Brown & Co partner Adam Oliver shares his view on the long-term growth prospects for Romanian farmland and the reasons why his firm opened a permanent office there in 2016.
Farmland prices in Romania are currently the lowest in the EU. But as the country progresses along the development curve, it is likely that the land market will develop from its current very low base and offer strong long-term growth prospects.
While a very fragmented market, current data indicates an annualized 16 percent increase in land values, with larger blocks of land rising faster than small individual parcels.
If Romania’s economy continues to grow and there are no major geopolitical upsets, then the prospect for long-term strategic growth look reasonable – as does, to some extent, convergence with the land markets of other EU member states.
However, as with so many agricultural investments, this macro view depends heavily on proper execution and needs to be delivered with a carefully devised and detailed investment strategy. It is for this reason that Brown & Co opened a permanent office in Romania in 2016, given the market’s long-term growth prospects.
In addition to a land consolidation strategy, one strategy being actively pursued is the acquisition of leased farms, which typically run from 1,000 hectares to as big as 50,000 hectares.
This involves acquiring a company with long-term lease rights (over 10 years) and effectively becoming the tenant. As the tenant there exists a first right of refusal to purchase the land. Therefore, we believe that acquiring a business with positive cashflows and the ability to convert leased land into owned land over an extended period of time is compelling.
Internal rates of return for this type of strategy are 14 percent to 15 percent, but it is not without its challenges. The extremely localized nature of the market means there has to be capacity to manage the business and individual transactions at a village level.
Many investors will not want to actively farm the land, and the rental market is underdeveloped both in terms of values (€110 to €200 per hectare) and the number of robust, financially sound tenants willing to rent to the land. This will change, but for now, operating the land and converting leased land into owned land represents a strong synergy that can be deployed to great effect.
Parallels can be drawn between what is likely to happen in Romania and what happened in Poland in the 2000s. As GDP grows, Romania will become more attractive for investment, banks will become interested in the Sector, management standards will improve (aiding profitability) and farmer to farmer transactions will become more commonplace – providing the basis of a functioning land market.
Typical land values in Poland just before EU accession in 2004 were about €2,500 per hectare for good quality (grade III and higher) land. In today’s market they are €12,000 to €16,000 per hectare, so what were the factors that were involved in this structural up-shift in the land market?
Firstly, productivity improved. Farmers became better educated and improved management standards, which coupled with access to better seed, fertilizer and crop protection technology has improved yields and therefore net farm income over time.
Simultaneously, Poland joined the EU in 2004 and started receiving subsidies, which represented all new money into the sector. While that was happening, macroeconomic improvements were gathering pace. Poland’s GDP was growing consistently, without a pause, and its GDP per capita since 2004 has doubled. This led to much improved investor sentiment towards Poland as an investment destination.
As a result, the premium required for investors to enter the market decreased and yield compression started to occur in all asset classes with corresponding rises in capital values.
At the same time, improved profitability (through the yields and the commodity price cycle) led to some banks entering the market, offering debt finance products at commercially viable interest rates, and the land market began to function properly. All of this combined with a cultural affinity for owning land and the market (like all developed markets) began to be strongly driven by local farmer-to-farmer transactions.
Romania’s current GDP per capita is at the level of Poland’s in 2010. Romania’s land market divides into two, with fragmented land at around €2,000 to €3,000 per hectare (not dissimilar to Poland in 2004) and larger blocks trading at €4,000 to €6,000 per hectare, with higher values particularly in the west of the country.
Brown & Co’s view is that for properly managed investments, there is a strong chance that Romania’s land market will continue along the current growth trajectory, for many of the same reasons that were relevant for Poland 10 years ago.