Digging deep in Denmark, facing anger in Hungary

Savills' Ian Bailey tells Agri Investor that institutional investors are more risk averse today than 10 years ago, when they at least seemed curious about frontier markets.

Although politics will likely keep institutional investors focused on mature farmland markets over the next five years, scope remains for an expansion into low-risk countries, according to a rural pundit at Savills.

The UK-based property firm, which produces a global opportunity-versus-risk matrix by assessing indicators of political, climate and other risks against specific markets’ agronomic potential and past returns, has just released an index showing a jump in Eastern European farmland prices.

But the matrix determined that mature markets, like the US and Australia, were the most attractive, while others with high potential benefit scores, like Brazil and Argentina, are pushed lower in the rankings by political dangers.

“The two things that drive land values around the world are politics and commodity prices,” Ian Bailey, the firm’s head of rural research, told Agri Investor. “We are, globally, in quite a volatile position politically.”



Bailey said Denmark provides an example of a market where recent changes are particularly visible in the matrix. Five years ago, he noted, the country stood near the bottom of the 15 markets examined in the ranking. Yet the government recently took steps to follow New Zealand’s approach of encouraging capital into the market to help capital-starved farming operations. It is starting to pay off.

“A lot of the farms in Denmark are heavily borrowed and heavily geared; technically brilliant, but actually they need some equity to support them,” said Bailey. “They are desperate for money to underpin those businesses so they can concentrate on producing and take away some of the debt, so there is a willingness to have foreign investors.”

Hungary, on the other hand, stands out because of the key role played by politics in dragging down the overall attractiveness of its farmland market. Bailey said that while Hungary’s current government seems opposed to foreign investment across the board, it reflects a sentiment that is widespread, adding that he had heard rumors recently about the beginnings of opposition to foreign agricultural investment in New Zealand.

“Foreign direct investment – whether people like it or not – is quite political,” said Bailey. “I think [opposition to FDI] is something that is rumbling around the world and it just depends on who is in government to determine how high up the agenda it goes.”

On the investor side, Bailey observed that the mood was markedly risk averse – much more so than 10 years ago, when many institutions were at least expressing interest in emerging farmland markets of Africa, Central Europe and South America, he argued.

Many investors are scared away by the complexity of agriculture and its exposure to weather risk, Bailey said, adding that in general, low commodity prices have slowed the pace of activity. Those investors who remain interested in the sector are focused on markets where they have the ability to achieve scale, he reckoned.