The traditional bond of Bulgarians to agricultural land has been perceived in the past 20 years more as linked to Bulgarian Revival literature than as a realistic market trend. However, the yield results on the Bulgarian Stock Exchange by the end of June 2007 show remarkable scores for real estate investment trusts (REITs) investing in agricultural land.
ELANA Agricultural Opportunity Fund chaired the score with a 50.39 per cent yield on its shares since January 1 2007 among a total of 41 REITs with varying investment focus, followed by Advance Terra Fund with 48.8 per cent, also investing in agricultural land.
How did agricultural land get on the investors’ agenda?
The end of private ownership of land and the emotional bond of Bulgarians to arable land occurred in the late 1940s when the communist government nationalised the land, turning it into state property. The co-operative model of agriculture was introduced, and by 1989 Bulgaria had managed to maintain a position of one of the biggest agricultural producers in South Eastern Europe.
With the fall of the communist bloc, the issue of restoring private ownership of nationalised land came on to the agenda of the development of a market economy. Agricultural land was returned to owners through restitution, which was the fairest method, but eventually not the most effective in view of future agricultural development. More than a million hectares were restored in the 1990s to previous owners or their heirs. As a result, agricultural land became highly fragmented, into a multitude of small plots averaging less than a hectare each. This trend, along with natural demographic processes, and mainly because of acute urbanisation, led to a staggering decrease in agricultural production and effectiveness.
During and following the restitution process, the agricultural land market was virtually non-existent, exhibiting little or no supply and demand, and an extremely sluggish up-trend. From 1998 to 2003, average agricultural land prices varied between 680 and 740 euro a hectare.
Revival of the agricultural land market began as late as 2004, with the start of the consolidation process, perceived as a necessary basis for modern and effective agricultural development. This revival immediately reflected into a substantial increase in the volume of traded land and a noticeable increase in prices. Very soon, the investment potential of the market was recognised and large investors turned their attention to it.
Consolidation boosts land prices
As the agricultural land market picked up pace, the first specialised investment fund entered the scene - Elana Agricultural Land Opportunity Fund REIT, established in 2005. It was soon followed by the emergence of a series of other funds with a focus on agricultural land investment. These funds recognised the potential of consolidation as not only a necessity for development of modern agriculture, but also as a means to capitalise on an underestimated market with excellent investment and development prospects.
Already, as a result of a now active agricultural land market and the consolidation process, the average price of agricultural land has seen an increase of more than 90 per cent since 2004, currently reaching more than 1300 euro a hectare.
What is the forecast?
It is expected that Bulgarian agricultural land will continue to demonstrate rising prices at a level of 15 to 25 per cent on an annual basis. Thus, by 2011 the average agricultural land price will be within the range of 2700 and 3500 euro a hectare. In comparison, the average prices of agricultural land in Western Europe currently vary between 5100 and 15 300 euro a hectare. Naturally, no forecast is precise, bearing in mind that the agricultural land market is subject to a set of factors related, for example, to the profitability of agricultural activity in the country, the climate, legislation, the use of state subsidies as well as EU funds to support the development of agriculture. However, the visible trend is that agricultural land is on the agenda of investors and the market is to develop in a positive way.
The promoters of investment in land
Currently there are six REITs investing in agricultural land listed on the Bulgarian Stock Exchange, with a total market capitalisation exceeding 150 million euro. The specific legal provisions applicable to REITs grant them a zero per cent corporate income tax and also set dividend payout at a minimum of 90 per cent (note: in Bulgaria, capital gains on shares are not taxable while there is a seven per cent tax on revenue from dividends), making investments in REITs particularly attractive to shareholders. REITs are not only an important factor for the modern development of agriculture, but also provide excellent prospects for earnings for their shareholders by capitalising on the dynamic agricultural land market. The concentration and consolidation of land by REITs opens additional opportunities for increasing returns by alternative methods of agricultural land use by renting it out for the construction of wind generator installations, for example, which adds value over the traditional land tenancy.
In order to boost the process of consolidation of agricultural land and the development of modern and effective agriculture, the REITs joined efforts in establishing the Bulgarian Association of Agricultural Land Owners. The members of the association currently own a total of about 100 000 hectares of arable agricultural land.
The fact that the most profitable REITs in the end of June are those that have focused on promoting agricultural land might give us a hint that the so-called lost emotional Bulgarian bond with agricultural land might be back after the growing attachment of investors to this flourishing sector of the local market.
