Interview with Radoslav Manolov, CEO of Advance Terrafund REIT, for the newspaper "Dnevnik"

Dnevnik Newspaper

11.02.2009, p. VII
At the end of last week amendments to the Agricultural Lands Act were promulgated in the State Gazette, which will give large real estate funds more opportunities for investments in the sector. At the same time the rest of the real estate market has openly begun talking about a crisis and depreciation of the prices. Will this affect the activities of the agricultural land companies and what are the plans of Advance Terrafund for this year, we speak to its Executive Director Radoslav Manolov.
Mr. Manolov, there are now open talks about crisis at the real estate market. Does this affect agricultural land as well? 
- The real estate crisis affects everything and every segment of the market. It can be said that because of it most of the investors have rethought their strategies and the euphoria is already gone.
Has the price of agricultural land already registered depreciation? 
- Yes, there is depreciation. Presently, prices have returned to the levels from a year and a half ago and we are now talking about values ranging between BGN 220-230 to 270 per decare for small plots. When talking about aggregated real estate, package prices can be several times higher.
Apart from buying and aggregating land, which do you prefer – renting out or selling? 
- For us securing rental revenues is a natural process which reflects the quality of the land we buy. Revenues from sales are a serious source but thus we lose the investment, and for us this moment has not come yet. Prior to the sale of real estate we aim to concentrate and aggregate the land and then offer a high quality product at the market. The purchase and the renting, concentration, aggregation and sale of land are all parts of the management process and each of them is important.
Have you decided whether to give out dividends for 2008? 
- For 2008 – no, but for 2009 we expect to register profit which will be distributed as dividend. As per the expected cash flows, the amount will be somewhere about 5% of the par value of the shares (Advance Terrafund’s shares have a par value of BGN 1, editor’s note), yet I would like to emphasize that this is a projection.
Does the government do anything to facilitate aggregation? 
- Yes, the Ministry of Agriculture and Foods participates actively. Amendments to the Property and Use of Agricultural Land Act have already been promulgated. These abrogate Article 4a which literally violated the rights of the people to dispose with their property and restricted the trade in agricultural land. Now when a land owner holds 10% of the land in a given area, they may initiate a consolidation procedure. Advance Terrafund has cases of such concentration of property in more than 100 areas where we can initiate aggregation. Together with the other members of the Association of the Owners of Agricultural Land, these projects will be increased many times. However, the process will begin only when the procedure is clarified, naturally. At present our company has started its first consolidation project in Bulgaria, on the territory of the village of Katunets.
Has the suspension of agricultural funds affected land prices or rental contracts? 
- It was characteristic for last year that agricultural producers participated actively at the land market, which was due, on the one hand, to the privilege they had to be the first ones offered land for purchase, and on the other hand – on the security they had prior to the steep decline in crediting. The latter will affect not only them but also the sector as a whole, and from there – the Bulgarian economy. A large part of the agricultural producers will have to streamline their activities in order to survive. How has this reflected on the land market – prices have been normalized, but the rental contracts have not been affected at this stage.
How much agricultural land does Advance Terrafund hold at present? 
- We currently own 264 thousand decares, of which we have rented out over 150 thousand decares, and we continue to rent out more. Our target is to have approximately 80% of the land rented out, and our rental prices at the moment are about BGN 20 per decare.
Will there be an increase of the rental price? 
- Our contracts stipulate 20% increase of the rental price. However, taking into consideration the current situation with the agricultural producers, we communicate with them actively and when they are in need or have problems, we are ready for dialogue. In this connection, last week we had a meeting with one of their business organizations and we are close to agreeing upon joint action in order to develop clear rules for the sector, simplified funding and subsidizing schemes for the producers. We are ready to assist this process because stability is important for all of us.
Is the amount of the rental price regulated in any way?
- No, the market principles apply here. At the moment the only correlation that can be noticed is that the rental price is about 80-90% of the subsidy for the current year. But this is not regulated officially; it all depends on the market.
The shares of the real estate investment trusts (REITs) were considered a shelter during crisis but in the least several months their price has dropped substantially. Why have the investors withdrawn from them?
They are truly a shelter, but the crisis is not just economic, it is to some extent psychological. At one point the investors themselves lose faith and sell, starting from the most liquid shares. That’s why REIT’s shares became the object of sales and respectively their prices dropped to the current levels. It is a fact that there still are quite a lot of investors who consider them not only a shelter, but also a steady investment. At present the purchase of shares of a real estate fund is equal to purchasing land at the price of BGN 120 per decare. Correlated to rental revenues of BGN 20, the profitability definitely exceeds 15%. For the last three years land prices have increased with an average of 27% for 2006, 28% for 2007 and 33% for the previous year, according to our observations and statistics. What are your projections for the price per decare for the current and following years? 
- For 2009 I suppose that the average price will be about BGN 250-300, possibly more. At this stage it is very advantageous to purchase agricultural land and that is exactly what we are doing – we are concentrating the property, initiating new projects, have talks with investors who want land for farming. The interest of the Dutch investors in Bulgaria is remarkable. Our project in Katunets is supported by the Dutch government on the basis of an intergovernmental programme. If a major investor owns land in a certain area this could contribute considerably for the improvement of the infrastructure, developing irrigation systems, opening of jobs and the overall development of the rural area.
We mentioned irrigation, but in Bulgaria the irrigation systems have not been maintained and they have not seen investments in years...
- Yes, they are not especially modern, therefore in the area of Katunets we will also develop an irrigation system project. Even this is enough to help increase the agricultural yields. Last year we had such a case – an Italian businessman had invested in the region of Shumen for several years and at one point his yield was twice higher than that of the others. The locals were asked what was the reason for that and they said that he consecrated his fields every year. The truth was, in fact, that he introduced drip irrigation. The lack of security the agricultural produces face leads to lack of irrigation and fertilizing, which reduces their crops. It is high time to change this manner of operation.
There have been talks for several years to impose fines for deserted lands. Do you support such a measure?
- Restrictive measures may be introduced only after the situation with the property is set right. Restrictions cannot be enforced for something which the enforcers themselves have reduced to a chaotic state. That is, if it is the fault of the State that the property the heirs have been restored is broken into  6-8-decare pieces, the new owners cannot be blamed that they do not farm these pieces, it is just that they are inefficient in this state. Currently most of the agricultural lands which can gain subsidies are already being farmed. The very common problem of unlawful use of land – agricultural producers farming whole blocks of land where not all the plots belong to them – has not been solved yet. But this is the transitional period now – the latest legislative changes envisage sanctions – when caught in such a violation, the unlawful user has to pay to the municipality the triple amount of the average rental payment for the previous year. This will help feed funds to the municipalities, and how these funds will be distributed is the decision of the municipality.
You once said that there are legislative obstacles for the participation of the real estate funds in the trade in land against compensation bonds. What are these exactly? 
- The Special Investment Purpose Vehicles Act very clearly shows where funds may be investment. One of the restriction is that these companies cannot invest in the capital markets, which means that they cannot buy compensation instruments, and respectively participate in such tenders. If we want to invest, the means can always be found, it is not impossible, but there is no direct way.
If you are allowed to purchase land with compensation bonds, will you find it profitable to participate in the tenders? 
- Currently the agricultural land tenders are profitable only against compensation instruments. Because at the tenders the value of the land is assessed at an average price per decare of about BGN 600. Thus, if at the moment we are offered to invest in 20 thousand decares at BGN 600 per decare, this will not be acceptable for us. But with compensation instruments, which are traded at 35-37% of their par value, the price will be close to the market prices.

Radoslav Manolov: The real estate crisis has affected agricultural land as well

Vessela Nikolaeva 

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