The agricultural land market in Bulgaria is picking up pace. Both 2006 and 2007 saw rapid development in volume and price levels. The market upward trend was fuelled mostly by the activities of large institutional players. However, their influence was not limited only to numerical achievements. Institutional investors began shaping the market into a more mature one in several ways. Up until 2005, the market was characterised by low liquidity; it was extremely chaotic and highly speculative. It was also very difficult to predict and deals were made very much “in the dark”. Since the first real estate investment trusts (REITs) investing in agricultural land were established back in 2005, the agricultural land market began changing. Three years later the market looks very different: it is highly liquid, predictable, segmented and transparent.
Competition is rising and land rental relations are being formalised and brought out into the light. As a result of the rapid market development, many banks in Bulgaria have begun to accept agricultural land as provision for granting loans, which only a couple of years ago was unthinkable. While the market may not yet be considered to be in its mature state, it is surely getting there and is so becoming more appealing to a wider range of investors, including those with rather conservative inclinations.
Agricultural land becoming an attractive investment
Now that the market has changed, many investors perceive agricultural land as a good investment asset. Not only is the upward trend of land prices sustainable but returns are also secure. These returns may be achieved not only through riding the market but also by active management of the land portfolio. Traditional land management consists of renting out land to farmers for cultivation and land consolidation. Better results may be achieved through alternative methods of agricultural land usage, and chiefly development of the ever more popular wind and photovoltaic generator installation projects as well as the cultivation of bio fuel crops, for example.
Production of bio fuels has become a hot topic since the introduction of European Union regulations promoting bio-components in regular fuels. Land for this usage may be rented out or sold at much higher rates. Another prospect is re-zoning agricultural land for construction purposes. There is a high demand for re-zoned and consolidated plots of sufficient size around large cities and particularly Sofia, which is due to land fragmentation and the considerable time needed by individual developers to tackle the process on their own. For example, this is one of the activities of the largest REITs such as Elana Agricultural Land Opportunity Fund REIT.
What drives the agricultural market ahead?
Investments in agricultural land are influenced by many factors. Two of the factors were described above – the state of development of the market and the investment prospects. Additionally, there is a multitude of other factors to be considered which depend on the investor’s target. Amongst these factors are the characteristics of the land. The market is now clearly segmented not only by location but also by land quality and plot size. Fragmentation of land is a severe problem for cultivation and the process of consolidation not only provides a fix, but also adds value to the investment as larger plots command higher prices.
When investing in agricultural land for renting out to farmers, it is important to consider the availability and readiness of potential tenant farmers in the specific area. For example, rental relations are traditionally well developed in northern and north-eastern Bulgaria.
When investing in land for the purpose of alternative usage, a good deal of research and preparation is required in identifying suitable land. Knowledge of governmental policies on the subject, including product buy-out prices, is necessary, as is the ability to work with the local municipal, regulative and permit institutions.
Investment for re-zoning requires both ample time for completion as well as good knowledge of general urban development plans and regulations. A good understanding of real estate developments in three tiers is necessary – local, countrywide and regional.
Investments in agricultural land are also influenced by the bank sector and particularly loaning regulations when looking for leverage. Governmental regulations and subsidies as well as EU funding programs should also be considered.
European and even worldwide trends must not be neglected either. Although the Bulgarian land market is somewhat resistant to outside influences at the present state, they give insight on future developments and also aid forecasting. Notable trends are the growing popularity of energy production from renewable resources (for instance, bio-fuels should constitute 10 per cent of the total fuel consumption by 2020 in the EU alone), rising consumption of basic food items and consequently rising prices, to name a few.
Growing value of agricultural land is the trend but not of any type of land
So, what are the expectations for the development of agricultural land prices in Bulgaria? They will rise. For the next five years, agricultural land prices should rise at an average of about 20 per cent each year. Of course, land prices will not rise equally for all land. It may certainly be expected that price of poorly managed and low quality land will rise at a significantly slower pace than that of professionally managed land, which generates good returns and added value. Although forecasts generally carry a dose of uncertainty, at the present, things are looking up on the Bulgarian agricultural land market.
