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09Nov2006
Foreigners indicate interest in capital increase of Advance Terrafund
Atanas Dimitrov is a Master in Finance, a graduate of the University of National and World Economy. He has 10 years of experience in the banking sector, is licensed as an investment consultant by the Financial Supervision Commission and a certified appraiser of agricultural lands. At present he is the Investors Relations Director (IRD) of Advance Terrafund REIT. We discussed with him the company’s plans and expectations about the future, as well as the overall land market development in Bulgaria.
- 2006 may be called the year of the REITs. We’ve been hearing about market over-saturation. How will you comment on the future of those companies? What are the growth prospects?
The number of the licensed REITs is growing indeed, and this is only natural for a developing market. In our view the problem is not with quality, but with the quantity of the forms of investment. REITs have definitely established themselves as quite an attractive incentive for capital investment, which is due to the good legislative provisions ensuring their operation, and also to their full transparency to the investment community and the tax breaks they enjoy, which compared to other types of companies, definitely give REITs the best possible treatment.
Probably at the IPO stage of REITs on the stock exchange there had been some over-eagerness on the part of investors for a quick profit, but it should be made clear that the operation of such companies involves long-term investments and their rate of return peaks after the 2nd and 3rd year. At the same time, Advance Terrafund REIT already has accumulated good experience and some strong results over a year and a half, having become the second largest owner of agricultural land in the country, the largest being the state.
- You have announced that in the beginning of December you will proceed with a fourth increase of capital. What interest in the company’s shares do you expect?
Strong investment interest has been expressed by existing shareholders and international funds. We have developed a clear plan for development of the company’s operation, the intention being for 75% of investments to be made in agricultural land and 25% maximum of investments to go into land whose status has been changed, or is for us to change, in order to use it for industrial, logistical or commercial centers. Advance Terrafund itself will not develop such lands.
The company’s business plan was presented by the Karoll investment brokerage to over 160 professional investors in Europe. In our talks with them it has become clear that they appreciate the uniqueness and potential of the product which we have developed. This gives us a reason to believe that interest in the issue of stocks by Advance Terrafund will be strong.
- And which are the strengths of Advance Terrafund?
It turns out that there are no other such public companies that invest in the acquisition of agricultural land throughout the whole of Europe, not even in the 10 new EU Member-states. The uniqueness and stability of our investment product is easy for everyone to understand. In neighboring Greece the average price of agricultural land is 10-12,000 €/ha, and in Bulgaria it is BGN 2,000 per hectare, i.e.1,000€/ha.
Another reason for attracting the interest of international investors is the price difference between small plots of land and consolidated ones. Our practice has shown that consolidated land plots double their price compared to the original small plots acquired. Further, what is of interest to international investors is that Advance Terrafund is one of the three most liquid positions in the REIT segment.
- Could you please be more specific?
Advance Terrafund is a straightforward, well organized and managed entity, with over 200 commissioners purchasing land for us on a daily basis. We also have a clear focus: we acquire land plots that can bring us a high rate of return. We focus our investments in the North Eastern and North Central regions of Bulgaria, where we own 45% ? 32% respectively of the total land bought. The price there may be 25% higher, but the rentals market is the most strongly developed and rent prices there are by 250% higher than in other regions. Therefore the rate of return is higher. The highest yields are those of cereals and there are large farms operating on lease, which we regard as our partners. Advance Terrafund will not be doing any actual farming, but will only lease out land. Therefore we wish to establish long-term relations with our tenant farmers in the field.
- What are your expectations about the land market?
There are two important aspects: what will happen with the price of land and what can we expect about the rate of rent payments. According to our estimate our average rental for this agricultural year will exceed BGN 110(or 56 €) per hectare, which will definitely be higher than the national average. This is due to the large area of land that we lease out for farming, as well as to our approach of establishing long-term relations with the farmers. In terms of direct subsidies, which agricultural producers will start receiving at the end of 2007, for them every additional hectare of cultivated land will mean larger income. We plan for about two thirds of our land to be leased out in 2007, and about 85% in 2008.
Regarding the price of land, let us look for example at developments in the Central European countries after their accession to the EU. The average land price in them for the past four years has been steadily increasing by 50% per annum and this growth trend is maintained after their second year of membership in the EU. In other words, the potential for increase of the agricultural land prices there has not been exhausted. The market in Bulgaria is only in the beginning of its growth cycle. Our analyses show a steady growth of the average land price by an estimated 30-50% per year.
- What are the company’s future plans?
First, our objective is to buy as much agricultural land as possible in the areas which we consider the most promising for the development of large-scale mechanized farming by our future and current lease holders. Now is the time to buy, because we are convinced that the price of land will keep increasing in the next 5-7 years. The big challenge for us continues to be consolidation. The Ministry of Agriculture and Forestry and the agricultural land funds realize the need for joint efforts to this and work on developing the rules by which this idea will be put into practice.
Second, to attain better lease terms for our land, i.e. a good current profitability.
Third, we ensure as favorable conditions as possible for our potential investors. In this context our managing company Karoll Finance is to reduce by half its management fees which, starting from the beginning of 2007 will be 0.375% per quarter plus 10% of the attained annual profit.
