Seizing the Opportunity in Australian Water Markets

Australian water markets present an underappreciated opportunity for investors. As Australia faces climate challenges and water becomes scarcer, the value of water entitlements is expected to rise. Much like investing in physical property, investors can own water entitlements, giving them the right to access specific water resources and lease annual water allocations for ‘rental’ income. Similar to land titles, water entitlements are finite, tradeable, regulated by state governments and influenced by supply and demand factors.

What Australia has on offer

Australia operates one of the most sophisticated water markets in the world, with annual turnover exceeding 2,500 gigalitres (GL), and the Murray-Darling Basin at its epicentre.¹ The basin alone covers 14% of mainland Australia, representing a vital resource for the country’s agriculture, and a huge contributor to the domestic economy.²

Here’s why we believe water entitlements are an enticing opportunity for investors.

Changing Climate and Reducing Water Supply

Australia’s climate is evolving, with annual rainfall reducing – and an imminent El Niño event could further disrupt water supply. Historically, El Niño-triggered droughts have driven up water prices, making entitlements increasingly valuable.

High-Value Crops and Water Demand

Within the Murray-Darling Basin, farmers are pivoting towards high-value, water-intensive crops such as almonds, grapes, and olives. These are perennial crops, which unlike annual crops, don’t need to be replanted each year. For crops with multi-year tenures, accessing adequate water over the full crop-lifecycle is important – underwriting future demand for water in this region.

Government’s Basin Plan

To manage the environment and the future of the Murray-Darling water system, the government has implemented the Basin Plan, reducing the available water for irrigation. As water entitlements become scarcer, the worth of existing entitlements escalates.

Performance and Diversification Opportunity 

Water entitlements are unique as they don’t always follow the same trajectory as traditional assets like stocks or bonds. They’re affected by factors like rainfall, water storage levels, and crop prices, which often don’t have a material impact on traditional investments. This characteristic means water entitlements could increase your portfolio diversification, mitigating risks and potentially enhancing your investment profile.

Over the long term, water entitlements have performed well compared to other investments. Historical evidence shows that including water assets in a portfolio can improve the risk-return metrics, making your investments more balanced and potentially more profitable.

Social and Environmental considerations  

Water markets are complex given the impact placing a financial cost on water has on society and the environment. While having a price on water resources means it is likely to be more efficiently allocated, it also creates the potential for over extraction and ecological degradation, particularly when owned by those primarily focused on financial gains. To counteract these issues, some investment strategies aim to balance financial returns with positive environmental outcomes, like donating water for wetland restoration. These strategies can suit investors who want to direct their investments to protect the environment.

Australian water markets can present a compelling investment opportunity, allowing you to invest in something both financially valuable and environmentally beneficial. We encourage you to consult your adviser or our sustainable investment team to explore how this opportunity aligns with your financial goals and values.