VITICULTURE PROPERTY MARKET REVIEW

Marlborough DECEMBER 2018

Accelerating success. Colliers International Viticulture Property Market Review Marlborough

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

CRIGHTON ANDERSON PROPERTY & INFRASTRUCTURE LTD. t/a COLLIERS INTERNATIONAL | RURAL & AGRIBUSINESS VALUATION

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

Sector overview Marlborough region NZ wine markets Marlborough model vineyard Returns and values Sales evidence Sales map Future outlook

Hawke’s Bay Wine Industry Overview 4,681 ha total producing area 12% of total viticulture land in New Zealand Together, the two main wine regions in New Zealand, from export markets and a lift in the contract grape Chardonnay is the main variety Marlborough and Hawke’s Bay, make up 80% of the price paid to growers. 41,061 tonnes total harvested in 2018 10% of total harvest total of New Zealand producing vineyard area (ha), up This has resulted in strong increases in vineyard 22% change in tonnes harvested y/y from 73% share in 2009. values, which have now plateaued somewhat in the Over the past 10 years, the total vineyard area in past six months. Annual wine export revenue now Gisborne New Zealand has grown from 31,964ha to 37,967ha or exceeds $1.6 billion and grape plantings predicted in 1,274 ha total producing area 18.8% increase. coming years reflect ongoing industry confidence. 3% of total viticulture land in New Zealand Chardonnay is the main variety Recent surveys by the Ministry of Primary Industries Figures from New Zealand Winegrowers show 13,000 tonnes total harvested in 2018 show a potential 20% or approximately 5,000 ha 419,000 tonnes of grapes were harvested nationally 3 % of total harvest increase in Marlborough’s vineyard area in the next during vintage 2018. This is 6% up on 2017 and near -20% change in tonnes harvested y/y 5 years, increasing production levels beyond 2020 the record 436,000 tonne harvested in 2016. when these areas will mature and drive further export growth. Annual wine export revenue now exceeds $1.6 billion Marlborough and grape plantings predicted in coming years reflect We have seen strong growth in the wine industry ongoing industry confidence, 26,007 ha total producing area 68% of total viticulture land in New Zealand over the last five – six years on the back of increased Sauvignon Blanc main variety processing capacity within wineries, stronger demand 296,573 tonnes harvested in 2018 77% of total harvest 4% change in tonnes harvested y/y VOLUME OF GRAPES HARVESTED: 2018 CHANGE 2017 % year on year Central Otago 40% 396,000 1,904 ha total producing area 5% of total viticulture land in New Zealand 30% tonnes crushed Pinot Noir is the main variety 20% 11,358 tonnes total harvested in 2018 3% of total harvest 10% 2018 36% change in tonnes harvested y/y 0% 419,000 -10% South Island North Island New Zealand tonnes cushed -20% 30,610 ha total producing area 7,359 ha total producing area 37,969 ha total producing area 81% of total viticulture land in New Zealand 19% of total viticulture land in New Zealand 3% change in planted area y/y -30% 3% change in planted area y/y 2% change in planted area y/y Sauvignon Blanc is the main variety Sauvignon Blanc is the main variety Chardonnay is the main variety 419,000 tonnes total harvested in 2018 344,843 tonnes total harvested in 2018 59,554 tonnes total harvested in 2018 6% change in tonnes harvested y/y ↑ 6% 85% of total harvest 15% of total harvest 5% change in tonnes harvested y/y 8% change in tonnes harvested y/y

PRODUCING AREA BY REGION 2018 IN HA PRODUCING AREA BY VARIETY 2018 IN HA 10 YEAR OVERVIEW 2017 500,000 39,000 30000 25000 450,000 38,000 36,943 ha 25000 20000 400,000 37,000 20000 36,000 15000 350,000 total producing area 15000 35,000 10000 300,000 10000 34,000 250,000 5000 33,000 5000 200,000 32,000 2018 0 0 150,000 31,000 100,000 30,000 37,969 ha 50,000 29,000 0 28,000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 total producing area

Source: Colliers International Rural Valuation, Wine NZ, Statistics NZ tonees crushed producing area

4 5 Colliers International Rural & Agribusiness | Viticulture Land Values Review: Marlborough 2018

Sector overview Marlborough region NZ wine markets Marlborough model vineyard Returns and values Sales evidence Sales map Future outlook

Marlborough region

The total area of vineyards in the Marlborough region The increase in volume, is largely influenced by the Contributing to the cost pressures are more spraying is 26,007 hectares or 68.5% of the national producing additional 1,553 hectares of Sauvignon Blanc in the and canopy management to control powdery mildew,

area. The average vineyard size in the region has vintage survey coming into production with first and mealy bug and botrytis. Growers targeting consistency grown to 24.9 hectares with the main varieties grown second year crops. in high yields have also increased fertiliser applications including Sauvignon Blanc (88%), Chardonnay (5%), to maintain nutritional inputs. In terms of the total and Pinot Gris (5%). Predictions are for the local NEW INVESTMENT return on capital this has averaged 12.3% per annum planted area to increase to 26,693 hectares by 2020. post-2012 for a Marlborough vineyard. Of this, 5.6% One of the restrictions on growth is the tightening of has been the average cash return and 6.7% - the We have seen continued strength in the Marlborough the rules of foreign investment in ‘sensitive’ land as capital return from increased vineyard values. viticulture market with a number of large scale outlined in the 2017 announcement of the Overseas transactions throughout the district and high investor Investment Office (OIO). Labour typically accounts for 50-55% of a vineyard’s interest. cost structure and sourcing quality labour or The sector has been going through a period of contractors has become more of a challenge. For this consolidation and expansion by larger wine companies reason, trends towards mechanisation in vineyard tasks 2018 HARVEST and now 17 companies (2% of total number of wine such as harvesting and pruning will continue. A warm and dry first half led to rapid early vine companies in Marlborough) account for 68% of total development. Great conditions during flowering ensured exports. The fall in NZD is positive, but it has largely centred on an excellent fruit set in most vineyards which mitigated the NZD/USD so far. Additionally, it seems to be give widely reported lower bunch numbers. This is up from 49% in 2011 and demonstrates the and take with the marketplace on the currency gains/ growth of these companies post the Global Financial losses most of the time. This strong growth in the early stages contributed Crisis (GFC) adjustment period. to delayed ripening. Many growers invested in shoot, Better revenue outcomes of both higher grape prices bunch and mechanical thinning to moderate crops to The new OIO rules are likely to pose restrictions the and average yields (i.e. productivity improvements winery yield caps after struggling to ripen large crops in multi-national companies that have led the charge on through canopy and disease management) will be the 2017 vintage. greenfield development post the Global Financial Crisis required to underpin any further increases in vineyard (GFC) adjustment period. This means other domestic values. Harvest conditions were challenging after few rains in sources of capital will be required to fund new critical stages that increased the instances of fungal development, succession, productivity improvements, disease. marketing and other investment activity.

This year’s crop had higher brix levels. The Awatere For this capital to be raised (for both in development valley growers in the model vineyard achieved an and operating costs), returns for growers need to average Sauvignon Blanc brix of 21.7 compared with be attractive enough to encourage investment in the 20.8 for the Wairau valley growers. Marlborough viticulture assets. The lower part of the Awatere valley received some 30 mm less rain at the crucial event of the 22-24 March VINEYARD INCOMES and many blocks consistently have smaller canopies By global standards Marlborough represents a relatively Good growing Challenging Yields per due to soil type and higher wind run. These proved to Vineyard value small growing area, but there is still large variation in conditions harvest hactare are be advantages in the 2018 vintage as there was such increases both cash and capital returns within the region. conditions down on 2017 throughout excessive growth on the fertile soils which slowed but still above ripening. the first part The range depends on factors such as yield history and 10-year average of 2018 but potential, disease pressures, climatic and soil variations Production yields were 12.7 tonnes per hectare stabilised in the due to locality, irrigation, varietal and clonal mix, age across all varieties and 14 t/ha for Sauvignon Blanc in past six months and quality of infrastructure, and reputational attributes particular. This is 4% down on 2017 but still higher than of fruit qualities. the 10-year average. Vineyard net cash income is 5% down on 2017 and this The New Zealand Winegrowers (NZW) Vintage Survey season averages at $24,690 per hectare. reported that the total 2018 Marlborough production was around 313 000 tonnes which is 4% up compared Rising Net cash Lower volume The reduction in profit is 14% and is mainly due to operational income of vineyard with 2017. The Marlborough Sauvignon Blanc total is at decrease in net cash income (because to lower yield) costs down sales 269 400 tonnes – 2% up on last year. and increased operating expenses.

6 7 Colliers International Rural & Agribusiness | Viticulture Land Values Review: Marlborough 2018

Sector overview Marlborough region NZ wine markets Marlborough model vineyard Returns and values Sales evidence Sales map Future outlook

Domestic Market Wine Exports

The domestic market accounted for around a fifth of Legislative changes lowering the alcohol limit for driving UNITED KINGDOM bulk export volumes seeing NZD prices lift 25% total supply in 2017. This makes it an important market has also supported a similar trend in New Zealand bars y/y helping support overall returns. While the retail In terms of volume growth, the UK lead the way and particularly so for smaller wineries, which are more and restaurants. channel continues to dominate in Australia, times are increasing 27% y/y (year on year) to nearly 75 million reliant on cellar door sales and tourism activities. changing with increased penetration through online litres. A big part of this involved bulk wine exports, These trends, alongside a more knowledgeable channels. Online wine retailers are increasingly which lifted 48% y/y to account for nearly 50% of total This is highlighted by wineries with less than consumer, are driving an increase of domestic product stocking premium, niche and independent wine labels UK exports. This is likely to have been a deliberate $1.5 million in turnover deriving 54% of their revenue sales at the premium end as consumers ‘trade up’. that are not available from the major retailers. The strategy from larger wine companies to minimise the from local market sales. major growth is in the AUD10-25/bottle price segment financial impacts of a higher NZD/GBP caused by the TOURISM (or NZD15-37/l). Consumers are also attracted by By all accounts the domestic market has remained fairly Brexit vote, to overcome capacity issues due to the online wine clubs, offering members better deals and stable in recent years, with consumption ranging 90-95 The other driver is tourism with spending increasing large vintage and earthquake damage, as well as to the chance to be a part of wine events, creating an million litres, or 20-21 litres per capita. by 50% since June 2014 and 22% of the visiting keep supply chain costs low. international tourists are including a winery on their immersive wine experience. Imported product has accounted for anywhere from tour down under. 35% to 45% of total consumption with Australia the NORTH AMERICA OTHER MARKETS main competition in the reds space. All of these trends are likely to present opportunities Overall, the standout market remained North America, The growth in exports (+15% y/y in volume) to other for wine businesses of all sizes, but particularly so for where total export earnings cracked the $600+ million international markets didn’t quite keep pace with the CONSUMER PREFERENCES smaller producers with a premium and domestic market mark for the first time. Export volumes grew 17% y/y ‘big three’ in 2017. However, the picture over a 10-year focus. and in-market returns remained stable despite this An influential consumer trend is forming around health horizon is far more favourable with higher volume outstanding growth. and wellness awareness, which is leading to more low- These producers generally have lower proportions of growth and better returns helping to compensate for alcohol wines and smaller servings. export revenue, but also higher price points with better A strong US economy and wine companies the extra costs associated with market development revenue per litre ratios. marketing investments in recent years are both and distribution. Looking over a 10-year period shows providing tailwinds. Yet there is scope for more these other markets have grown at 17% per annum growth from consumers looking for sophisticated compared with the ‘big three’ at 14% per annum. foods and beverages, a new generation of younger Perhaps even more compelling is the average local NEW ZEALAND WINE SALES 2017 NEW ZEALAND WINE SALES 2017 consumers coming through as well as a trend towards returns have been $9.4/l over this period, which was Average price per litre By volume in million litres $12.00 1400 ‘premiumisation’. 34% higher than the ‘big three’. $10.00 $10.00 1200 157m litres $8.20 Average 1000 Health concerns around the amount of alcohol EXPORT FORECAST $8.00 $7.20/l being consumed are having an impact too. However, 800 $6.00 many consumers appear to have opted for a ‘quality Wine exports are forecast to reach close to $1.9 billion 600 $3.94 by 2021 as new grape plantings in coming years $4.00 over quantity’ attitude. All of these trends suit New 400 97m Zealand’s existing market positioning; however, bear fruit. These plantings reflect the expanding $2.00 54m 200 litres litres wineries have also indicated that they see growth offshore demand for our wines. This is slightly $- 0 opportunities from existing products in new markets. more conservative than the previous forecasts and Domestic sales Export packaged sales Export bulk sales Domestic sales Export packaged sales Export bulk sales reflects trade uncertainty in the US and the EU, AUSTRALIA where protectionist sentiment may affect demand for COMBINED VALUE OF imported wine. NEW ZEALAND WINE SALES 2017 Rounding out the ‘big three’ is Australia, which despite Total value in million $ NEW ZEALAND WINE $1,400.00 MARKETS reaching a more mature stage in recent years, saw $1,200.00 $1,282 volume growth of 13% y/y in 2017. Interestingly most million $1,000.00 of the growth was driven by a 25% y/y increase in $800.00 $580 packaged wine exports, whereas bulk wine exports $600.00 million $381 dropped 2% y/y. million $400.00 >$2.2 $200.00 Australia was the only major market where bulk wine exports declined in 2017. However, the price $0.00 Domestic sales Export packaged sales Export bulk sales billion outcome (-21% y/y on per litre basis) and stronger NZD completely cancelled out the effect of better Source: Colliers, Statistic NZ, NZ Winegrowers packaged sale volumes with total revenue down -2% y/y. There was some salvation with the constrained

8 9 Colliers International Rural & Agribusiness | Viticulture Land Values Review: Marlborough 2018

Sector overview Marlborough region NZ wine markets Marlborough model vineyard Returns and values Sales evidence Sales map Future outlook

Top export destinations for New Zealand wine China Canada Netherlands Denmark Sweden 8% 2% of total 3% 1% 2% of total Asia exports exports 0.6% 2.5% market 0.1% market market United States share share share 31% of New Zealand UK total wine exports 23% of total 2.3% market share exports 6% market Japan share 1% Ireland 2% Hong Kong 6.2% 1% annual growth between Singapore 2010-2018 1%

total value of exports Germany in 2018 1% 1.6 billion

TOTAL VALUE OF NEW ZEALAND WINE EXPORTS (in millions) 2,000 Australia 1,500 22% 1,000 of total exports 500 9.8% market share 0 THE REST OF THE WORLD 2014 2015 2016 2017 2018 2019F 2020F 6% Data source: Colliers International, Statistics NZ, PWC

10 11 Colliers International Rural & Agribusiness | Viticulture Land Values Review: Marlborough 2018

Sector overview Marlborough region NZ wine markets Marlborough model vineyard Returns and values Sales evidence Sales map Future outlook

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: Block Variety Age Area Code Riesling Sauvignon Blanc A 2006 23 ha 0.50 ha Pinot Noir Pinot Gris Pinot Noir B 2006 3 ha 3.00 ha 1.50 ha Chardonay Chardonnay - Men- C 2006 1.5 ha 2.00 ha doza & Clone 15 Chardonnay - all other clones D 2006 0.5 ha Sauvignion Blanc Riesling E 2006 0.5 ha 23.00 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.

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.

2015 2015 2016 2016 2017 2017 2018 2018 Variety Area tonnes tonnes/ha tonnes tonnes/ha tonnes tonnes/ha tonnes tonnes/ha

Sauvignon Blanc 23.00 269 11.70 380 16.52 358 15.60 322 14.00 Chardonnay - WORKING TOGETHER TO DELIVER Mendoza & Clone 3.00 13 4.33 16 5.33 14 9.20 20 6.70 15 THE MARKET INFORMATION YOU NEED Pinot Gris 1.50 15 10.00 18 12.00 17 11.50 17 4.60 Chardonnay - all 0.50 6 12.00 7 14.00 5 9.60 14 9.30 other clones New Zealand Wine in collaboration with the Ministry for Primary Industries (MPI) produce a Viticulture Riesling 0.50 5 10.00 6 12.00 4 7.30 4 9.00 Model Vineyard Benchmarking Report, which is compiled from the results of data collected from interviews with contract grape growers and winery operated businesses. Pinot Noir 1.50 16 10.67 26 17.33 21 7.00 5 9.20

Since 2012, Tim Gifford of Colliers International’s Rural & Agribusiness team has provided a market Grand Total 324.00 10.80 452.00 15.10 419.00 14.00 382 12.70 value assessment of the model vineyard in order to analyse value changes and return on capital. The pruning method used is a mix of three and four cane vertical shoot positioning (VSP) style. 12 13 Colliers International Rural & Agribusiness | Viticulture Land Values Review: Marlborough 2018

Sector overview Marlborough region NZ wine markets Marlborough model vineyard Returns and values Sales evidence Sales map Future outlook

DISCOUNTED CASH FLOW (DCF) APPROACH TO VALUATION • 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. The application of DCF analysis allows a forward to reflect the risk of and, therefore required rate of However, given we are in an active trading period coming off a low base price, we regard CPI to be a reasonably looking approach to valuation, rather than relying solely return of the project. The net cash flow comprises the sound basis for cash flow purposes. The table below indicates historical grape prices and the price adopted for the on market comparison with historical sales evidence. purchase price (outflow), cash inflows (grape sales) varieties included in our DCF: We use it to compare the potential returns from a less the cash outflows (operating expenses) over the particular vineyard and the price paid in the market. forecast period, with the addition of the terminal value Variety 2006-15 2011-15 2015 2016 2018 Budget This approach also allows for comparison of vineyard (inflow) in the final cash flow period. ($/t) ($/t) ($/t) ($/t) ($/t) 2019 values from differing localities for variation in yields Sauvignon Blanc $1,765 $1,490 $1,710 $1,805 $1,845 $1,865 and grape price using financial modelling. The projected income stream reflects the anticipated growth, or otherwise, inherent in a property Pinot Noir $3,030 $2,980 $3,220 $3,085 $3,245 $3,255 We have tested the assessed capital value of the investment based upon the physical, tenancy or market Pinot Gris $1,815 $1,780 $1,830 $1,885 $1,945 $1,960 Marlborough model vineyard derived from the characteristics related to that property. The future Chardonnay - primary method of valuation (direct comparison and values quoted for property, income and operational $1,955 $1,950 $2,200 $2,130 $2,375 $2,345 summation) through the use of DCF analysis. The DCF expenses are projections only formed on the basis Mendoza & Clone 15 approach involves the discounting of the net cash flows of information currently available to us and are not Chardonnay - all other $1,785 $1,715 $1,830 $2,000 $1,915 $1,955 predicted to be generated by the vineyard, together representations of what the returns of the property will clones with an assumed purchase at commencement and be as at a future date. This information includes the Riesling $1,705 $1,620 $1,785 $1,775 $1,840 $1,830 sale on conclusion, to assess the likely return of the current expectations as to property values and income investment. that may not prove to be accurate. Weighted Average $1,830 $1,605 $1,810 $1,900 $1,930 $1,960

The cash flows are discounted on an annual basis over Summary of Grape Prices the assumed cash flow period at an appropriate rate • 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 KEY DCF ASSUMPTIONS 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. 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 • The terminal value has been estimated by escalating the assessed market value by forecast CPI. In the absence basis and is based upon the following assumptions: 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 • Inflationconsiderations are based on the New Zealand Reserve Bank consumer price index (CPI) data, which cycle. 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. DCF OUTCOMES

Production levels are based on district averages for each variety and adjusted for individual property attributes • Based on the above income and expenditure assumptions, forecast net income has been modelled for the 10-year such as soils, climate, planting and management considerations. We have estimated the production levels cash flow period. The graph below summarises the estimated returns generated on a net income basis: 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: 600,000600000

500,000500000 District Average Adopted Average Variety Yield t/ha Yield t/ha 400,000400000 Sauvignon Blanc 10 – 16 14 300,000300000 Chardonnay - Mendoza & Clone 15 8 - 10 9 Pinot Gris 10 - 12 10 200,000200000 Chardonnay - all other clones 10 - 12 12 100,000100000 Riesling 8 - 12 10 $ Pinot Noir 6 - 12 10 year 1 2 3 4 5 6 7 8 9 10 year Yield information Net Income

14 15 Colliers International Rural & Agribusiness | Viticulture Land Values Review: Marlborough 2018

Sector overview Marlborough region NZ wine markets Marlborough model vineyard Returns and values Sales evidence Sales map Future outlook

Vineyard profit before tax has decreased from 2016 This approach also allows for comparison of vineyard Returns and Valuation Implications and 2017 to $10,000 per hectare because of slightly values from differing localities for variation in yields, lower production and increased working expenses. variety and grape price using financial modelling. MARLBOROUGH MODEL VINEYARD: FINANCIAL RETURNS The average fruit price has again been affected by a We have examined the assessed capital value of the Marlborough model vineyard through the use of DCF We have used the Marlborough model vineyard monitoring results as comparison for financial returns within the challenging growing season, particularly with heavy analysis. The DCF approach involves the discounting region. The key parameters for the Marlborough model vineyard are summarised in the table below together with the rain prior to harvest resulting in some case in reduces of the net cash flows predicted to be generated by implications on asset values. quality, which impacted on growers returns. the vineyard, together with an assumed purchase at Working expenses were higher again this year at commencement and sale on conclusion, to assess the For the purpose of the assessed land and vineyard value we assume a well located central Wairau location for the $11,135 per hectare, with labour increases, crop likely return of the investment. assessed value rates. manipulation and increased costs of mowing, trimming and disease pressure were cited as having a significant The cash flows are discounted on an annual basis over Marlborough V2013 V2014 V2015 V2016 V2017 V2018 impact on working expenses in Marlborough. the assumed cash flow period at an appropriate rate to reflect the risk of and, therefore required rate of Producing planted area 30 ha 30 ha 30 ha 30 ha 30 ha 30 ha The increased carryover of powdery mildew inoculums return of the project. The net cash flow comprises the between seasons requires many vineyards to shorten purchase price (outflow), cash inflows (grape sales) the spray interval to prevent economic losses. This less the cash outflows (operating expenses) over the Total yield (t) 365 t 439 t 324 t 452 t 419 t 382 t issue is likely to continue in the coming seasons. forecast period, with the addition of the terminal value (inflow) in the final cash flow period. Average return ($/t) $1,720 $1,730 $1,810 $1,900 $1,840 $1,930 The graph below plots the analysed land and vineyard value per hectare from sales throughout Marlborough The projected income stream reflects the anticipated Net cash income ($) $625,800 $763,000 $587,300 $868,800 $781,700 $740,700 over the past 5 years. The steady increase in vineyard growth, or otherwise, inherent in a property values can be seen, in line with the price paid for investment based upon the physical, tenancy or market Vineyard working expenses ($) $237,600 $289,300 $291,600 $313,300 $323,100 $334,000 Sauvignon Blanc fruit which has also increased over characteristics related to that property. The future this period from a low point in 2010 post Global values quoted for property, income and operational Financial Crisis. expenses are projections only formed on the basis Profit before tax ($/ha) $9,800 $11,277 $6,107 $14,823 $11,600 $10,000 of information currently available to us and are not The application of DCF analysis allows a forward representations of what the returns of the property will Land value ($/ha) $85,000 $85,000 $95,000 $105,000 $120,000 looking approach to valuation, rather than relying solely be as at a future date. on market comparison with historical sales evidence. Vineyard value $175,333 $188,000 $218,000 $232,000 $254,000 We use it to compare the potential returns from a particular vineyard and the price paid in the market.

Summary of key viticulture sector statistics Source: NZ Wine, MPI, Viticulture Model Vineyard Benchmarking Report Marlborough 2018 and Colliers International Rural & Agribusiness ANALYSED VINEYARD VALUE PER PLANTED HA - MARLBOROUGH

$2,000 $400,000

MODEL VINEYARD PROFIT PER HA RICE

P $1,800

$350,000 ECTARE

$16,000.00 H RUIT

F $1,600 ER

$14,000.00 $300,000 P $1,400 LANC B $12,000.00 ALUE $250,000 V $1,200 $10,000.00 $1,000 $200,000 AUVIGNON INEYARD S

$8,000.00 V $800 $150,000 $6,000.00 $600

$100,000 NALYSED

$4,000.00 A $400 ARLBOROUGH

$2,000.00 M $50,000 $200 $- $- $0 2014 2015 2016 2017 2018

Source: Colliers International, MPI , New Zealand Wine 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

16 17 Colliers International Rural & Agribusiness | Viticulture Land Values Review: Marlborough 2018

Sector overview Marlborough region NZ wine markets Marlborough model vineyard Returns and values Sales evidence Sales map Future outlook

Marlborough Model Vineyard: MODEL VINEYARD VALUE: IN POSITIVE TERRITORY UP 9% ON 2017 key performance indicators The assessed value of the vineyard equates to $7,610,000 and reflects the following: Production Production Contract price Parameters Assessment 2018 average yield Sauvignon Blanc yield Sauvignon Blanc Internal rate of return 8.12% 12.7 tonnes/ha 14.0 tonnes/ha $1,825 /tonne

Model vineyard → Price ratio (Adopted value : gross revenue in year one) 9.91 → value Direct comparison across net planted area only $253,667 per hectare

Direct comparison across the entire property area $227,164 per hectare 9% 10% → 4% ↑ 9 % DCF results Source: Colliers International Rural Valuation Income Profit before tax Working expenses

$24,690→ /ha $10,000→ /ha $11,135 /ha We have compared the Internal rate of return (IRR) increased at a greater rate than the vineyard operating with our analysis of similar vineyard sales. The graph returns. below demonstrates the range of IRR that have been 5% 14% 3% → calculated from vineyard sales. Since 2012, the average grower returns in Marlborough have increased by around 40% with lifts to the average The vineyard internal rate of return (IRR) has fruit price and favourable growing conditions. Vineyard continued a downward trend with a decrease of operating expenses have risen over this time at an approximately 2% over the past five years from around equal pace. Increased labour, crop management and MODEL VINEYARD VALUE: 2016-2018 10.5% in 2013 to 8.12% in 2018. This downward trend spraying costs have seen per hectare net returns dependent on crop levels throughout recent years. is influenced by the high demand for vineyards and Parameters 2016 2017 2018 subsequent increase in vineyard value, which have 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 AnalysedANALYSED SaleSALE InternalINTERNAL RateRATE ofOF ReturnREUTRN Direct comparison across net planted area only $195,224 $208,000 $227,164 18.00% Assessed total value of the model vineyard ↑ 6,540,000 ↑ 6,690,000 ↑ 7,610,000 16.00%

14.00% Source: Colliers International Rural Valuation

12.00%

10.00% EXPORT MARKETS AND TRENDS

8.00% Its provenance story, combined with best practice canopy management, world class winemaking and sustainability efforts 6.00% continue to see Marlborough wine,positioned as a high quality, proprietary branded wine in major established markets. 4.00% Another emerging trend that is in play is “the less is more” 2.00% approach to consuming alcohol and the rising preference for lower 0.00% alcohol and low-calorie wines.

We also observe a growing uncertainty currently affecting global

IRR Expon. (IRR) trade. The Brexit deal will complicate trade negotiations along the Source: Colliers International Rural Valuation way as well. Source: Colliers International Rural & Agribusiness Valuation & Advisory

18 19 Colliers International Rural & Agribusiness | Viticulture Land Values Review: Marlborough 2018

Sector overview Marlborough region NZ wine markets Marlborough model vineyard Returns and values Sales evidence Sales map Future outlook

Vineyard market overview

Marlborough has long been recognised as the centre extended sales periods for smaller and higher valued for wine production in New Zealand. vineyards. Premiums are still being paid for strategic purchases in prime locations. With over 26,000 hectares of planted vineyards and a limited amount of land remaining for future expansion, Two large scale vineyard sales of note have occurred the regions vineyards have continued their trend of - the Altimarloch and St Lukes vineyards. They are increasing value during 2018. both located in the Awatere Valley, where investment returns are seen to be slightly more favourable at There are estimates of only 5,000-6,000 hectares of present. suitable land left for vineyard development and water is over allocated in many of Marlborough’s sub- Both properties sold to New Zealand buyers and catchments. demonstrate that despite restrictions on overseas investors, there remains a market for large scale This means the sector may need to rely on other horticultural assets suitable for vineyard development regions and varietals for further growth. and New Zealand based buyers are active in the The volume of vineyard sales in Marlborough has market. decreased over the past year to around 14, compared Rapaura & Lower Currently we are seeing vineyards in the prime Lower to around 25 in previous years, but still well above of Wairau Wairau and Rapaura locations are selling at between previous lows in 2008-2011. $250,000 - $300,000 $250,000 - $300,000 per planted hectare. Blocks in vineyard value per ha The number of transactions is often a good indication the central Wairau with good production at between of market sentiment, and indicates there maybe $175,000 - $250,000 per hectare and vineyards in the a disparity between vendor and purchasers price Awatere and upper Wairau are achieving sale prices expectations in the market at present. between $125,000 and $185,000 per hectare. Wairau & Southern Valleys Our analysis shows that values appear to have $175,000 - $250,000 stabilised throughout the second half of the year with vineyard land value per ha

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

30

25

Awatere & Upper 20 Wairau $125,000 - $185,000 15 vineyard land value per ha

10

5

0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Colliers International Rural Valuation, Core Logic

20 21 Colliers International Rural & Agribusiness | Viticulture Land Values Review: Marlborough 2018

Sector overview Marlborough region NZ wine markets Marlborough model vineyard Returns and values Sales evidence Sales map Future outlook

Marlborough Viticulture Sales Evidence ADDRESS DETAILS

Mahers Rd, A mature Sauvignon Blanc vineyard located at Kaituna. No buildings with improvements limited Key sales in the past 12 months Kaituna to single frost fan. A mid-tier productive block which sold well.

AREA in PLANTED VINEYARD / 191 Jones Rd, Grovetown A contracted Sauvignon Blanc vineyard on heavy productive ground in the Lower Wairau area. ADDRESS LOCALITY SALE DATE SALE PRICE NSP/HA IRR HA AREA Planted ha No buildings or other improvements.

92 Cable Station Road Awatere Nov 2018 $2,400,000 50.29 ha 10.85 ha $47,721 $146,083 7.04% 84 Higgins Rd, A medium-scale vineyard located on Higgins Road on the southern side of the Awatere Valley in 85 Bedford Road Renwick Jun 2018 $8,875,000 60.07 ha 30.78 ha $147,740 $231,870 5.46% Seddon Marlborough. The block comprises an area of 160 Jones Road Rapaura Mar 2018 $7,525,000 26.31 ha 25.70 ha $286,013 $261,766 11.18% 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 Rapaura Mar 2018 $3,300,000 9.47 ha 7.60 ha $348,454 $294,343 8.48% 57 Selmes Road flats and non plantable land. Buildings on the property include a well-appointed modern four- Mahers Road Kaituna Valley Feb 2018 $2,950,000 13.84 ha 12.60 ha $213,127 $219,853 9.98% 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 191 Jones Road Lower Wairau Feb 2018 $2,365,000 9.47 ha 7.50 ha $249,847 $279,625 10.65% appealing and productive vineyard property. 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, A lifestyle and vineyard property featuring a very well-appointed residence set amongst mature 671 New Renwick Road Fairhall Dec 2017 $2,400,000 8.00 ha 6.10 ha $300,000 $232,869 6.65% Fairhall and well-developed grounds in the Fairhall locality. 6.1 hectares of vineyard including Sauvignon 74 Fareham Lane Renwick Dec 2017 $5,000,000 24.00 ha 20.70 ha $208,333 $193,150 8.88% Blanc and Chardonnay plantings.

112 Vickerman Street Grovetown Nov 2017 $2,990,000 8..84 ha 6.75 ha $338,251 $292,381 8.24% 74 Fareham Lane, A 24.0000-hectare vineyard and lifestyle property located on Fareham Lane, west of Renwick 2216 Awatere Valley Rd Awatere Valley Nov 2017 $31,500,000 319.67 ha 194.14 ha $98,539 $150,205 10.29% Renwick in the Wairau Valley and is held in three titles. Buildings on the property include a modern 877 Waihopai Valley Road Waihopai Valley Nov 2017 $5,500,000 38.99 ha 25.16 ha $141,062 $175,271 10.72% 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 5824 State Highway 1 Seddon Oct 2017 $19,000,000 365.79 ha 130.00 ha $134,038 $125,615 9.11% gently undulating in contour with approximately 20.7 hectares planted in Sauvignon Blanc (9.6 Source: Colliers International Rural Valuation 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.

ADDRESS DETAILS 112 Vickerman Street, A very well-located property being a short distance from town includes approximately 6.75 Grovetown hectares of Sauvignon Blanc vines along with modern dwelling, garage and outbuildings. Very 92 Cable Station Road, Developed vineyard with approximately 10.85 hectares of plantings with scope for further well-presented property located at Grovetown on heavy productive soils with low climatic risk. Awatere development holding 25 Blind River Irrigation shares with onsite storage dam. Four bedroom modern dwelling plus garaging and other sheds. 2216 Awatere Valley Road Altimarloch Vineyard located in the Awatere Valley with a total planted area of 194 hectares in 85 Belford Road, Renwick Seresin Estate vineyard located on Bedford Rd, near Renwick. An organic vineyard with high predominantly Sauvignon Blanc with a small area (4.68 hectares) of Pinot Gris. Approximately density plantings developed mainly in the mid 1990s with Sauvignon Blanc, Chardonnay, Semillon, 14 hectares of potentially plantable land and the remainder steeper terrace faces and non- Pinot Gris, Pinot Meunier and utilised land. Sold to NZ Super Fund. Pinot Noir varieties. Older vines with low production and likely redevelopment with further plantable areas that could be planted in vines. Winery sold separately. 877 Wahopai Valley Road, Ants Nest vineyard located in the Waihopai Valley occupying an upper terrace of undulating Waihopai Valley contour. 25.26 hectares planted in 2004 comprising 24.5 hectares Sauvignon Blanc, 1.6 160 Jones Road, Rapaura Situated at the end of Jones Road Grovetown this 10.4 ha property sold in conjunction with the hectares Riesling and 1.6 hectares of Pinot Gris. Superior size two level five bedroom dwelling adjoining 15.9 ha on what appears to be one sale apportioned. built in 2000 plus freestanding double garage.

57 Selmes Rd, A 9.4704-hectare lifestyle property located on Selmes Road in the highly regarded Rapaura 5824 State Highway 1, St Lukes Vineyard located at Blind River / Tetley Brook near Seddon. 130 hectares of vineyard Rapaura location. Improvements on the property include a superior size very well-appointed dwelling Seddon development on a mix of flat and easy undulating contoured land. Blind River Irrigation Scheme and garage, along with a 7.6-hectare vineyard planted in 2015/16 in Sauvignon Blanc vines. The water with storage dams. A large-scale vineyard which sold to a local wine company. 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.

22 23 COLLIERS INTERNATIONAL RURAL & AGRIBUSINESS | VALUATION SERVICES

COLLIERS INTERNATIONAL VITICULTURE MARKET DATA SERIES

74 FAREHAM LANE MAHERS ROAD 57 SELMES ROAD 112 VICKERMAN STREET 191 JONES ROAD 160 JONES ROAD RENWICK KAITUNA VALLEY PAPARUA GROVETOWN LOWER WAIRAU RENWICK Dec‘17 $5,000,000 Feb‘18 $2,950,000 Mar‘18 $3,300,000 Nov‘17 $2,990,000 Feb‘18 $2,365,000 Mar‘18 $7,525,000

24.00 ha 13.84 ha 9.47 ha 8.84 ha 9.47 ha 26.31 ha ha ha ha ha ha ha Tim Gifford +64 27 460 0371 20.70 ha 12.60 ha 7.60 ha 6.75 ha 7.50 ha 25.70 ha [email protected]

$/ha $208,333 $/ha $213,127 $/ha $348,454 $/ha $338,251 $/ha $249,847 $/ha $286,013

$193,150 $219,853 $294,343 $292,381 $279,625 $261,766

IRR 8.88% IRR 9.98% IRR 8.48% IRR 8.24% IRR 10.65% IRR 11.18%

KEY Total area in hectares Planted area in 877 WAIHOPAI VALLEY 85 BEDFORD ROAD 2216 AWATERE VALLEY 84 HIGGINS ROAD 671 NEW RENWICK RD 92 CABLE STATION RD hectares ROAD, LOWER WAIRAU RENWICK ROAD, AWATERE AWATERE FAIRHALL AWATERE NSP Net Sale Price Nov‘18 $5,500,000 Jun‘18 $8,875,000 Nov‘17 $31,500,000 Dec‘17 $4,576,640 Dec‘17 $2,400,000 Nov‘18 $2,400,000 Net sale price per $/ha hectare ha 38.99 ha ha 60.07 ha ha 319.67 ha ha 35.07 ha ha 8.00 ha ha 50.29 ha Analysed vineyard value per planted 25.16 ha 30.78 ha 194.00 ha 21.00 ha 6.10 ha 10.85 ha hectare

$/ha $141,062 $/ha $147,740 $/ha $98,539 $/ha $130,500 $/ha $300,000 $/ha $47,721

$175,271 $231,870 $150,205 $168,486 $232,869 $146,083

IRR 10.72% IRR 5.46% IRR 10.29% IRR 7.22% IRR 6.65% IRR 7.04% Data source: Colliers International Rural Valuation, Property Guru, REINZ Colliers International Rural & Agribusiness | Viticulture Land Values Review: Marlborough 2018

Sector overview Marlborough region NZ wine markets Marlborough model vineyard Returns and values Sales evidence Sales map Future outlook

Outlook

We are anticipating grape prices to remain at similar perspective. This may create issues for future rent levels for the coming vintage, and depending on review negotiations, particularly in higher valued climatic conditions, volumes are expected to be up localities. around 6% based on new plantings coming into production and long-term average yield estimates. WINE SALES

The underlying industry confidence remains strong New Zealand Wine Growers report that markets in the with strong grower and winery relationships at United States and Canada continue to grow but the present. Australian market is down slightly. With a total 2018 vintage production of 419 000 tonnes, against the pre- At the same time, there are several issues the industry season vintage survey anticipating 450 000 tonnes, it continues to face including labour shortages, increased is expected that some wineries will be short of wine operating expenses, climate change, biosecurity and against potential sales. succession. Disease, pest and weed control continues to increase in both importance and expense. Marlborough Sauvignon Blanc will continue its efforts to maintain and grow its premium positioning in A number of growers are concerned that prices are international markets, avoiding commoditisation and remaining static, yet costs are going up reducing limiting bulk sales. profitability and leaving increasing yield as the only way to maintain or improve returns. Increased yield WATER can only be achieved if within winery limits. Marlborough District Council’s Marlborough Environment Plan which includes future water This affects grower morale, also partly due to going allocation was notified on 9th June 2016 and was through a second wet and difficult vintage in a row as closed for submissions on 23rd June 2017. For new well as static prices and increased costs. and renewed water resource consents, monthly limits Another upward pressure to vineyard operation costs using Aqualinc’s IRRICALC calculation tool have now is the increase of minimum wage and the subsequent been imposed which some growers are concerned flow on effects to other better paid staff wanting about and have put in opposing submissions. Hearings increases as well. for water allocation and use are scheduled for December 2018. The recent lift in vineyard prices we’ve experienced was triggered by larger wineries looking to secure We are noticing increased investment in water storage supply for their marketing programmes. This has now and irrigation efficiency to improve water security on started to erode cash returns to a less comfortable existing vineyards. level once again. This could be of some concern if LAND DEVELOPMENT costs are to increase without any upward movement in grape prices, and/or vineyard productivity. There has been a resurgence of greenfield vineyard developments over recent years with expansion into LEASING areas previously deemed unsuitable for vines due to climatic risk. Leasing will continue to be a good option for land owners as provides ongoing return without carrying There are a number of further bare land blocks additional risk and they can still bank on capital which have sold or have been earmarked for vineyard appreciation later on. Leasing is increasingly part of expansion and will be development over the next succession planning for many vineyards owners in the couple of years. This expansion demonstrates the region. confidence within the industry but also presents risk of oversupply if not carefully managed. Due to strong increases in vineyard values, rental levels (which are usually based on a percentage of The limited supply of suitable land, water and capital underlying capital value), have reached a point where restrictions, will limit long term expansion within the it may not be economically viable to operate the region, and the sector may look to other growing vineyard from the lessee (usually a wine company) locations and varietals for future growth.

26 27 About the author

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 Tim Gifford for financing, sale and purchase due diligence and rental negotiations. Tim is Director frequently engaged to provide valuation advice for financial reporting as well. +64 27 460 0371 [email protected] Auckland Tauranga

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