RURAL & AGRIBUSINESS

Viticulture Report

COLLIERS INTERNATIONAL NEW ZEALAND

MARLBOROUGHVINEYARD VALUES2016 OVERVIEW

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MARLBOROUGH VINEYARD MARKET: STRONG OUTLOOK

Over the past twelve months we have seen vineyard values rise sharply within Marlborough – the centre of New Zealand’s wine industry – with around 23,000 hectares of developed vineyard area. Vineyard values in other wine growing regions throughout New Zealand have remained relatively static in comparison, with older vines being replanted or replaced by alternative land uses occurring in Hawke’s Bay and Gisborne.

There is still a strong market preference for Marlborough Sauvignon Blanc, with export markets showing good growth. This has resulted in increased demand for vineyards within Marlborough as the supply of available land for vineyard expansion becomes scarce within the region.

We are seeing very active interest from existing wine companies looking to secure vineyards to meet future growth, along with both onshore and offshore investors taking advantage of strong yields that can be achieved through vineyard leasing. These buyers prefer larger blocks with a low proportion of non-productive assets, although we are now also seeing smaller lifestyle type vineyards selling very well. Due to the good returns generated over the past three years, there is a lack of listings available for sale which has led to a supply / demand imbalance and driven values upward.

Within the prime growing area of Rapaura and the Lower Wairau vineyard values range from $175,000 - $250,000 per hectare. Mid-tier productive blocks within the Wairau and Southern Valleys have been achieving $150,000 - $200,000 per hectare, while Awatere and Upper Wairau sales range from $100,000 – $150,000 per hectare. The main determinates of value are soils / contour, climatic conditions and irrigation, which ultimately drive the long-term productive capabilities of each vineyard. Throughout Marlborough long-term average yields can range between 6 – 16 tonnes per hectare depending on growing conditions and variety.

Vineyard values are closely related to the contract grape price paid to growers, which is currently between $1,800 - $2,000 per tonne for Marlborough Sauvignon Blanc. The grape price has risen by around $400 per tonne over the past four years, however, we expect this to remain static for the coming year as a result of a large 2016 crop, with most wineries operating at near capacity and increased stocks of wine to be sold in the coming year.

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.

TIM GIFFORD Associate Director, Registered Valuer B.Com(Ag) VFM, MPINZ, MNZIPIM

+64 27 460 0371 Tim.Gifford@colliers.com

2016 MARLBOROUGH MODEL VINEYARD DATAMODEL VINEYARD OVERVIEW

The Marlborough model remains at 30 producing hectares. For 2016, data was sourced from 38 vineyards compared with 31 vineyards in the previous year. Nine vineyards are located in the Awatere Valley and 29 vineyards in the Wairau Valley. There are 29 contract growers and nine winery operated vineyards in the monitoring group. Eight of the vineyards are 0–10 hectares, eight are 10–20 hectares, thirteen are 20–50 hectares and nine are 50 hectares or larger.

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 - Mendoza & 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

Table 1: Planting Schedule

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

2016 TRENDS

• Sharp rise in values in Marlborough

• Still preference for Marlborough Sauvignon Blanc

• Strong interest from existing wine companies to secure vineyards to meet growth

Prime winegrowing blocks in Rapaura and the Lower Wairau attract prices in the range $175,000 – $250,000/ha

Mid-tier productive blocks within the Wairau and Southern Valleys have been achieving $150,000 – $200,000/ha

Awatere and Upper Wairau sales range from $100,000 – $150,000/ha

Suvignon Blanc

Pinot Noir

Riesling

Chardonnay

Pinot Gris

23 ha

3.5 ha

1.5 ha1.5 ha

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PRODUCTION: 2014-2016We have been provided with the past three years’ production records for the Marlborough model vineyard as presented in the benchmarking report. Production figures are shown in the table below:

Variety Area 2014 tonnes

2014 tonnes

/ha

2015 tonnes

2015tonnes

/ha

2016 tonnes

2016 tonnes

/ha

Sauvignon Blanc 23.00 380 16.52 269 11.70 380 16.52

Chardonnay - Mendoza & Clone 15 3.00 11 3.67 13 4.33 16 5.33

Pinot Gris 1.50 18 12.00 15 10.00 18 12.00

Chardonnay - all other clones 0.50 6 12.00 6 12.00 7 14.00

Riesling 0.50 5 10.00 5 10.00 6 12.00

Pinot Noir 1.50 19 12.67 16 10.67 26 17.33

Grand Total 439.00 14.63 324.00 10.80 452.00 15.10

Table 2: Production summary

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

MODEL VINEYARD RETURNS AND VALUATION IMPLICATIONSFINANCIAL RETURNS: INCREASED PROFIT BEFORE TAXWe have used the Marlborough model vineyard benchmarking results as comparison for financial returns within the region. The key parameters for the Marlborough model vineyard are summarised in Table 3 together with the implications on asset values. For the purpose of the assessed vineyard land value we assume a well-located central-Wairau location.

Marlborough 10/11 11/12 12/13 13/14 14/15 15/16

Producing planted area (ha)

30 30 30 30 30 30

Total yield (t) 363 290 365 439 324 452

Average return ($/t) $1,350 $1,410 $1,720 $1,730 $1,810 $1,900

Net cash income ($) $489,700 $409,200 $625,800 $763,000 $587,300 $868,800

Vineyard working expenses ($)

$230,200 $229,400 $237,600 $289,300 $291,600 $313,300

Profit before tax ($/ha)

$5,577 $3,230 $9,800 $11,277 $6,107 $14,823

Model vineyard capital value (CV)

$4,650,000 $4,673,000 $4,927,000 $5,260,000 $5,640,000 $6,540,000

CV / planted ha $155,000 $155,767 $164,233 $175,333 $188,000 $218,000

Capital value movement

0.49% 5.44% 6.76% 7.22% 15.96%

Return on capital EBIT/CV

5.58% 3.85% 7.88% 9.01% 5.24% 8.49%

Total Vineyard Return

5.58% 4.34% 13.31% 15.76% 12.47% 24.45%

Table 3: Summary of key viticulture sector statistics Source: NZ Wine & MPI Viticulture Model Vineyard Benchmarking Report Marlborough 2016 and Colliers Rural & Agribusiness

Vineyard profit before tax has increased 142% from 2014/15 season of $6,107 per hectare to $14,823 in 2015/16, which is close to the 10-year high of $14,970 per hectare in 2008. Working expenses were higher this year at $10,500 per hectare, with crop manipulation and powdery mildew control adding to the overall expense.

OUR DISCOUNTED CASH FLOW (DCF) APPROACH TO VALUATION

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.

MODEL BLOCK PERFORMANCE AT A GLANCE

• Overall strong production

• Very dry summer affected 2015 vintage

• 2014 and 2016 exceptional years with higher than average yields

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600000

year 1 2 3 4 5 6 7 8 9 10

$year

600,000

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400,000

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200,000

100,000

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.

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 per cent 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:

Graph 6: Net Income

• 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:

• Total operating expenses for a corporate style vineyard of the subject’s scale would typically fall in a range of $9,000 to $10,500 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:

Variety2006-15

($/t)2011-15 ($/t)

2015 ($/t)

2016 ($/t)

2017 Budget ($/t)

Sauvignon Blanc $1,765 $1,490 $1,710 $1,805 $1,840

Pinot Noir $3,030 $2,980 $3,220 $3,085 $3,210

Pinot Gris $1,815 $1,780 $1,830 $1,885 $1,915

Chardonnay - Mendoza & Clone 15

$1,955 $1,950 $2,200 $2,130 $2,250

Chardonnay - all other clones

$1,785 $1,715 $1,830 $2,000 $1,910

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

Weighted Average $1,830 $1,605 $1,810 $1,900 $1,940Table 5: Summary of Grape Prices

VarietyDistrict Average

T/haAdopted 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

Table 4: Yield information

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VINEYARD VALUES: ALSO IN POSITIVE TERRITORY

The assessed value of the vineyard equates to $6,540,000 and reflects the following:

Parameters AssessmentInternal rate of return 9.72%

Price ratio (Adopted value : gross revenue in year one) 8.88

Direct comparison across net planted area only $218,000 per hectare

Direct comparison across the entire property area $195,224 per hectare

Table 7: DCF results

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:

Graph 8: Sale Analysed IRR

The properties with a lower IRR are generally smaller blocks with a higher proportion of non-productive assets or unplanted land which is not generating a return. The analysed IRR can also relate to the climatic or other growing risks associated for a particular vineyard; an investor maybe prepared to accept a lower rate of return for a vineyard with consistent and reliable production or lower than average operating costs.

The resultant IRR of 9.72% in this instance is within acceptable market parameters, as shown in the sales evidence, which franges between 8% to 12% for productive vineyards. In this case the rate is towards the middle of the range and reflects the assumed premium location and ability to produce consistent yields.

MODEL VINEYARD VALUATION CONCLUSIONS

The market value of the hypothetical Marlborough model vineyard has increased by around 16% since June 2015 on the back of strong demand for productive vineyards throughout Marlborough. The 2016 season’s favourable climatic conditions resulted in an exceptional harvest with near record yields. The high yields combined with very strong fruit prices has resulted in a sharp increase in vineyard profitability.

Market activity is very strong at present as wine companies look to secure future supply and investors are attracted to the potential returns available either through operating or leasing vineyards. We are seeing an increase in vineyard development of bare land. However, in contrast to the speculative development of the mid- to late-2000’s the development currently being carried out is largely by existing wine companies to meet existing and future demand.

Competition between buyers continues to drive values up in Marlborough, as a result of the constrained supply of land suitable for vineyard development and the reduced number of vineyards listed.

A combination of very high operating profits combined with excellent capital appreciation has resulted in exceptional returns for the Marlborough model vineyard. We expect a static grape price combined with a return to long-term average yields, which will see returns for 2017 being down on the past year, however, we predict the strong demand for Marlborough vineyards will continue.

WE WELCOME YOUR FEEDBACK. FOR MORE INFORMATION OR WITH ANY ENQUIRIES, PLEASE CONTACT:

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

$6,540,000 ↑

TIM GIFFORD | +64 27 460 0371 | Tim.Gifford@colliers.com

WE HAVE THE EXPERTISEVALUATION | ADVISORY | SALES

Exceptional conditions

Strong market activity due to expansion plans/intentions

Record harvest yields

High operation profits and excellent capital appreciation

Model vineyard value ↑ ~16%

COLLIERS INTERNATIONAL | NEW ZEALAND

RURAL & AGRIBUSINESS | VITICULTURE TEAM

INSI

GHT EXPERTISE

MARK

ET SPECIALIST

GEO

GRAPHICAL COVERAGE OF SOLU

TION

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ECTOR AND FULL R

ANGE

COMPLETE CLIENT

SERVICE

AGENCY

We have a focused viticulture sales team specifically covering Marlborough, Hawke’s Bay, Wairarapa and Nelson but with the ability to market vineyard and wine company assets anywhere in New Zealand.

We work closely with the Colliers rural valuers as well as the viticulture team at Colliers Australia, which is the market leader in that country.

As many of the leading companies have extensive operations on both sides of the Tasman, Colliers Rural & Agribusiness is very well placed to provide seamless services to those key industry players. Our local knowledge and global connections are also highly valued by clients at the boutique end of the scale. With this knowledge and expertise, our viticulture team is able to provide effective solutions – from straightforward disposals and acquisitions to more complex restructuring projects including sale and lease back transactions.

With its extensive global reach and experience of collaboration on cross-border transactions, Colliers International Rural & Agribusiness has easy access to overseas investors and corporates who have an interest in participating in the New Zealand wine sector.

MIKE LAVEN Viticulture Assets AgencyCommercial Consultants Ltd, Licensed under REAA 2008+64 21 681 272 Mike.Laven@colliers.com

Mike has over 35 years experience in real estate, principally as a consultant and broker in the commercial property sector in the United Kingdom, Asia and New Zealand. He has also undertaken several real estate developments including a number of wine and tourism projects in New Zealand.

As a former director of one of Hong Kong’s leading real estate firms, Mike has developed a strong network of corporates, family offices and high net worth individuals, and he continues to inform and advise them on New Zealand market investment opportunities. Mike is based in Wellington, working with clients New Zealand wide.

HADLEY BROWN Director, Rural SalesCRHB Ltd, Licensed under REAA 2008

+64 27 442 3539 Hadley.Brown@colliers.com

Hadley has extensive experience in the rural and viticulture sectors. He has held a variety of roles within these sectors both in New Zealand and abroad and has an astute understanding of both the practical and business aspects of these industries.

Hadley’s years of specialised experience in rural property sales have resulted in an outstanding track record of more than $150 million in sales, a large portion of which have been viticultural sales across Hawke’s Bay, as well as a large client base that spans the globe. These results place Hadley in the top tier of agents nationwide and have given him a reputation as one of the leading agents in his field.

VALUATION & ADVISORY

Our experts have been active in the viticulture sector for 20 years and have seen it through multiple cycles and changing market conditions.

With the viticulture sector becoming ever more complex and global in nature, there is an increased requirement for comprehensive information and rigorous reporting by owners, investors, financial institutions and regulators. We understand these different levels of reporting and how to drive improved returns on investment.

We base our advice on robust analysis of the data and include all aspects of any viticulture enterprise – from straightforward land and assets valuations, through financial performance and management practices, to vertical integration structures and brand recognition.

A commitment to an accountable service, delivered with integrity, honesty and transparency at all times is fundamental to our approach as we strive to create a long term value for our clients through provision of the highest quality professional market-focused valuation advice.

We offer a depth of senior personnel and resources both across New Zealand and Australia. Our commitment to service excellence, coupled with our unparalleled market intelligence continues to differentiate us as a valuation firm of choice.

JOHN DUNCKLEY Director, Registered Valuer B.Com (Ag), Dip Prof Urb, FNZPI, FNZI

+ 64 21 326 189 John.Dunckley@Colliers.com

John has been actively involved in the property industry as a valuer for more than 40 years. He has 20 years experience in the viticulture sector valuing over 10,000 ha of vineyards throughout New Zealand and experiencing a wide range of market conditions and growth cycles.

John provides investment advice for purchase, sale, rental of existing going concern vineyards and wineries and proposed greenfield developments. He is regarded as a leading valuation practitioner in New Zealand and has served the profession as a chairman and representative to the various industry boards and organisations.

TIM GIFFORD Associate Director, Registered Valuer B.Com(Ag) VFM, MPINZ, MNZIPIM

+64 27 460 0371 Tim.Gifford@colliers.com

Tim has 14 years property valuation experience. He resides in Marlborough and has knowledge of all of the main wine growing regions in New Zealand. In the past 18 months Tim’s viticulture work has included more than 4000 ha of vineyards with a combined value in excess of $275 million. He has done valuations for financing, transaction advice and rental purposes for a number of clients, including most major banks.

Tim offers our clients excellent technical skills and market knowledge, together with a sound appreciation of both private and public sector imperatives.

COLLIERS INTERNATIONAL NEW ZEALAND | VITICULTURE 0800 697 872 | COLLIERS.CO.NZ/VITICULTURE

This document has been prepared by Colliers International for advertising and general information only. Colliers International does not guarantee, warrant or represent that the information contained in this document is correct. September 2016

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