Many generations of farmers have expanded their financial interests beyond the farm gate by buying commercial real estate.

This includes owning office buildings, retail spaces, factories, and other similar properties. These investments can involve anything from subdividing land to taking on the task of developing a full-scale commercial property. 

Through 40 years investing in, managing and advising others on commercial property, I have worked with many farmers seeking out such opportunities. Most are primarily motivated to diversify their investment portfolio, therefore reducing risk associated with fluctuations in farm gate income.

My first advice to anyone embarking on such a venture is do your due diligence. Whereabouts is the property you are looking at? How has it performed in the past? Will it endure the test of time? 

If it is on the main street of town, has regularly been leased to reliable tenants, occupied for most of its tenure, and is not a specialist building exclusively servicing a dying trade, there is a good chance it will provide consistent returns. Look at it as similar to buying rural property, where you will need to assess whether it has been a good farm in the past. Rural or commercial, the property’s history is going to give you the clearest pointer on its future performance.

Generating additional income is what draws many farmers to commercial property. With reliable tenants, owning an office building, a retail premises, or similar can provide a steady stream of rental income to supplement primary production revenue.

One person I have advised regularly grows grapes. After going through a series of seasons when the harvest was poor, a neighbour came in with an offer to buy part of his vineyard. My viticulture friend sought my advice on whether to invest the equity from the sale into commercial property. I could see he was looking at a good and well located building, with a mix of strong tenants, so suggested he go ahead. It went well. While initially he had some debt on the building, he has chipped away at that, while also taking some money out of it to live off. That has eased pressure on the vineyard, and if he has a bad year with the grapes nowadays, because the commercial property gives him a steady back up, it doesn’t seem quite so bad anymore.

Another family I know has a service and trading business. 

Over the years they have also bought commercial property, spreading that against the other side of their business. Twenty years later it has paid off well for them. They have two circles side by side: when the trading business has gone well they have paid down debt off the properties, whereas in other years when trading has not gone so well, they have been able to pull capital back the other way to keep their cashflow ticking along.

Retirement planning and long-term appreciation also attract investors, including farmers, to commercial property. Generally, as well as generating income, a commercial real estate asset will increase in value over time, resulting in a capital gain when sold. In the meantime, investing in commercial property can be a strategic part of a farmer’s retirement plan, providing a source of income once they retire from farming.

Earlier in my career I had a client who had been a developer, though opted for retirement earlier than he ought to have. I had a project for him and managed to persuade him out of retirement to start developing again. I managed to help him with one last development that would provide him with permanent income. Previously he thought he had enough to survive on, though didn’t take account of the likes of overseas holidays, updating his car, or similar spending requirements.

We found an office building for him in the Christchurch CBD, lined up the deal, he bought it, and owned it for 20 years freehold. As a consequence he was able to retire for a second time with his pockets full of money. Since his retirement he has lived off the income from the building and lived well. In the past couple of years he received a generous offer for his building, demonstrably more than his original purchase price, and he decided to sell. Now he is fairly elderly and highly unlikely to ever be able to spend as much money as he sold the building for.

Investing in commercial property is similar to investing in rural property, carrying similar risks, although such risks tend to be influenced by different external factors between the two categories. To determine the more appropriate investment option for a particular farmer or investor, a general rule of thumb is that while a commercial property with a long-term tenant may provide a stable income, farmland has historically yielded higher capital gains. Regardless, being able to commit to a minimum of five years for any investment is crucial. 

You should take particular care to understand the risks involved, assess your tolerance for them, and develop strategies that will mitigate them. Very much the same as owning a farm.

Shaun Stockman is managing director of The Stockman Group, based in Christchurch and active throughout Canterbury, holding a portfolio of more than 40 commercial buildings offering a mix of retail, office, hospitality and industrial spaces. Shaun works closely with Peter Wilson of PGG Wrightson Real Estate, Timaru, who specialises in commercial, retail and industrial sale and lease listings.

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