  3. Paranormal says:

    DK any guesses at the ‘profit’ would be just stabs in the dark.

    Amongst a range of cost factors you would need to know what infrastructure was added to the property, which would be far more than just chucking on a milking shed. On top of that you would also need to understand how much operating capital the previous owners may have had to inject in years when operational costs exceeded revenue.

    Like

  4. Dave Kennedy says:

    Paranormal, I am not entirely stupid and realize that up to $5 million may need to be spent to convert a sizable farm. This would include the conversion costs (including shed, lanes and water systems etc), purchase of cows and the purchase of Fonterra shares. If a wintering shed was included it would add around another $2 million. This makes $11 million when the purchasing price is added. At the point of sale there is also tax on depreciable assets and maybe other costs as well. It looks to me as if around $40 million profit (conservative?) may have resulted in the end.

    We have become an attractive country for overseas investors as we are largely tax free (most attractive of all OECD nations): we have no capital gains tax on most investments, no inheritance tax, relatively minor (in comparison) property rates to local authorities, no payroll tax, no social security tax, no health care tax and ACC is considered a minor tax. Income and company tax is lower than many others (including Australia).

    We have few restrictions on nonresident investors in property and our property prices are growing at a rate well above inflation.

    Our current account deficit is huge compared to many countries because we borrow so much from overseas banks and much of it is so we can buy property at inflated prices.

    It worries me that by allowing nonresident buyers to purchase farms and houses we are actually encouraging inflated growth of property values and shutting ordinary New Zealanders out of the markets. Even if the yearly percentage of foreign sales is around 5%, when this occurs year upon year, we are seeing a creeping but steady growth in the percentage of foreign ownership.

    I am happy to have any of my facts challenged or errors exposed as this issue is a genuine concern for me and I would like to have my facts right.

    Like

  5. Paranormal says:

    DK: Yet again you have missed the point, is that deliberate? Are you trying to disprove your statement?

    The capital required for conversion is only part of the equation, and we can’t accurately quantify that as you are only guessing at what was needed.

    The other part of the equation is how may years they needed to inject working capital to support operational costs that were not met from revenue, particularly during the development years. Again we can only speculate what that might have been.

    The important thing to note is those that purchased the property now can see returns in coming years, from what has been invested to date, that will provide a return on their investment.

    Like

  6. homepaddock says:

    Another big cost would have been interest.

    I’m not against a capital gains tax in theory if it was comprehensive and replaced other taxes. Policies on a CTG aren’t comprehensive and are on top of other taxes.

    But CGT in other countries hasn’t made it any easier for people to buy property. On the contrary, it is one of the reasons that so little farm land is sold in Argentina. People hang on to farms and lease them out as a better investment than selling and losing too much in tax.

    Like

  7. Dave Kennedy says:

    Paranormal, I think we are talking across each other, it probably doesn’t really matter what the end profit actually was but there was obviously a solid financial gain. My point is really about how attractive our properties are for overseas, nonresident investors. This is not a racist issue but one about the impact it has on values and for local buyers. Whether they be German or Chinese, they have helped inflate our land and house prices beyond reach of ordinary new Zealanders. Either we limit sales to residents only or introduce an effective capital gains tax that most other countries have. Being the 3rd easiest in the world for doing business in and having the lowest tax for overseas investors is not really a good thing for government revenue, nor for establishing realistic property values.

    http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10801917

    http://www.radionz.co.nz/national/programmes/morningreport/audio/2523400/shanghai-pengxin-is-making-farms-'unaffordable'-says-iwi

    Like

  8. Dave Kennedy says:

    Ele, I think the CGT is actually necessary and I agree that how that is managed needs to be properly worked through. It is about achieving the right balance to make things worthwhile for investors and not over inflating demand. We definitely need to shift investment into other areas of our economy.

    Like

  9. Gravedodger says:

    Dave I am not as informed as I once was but your values ignore Interest and the rest would be on the very light side.
    Current Heard value would be around $7 000 000, shares a similar value, conversion costs then? .

    The under bidder already owned 50%.
    The operators @ 25% wanted to buy Hubbard’s 25% share and that went to court,

    Yes a $60 million profit looks attractive but I would suggest adding in a risk factor not much of that $60 m reached any of the vendors bank accounts as clear profit and even any notional CGT would be bugger all to boot.

    Mr Real estate and the Lawyers would be the most rewarded, and rest assured they will pay eye watering taxes on their windfalls.

    Like

  10. Dave Kennedy says:

    GD, the tax element is interesting and I don’t think our tax on capital gain is very eye watering at all, but happy for you to prove me wrong if you have useful links. Everyone appears to be focusing on the level of profit from the sale in the initial post, but my real interest is in the influence of nonresident investors and the overly attractive terms for buying property rather than investing elsewhere in our economy.

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: