Lessons from Romania – a practical response

Last week’s Editor Letter highlighted some important features of Romania’s agriculture investment market but failed to demonstrate the country’s real potential, argues Carl Atkin, director at Terravost Limited.

I read with great interest last week’s Editor Letter Lessons from Romania. As someone who has been active in agricultural investment projects in the country since 2006, a lot of the messages in the article rang very true. Yes, the country presents many challenges: a high degree of fragmentation and the lack of a well-developed tenant and operator market means asset selection can be tricky and it means that most successful investments have to pursue an integrated own-and-operate strategy.

But the letter failed to show how the country’s quirks can be navigated and poor performance avoided. It is also important to highlight how big the Romanian opportunity is within Central and Eastern European region; arguably it has one of the best combinations of income return and capital appreciation potential of any country globally.

The agro-ecological basics are sound. The country is well endowed with fertile soils and a growing season much longer than Russia and Ukraine; the biological crop yield potential sits mid-way between ‘maritime’ Western Europe and the continental land masses of the former Soviet Union.

Yes, the legacy of land reform remains painful – Romania practiced one of the most extreme land reforms of any post-Soviet economy. However, in the west, early stage investors have built many large compacted farms of several thousand hectares and there are many partially consolidated land projects for sale across the country, where investors have achieved 40 percent to 70 percent land consolidation.

The key to a successful parcelling project is ensuring a tightly-defined command area such as around a few specific towns or villages, and working with reputable local brokers. Those investors that may have failed or performed poorly are those that have allowed brokers to buy scattered parcels over a huge area which are never going to be consolidated into commercial blocks in a reasonable timeframe. Broker due diligence is critical: there is plenty of ‘false intermediation’ and less than reputable agents operating in this space.

Romania’s land market has seen considerable capital appreciation in the last fifteen years, especially since its accession to the European Union in 2007. The larger commercial blocks have improved markedly but unaggregated parcels have also increased in some parts, contrary to the thoughts presented last week.

Early Italian investors, who entered the country 10-15 years ago, are now exiting to be replaced by Germans and Hungarians. Institutional capital is now slowly beginning to flow at a steady pace and will soon replace the private capital that has dominated land ownership for the past decade. And most importantly – the country has no restrictions on foreign ownership of farmland, and in contrast to some other countries in the region, the political environment and rhetoric remains very supportive of foreign investment.

Cash yields are respectable: annual returns of up to 4 percent from leasing and 6 percent or more from operations mean the country compares favourably with more mature markets, such as the US or Australia. But the real opportunities for value creation lie in active asset value enhancement – turning around underperforming farms, consolidating and swapping land and converting leases into freehold. Combine this with land price convergence towards other EU countries – namely the old EU-15 – and with a shift of common agriculture policy subsidy payments eastwards, and the capital growth drivers remain very strong. One only has to look at Poland, arguably five to 10 years ahead of Romania, to see a market which is more institutionalised and sophisticated, with well-developed and well capitalised tenants, contractors and owner-operators. This gives us all a fairly strong idea of where the market is likely to shift.

Five years ago, global institutional capital looking at agriculture was flowing rapidly to Latin America. Now the focus has shifted to Australia and New Zealand. But the smart investors have already found Central Europe – and while a blend of countries in the CEE region offers good diversification and a greater pipeline of investment opportunities, Romania stands out as the particular star.