Sunday, May 29, 2011

South African game farm appraisal

Interior of hunting lodge

I have been asked about the photo at the top of my blog page. This photo was taken from a lodge at a South African game farm I appraised in 2008. It is located in the Waterberg, an upland area about an hour north of Pretoria. With an elevation of about 1000 meters, it is in an area with a mild, malaria-free climate.

I have recently found the same game farm for sale for 3 million UK pounds, or close to $5 million USD, lower than my appraised value and far lower than the South African appraiser’s estimate of value of 70 million rand, or about $10 million USD.

A game farm is basically a ranch that contains indigenous African animals and earns its revenues by hosting wealthy hunters or other tourists, such as photographers. Hunters pay for the animals they shoot. The hunters also have the option of eating what they kill, paying farm staff to prepare the killed animals for consumption. If the hunters do not want the meat, it may be sold to a local restaurant. At the game farm I appraised, the most expensive item on the menu was the white rhinoceros, which cost $25,000 to kill.

The game farming industry claims to be a greener alternative to conventional ranching, as indigenous animals live in better harmony with nature, consuming the full range of vegetation offered, while domesticated animals tend to denude the grasslands and need to be inoculated for disease. For example, there was a recent outbreak of “Foot and mouth disease” in the Kwazulu-Natal province this year.

So what is happening in the South African game farm market? Three years ago, billionaires such as Richard Branson and Howard Buffett (son of Warren) were buying their own game farms, and game farms were appreciating rapidly in value as the result of an increase in tourism by wealthy European hunters. The number of game farms was also proliferating. Nowadays, there are hundreds listed for sale.

Political rumblings

There is a vocal politician in South Africa’s ruling party, the ANC (African National Congress) who is causing some concern among game farm owners. Julius Malema, President of ANC’s Youth League, gave a speech at an ANC election rally two weeks ago which included the following remarks:

They [whites] have turned our land into game farms…We must take the land without paying. They took our land without paying. Once we agree they stole our land, we can agree they are criminals and must be treated as such

President Zuma, also a member of ANC, rebuked Malema and stated that land expropriation was not the policy of the ANC. Nevertheless, the gap in wealth between blacks and whites is still a divisive issue in this black-governed nation which has been ruled by the ANC since 1994. Mr. Malema is said to have a special appeal to young, poor, black voters and is an advocate of having the government nationalize the country’s assets, particularly its mines.

Market analysis

While not finding any current data on price trends in the game farm industry, the following information makes me wonder if there is a price correction about to occur in the South African game farm industry:

1. Seeing a game farm for sale at less than two appraised values.
2. The sheer number of listings of game farms for sale, including over 120 listed for sale with Africa Game Farms and 108 listed for sale at Africa Game Farm Estates.
3. Political rhetoric advocating land expropriation.

Valuation analysis

From an appraiser’s point of view, valuation can be tricky, as sales of game farms typically include a considerable amount of personal property – the animals themselves. Considering that a game farm without animals would no longer capture revenues from wealthy tourists, the real estate component of value is considerably less than going concern value.

Going concern value = real estate value + personal property value + business enterprise value.

The South African valuer took a different approach which essentially added the depreciated replacement cost of all of the improvements to the market value of the game-stocked land, based on sales of comparable game farms, thus including personal property value within the estimate of land value. This is a dangerous way to appraise collateral for lending purposes, which is one reason why this client sends me to appraise in other countries – valuation methods and standards differ.

My client was an adventurous private lender. I advised them that if they wanted to lend based on going concern value, the animals would have to be insured, as animals can be lost to poaching, theft, disease or natural disaster. The seller of the farm told me that he had already looked into insuring the animals, and the insurance costs would be too high for profitable operation of the game farm. In the end there was no loan and no sale.
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