What started off as a challenge in land consolidation is fast becoming an attractive financial investment. Agricultural land funds are turning Bulgaria's inefficiently small rural land plots into bigger and more manageable farms for later leasing to agricultural operators. As domestic and international investors become increasingly interested, agricultural land prices are going up and the farming business is set to get a boost.

Land dispersion has been an issue in the country since the fall of communism. The agricultural land market has been paralysed, mostly due to the fact that plots were excessively divided and dispersed. With plots often less than one hectare in size and ownership randomly distributed, farmers who wanted to expand production have had to negotiate with an array of owners in various locations. This has had an impact on the amount of foreign investment directed at the Bulgarian agricultural sector.

Now, however, land consolidation is bringing new players to Bulgarian agribusiness.

"We are seeing a change," Veselin Petrov, executive director of Elana Property Management, told OBG. "We have been approached by the Danish association of farmers; we have been approached by Greek, Turkish and English farmers wanting to rent land here."

Elana's agricultural land fund, the first of its kind, was established in 2005. The company's Agricultural Land Opportunity Fund currently holds a farmland portfolio of 25 330 ha, at an average acquisition cost of 1038 euro a hectare. The company has a capital of 47.4 million euro and plans to extend its ownership to 37 000 ha by the end of this year.

Five funds - financial services provider Karoll's Advance TerraFund, Agrofinance, FNI Bulgaria and Bulland Investments plus Elana - together own and manage about 60 000 ha of Bulgaria's estimated three million ha of arable land, according to local media.

Although the buying and consolidating of Bulgaria's agricultural plots has been pushing prices up, arable land is still relatively cheap compared to other European countries. The price of agricultural land in Bulgaria is almost a 10th of Greece's 10 500 euro a hectare and almost 30 times lower than in the Netherlands, where the average price of agricultural land is 29 000 euro a hectare, according to figures provided by Karoll.

Prices are set to rise in the near future, as foreign investors try to cash in on the affordable land. However, Bulgaria's cost advantage will remain considerable for years to come. "I do not believe that land prices in Bulgaria will reach those of Germany, the Netherlands or France, but there will be an increase," Petrov said. "Now the average cost is about 1500 euro a hectare, and I believe that in five years it will reach 3000 euro a hectare."

The rise in foreign interest is set to bring much needed know-how to the Bulgarian agricultural sector, used to operating small plots with rudimentary techniques. This inflow of foreign players is already raising the standard of production. "Some of our fund clients have rented the land and have begun the certification process for organic foods," Petrov said. This could be an appealing new market for Bulgaria, where a large number of farming plots have not been used for decades.

The movement of consolidation, currently being spearheaded by the agricultural funds, is bound to take some time. It will take about five to seven years for significant progress to be made, according to industry insiders. Karoll currently employs 200 agents whose jobs are to scour the country and buy up land plots, concentrating on certain geographical regions.

The land funds are attracting domestic and international attention and Karoll plans to launch an IPO in June. However, some experts have cautioned that agricultural land funds are overvalued.

"When you acquire dispersed land plots to make bigger plots the price goes up. So these large plots are currently traded at a premium of more than 50 per cent," a broker told OBG.