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28Dec2005
The agricultural land market has acquired higher liquidity
Advance Terrafund is a joint-stock company with a special investment purpose for securitization in real estate property (or Real Estate Investment Trust-REIT). The company’s investments are targeted mainly to purchasing agricultural land and land in urban areas. Having obtained a license from the Financial Supervision Commission in July 2006, in September the company started active purchases of agricultural land. After increasing its capital two-fold, the company now has a capital of BGN 11.05 million, one third of which has already been invested. We spoke with Radoslav Manolov, CEO of Advance Terrafund, about the dynamic development of the agricultural land market in Bulgaria after the establishment of the special investment purpose companies.
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Q: Several REITs have emerged on the market this year. What makes Advance Terrafund different from the others?
- A large number of the joint-stock companies that securitize in real-estate property buy plots of land and afterwards they develop them and rent out the built facilties. In our case the objective is to buy plots of land for cultivation, because it turns out that this niche in the real estate property market, namely the purchase of agricultural land, has been underestimated for a number of reasons.
The first reason is the rather strong fragmentation of the agricultural land. I cannot see anyone who will be willing to clear this mess and consolidate all that land. The state has the willpower, but not the potential to do it, therefore the only option is for private business to get the job done. That is why we have decided that our fund should focus on investments in agricultural land. At present the agricultural land does not generate any substantial profit, except from asset increase. If we make profit only from rent payments at BGN 60, 80 or 150 per hectare, the land should costs us about BGN 1,000, provided we want the profitability to be sufficient. Since at present the price of land is higher, we decided to buy plots in urban areas, in order to build a portfolio that would be tradable and would mark a sharper increase, and would thus ensure not only a steady growth of the company’s assets from the increase of agricultural land prices, but would also turn a dividend, one that will be formed either from rent from those plots, or from their resale.
If I may rank the currently existing REITs, with those that invest only in agricultural land being at one extreme , while those who invest only in plots for real estate development being at the other, then our fund will be somewhere in between. What I can say, however, is that in terms of investment intentions there are no other funds similar to ours at present.
Q: Am I right in understanding that you intend to invest in the tourism sector, in summer-house settlements and residential buildings?
- No such projects have been considered so far and we definitely keep our distance from them. We do not want to buy plots of land for development purposes. At present we buy land only, and we do not intend to make any big investments in construction of any kind on those plots. This does not mean that we simply buy and wait for the asset to increase its price. With agricultural land the price increase comes with good husbanding, with building plantations of perennial crops and with good management. The idea is that if at present one wants to invest in something that is undervalued, one goes and looks for agricultural land; conversely, one wants to buy a certain plot if one thinks that the land is offered at an acceptable price and in proper conditions. This is fine, but if you have one thousand Bulgarian leva, you cannot buy a plot. Therefore, if one wants to invest in an undervalued segment, ones buys shares of a particular fund, therefore the definition becomes as follows: acquiring undervalued assets is equal to acquiring equity in a fund that invests in such an undervalued asset. This is confirmed by a large number of external analysts who study the market and to a large extent approve the present combination in the portfolio, which in our case is a combination of land in urban areas and agricultural land.
Q: A month ago you increased the capital of Advance Terrafund. Do you think the funds thus raised will be sufficient to support your investment intentions?
- We have not set a limit to our investment intentions. We intent to buy on a continuous basis, without stopping even for a single day, and what is more, we have recently bought over 100 hectares. These are funds for which it is a matter of time to be invested, but what I can say is that one third of the BGN 10.4 million raised has already been spent by now.
Q: Spent on what?
- On agricultural land. A week ago we participated in a tender in a city, well – a district center, I am not saying which. We made the highest bid and now we look forward to the procedure for announcing the successful bidder. I am talking about a plot of land in a district center with a total area of 1.065 hectares.
Q: How much agricultural land have you bought so far?
- The targets announced in the beginning of September 2005 were to buy over 1,200 hectares by the end of the year. I am pleased to say that we have attained those targets, even doubled them. At present Advance Terrafund owns over 2,400 hectares of agricultural land. The average price is BGN 1,600 per ha, and the average size of the plots is over 1.5 ha. We work on a large scale currently.
Q: If you continue at the same pace, it may be expected that in the near future the raised funds will be invested rapidly. Does this mean that you will prepare a new capital increase?
- There will be one and it is a matter of time for us to announce it, and next year there will be at least one more increase of our capital, but we will decide on the actual size of such increase according to the market situation. It will be in accordance with our physical capacity to buy land, as well as with the interest of the shareholders, whereby we do not keep money in deposits, but invest it. What we have realized at Karoll is that the most valuable thing is the confidence of the investors and shareholders, and we respect that. The financial resources are only an instrument to achieve our goals.
Q: How was the market affected by the establishing of REITs which invest mostly in agricultural land?
- It has acquired higher liquidity. People already know that we buy, they know our intentions and have confidence in us. Regrettably, in some areas many of them are reluctant to sell their land because for them it is a matter of survival, of meeting their daily needs. These are areas with over 50% unemployment. These people have no other choice but sell their land, which they do not cultivate and it does not generate income for them. In most regions there are tenant farmers who make their rent payments in kind, in wheat, cooking oil, etc. At the same time, in the areas where we have already bought land and control about 400-500 hectares, at some point we may have meetings with people who wish to take that land on lease. We are now beyond the point where we had to look for lease holders ourselves. I could say that we almost did not need to go looking for them. We have gathered sufficient information about them and at present we select our would-be tenants so as to give the land to the right people. Those willing to work and develop modern farming.
For the farmers themselves it is also good to work with us, too, because they can have normal negotiations and contracts with us. If a farmer cultivates the land of a cooperative of several thousand individuals, he will face a multitude of diverging opinions and disagreements, which makes the negotiations of the farmer with the owners difficult. When there is only one owner of the land things will be much easier and convenient for the tenant. However, we will exercise follow-up control and will monitor the proper management of the land. That is why I can say that we are looking for suitable partners, rather than just farmers, and at the same time we buy and consolidate on a continuous basis.
Q: Despite all the active purchasing and consolidation of agricultural land, are you not concerned with the fact that the consolidation process is going at a slow pace and this might impede obtaining subsidies from the pre-accession funds of the EU?
- In my view on a national scale there will be difficulties in the absorption of the subsidies, because the major problem is the fragmentation of the agricultural land. For our fund in particular we have not set any time limits. We have set ourselves quite high targets and I think we will meet them.
Initially, as I have said, while we had set ourselves the target of acquiring approximately 1,200 hectares of land by the end of the current year, we already have over 2,400 hectares. We are going at a faster pace than planned and I believe that if we maintain that pace by the end of next year, we can actually purchase even more than 10,000 hectares, which would make us one of the largest landowners in Bulgaria. Advance Terrafund has big potential; we have the willingness to achieve these targets, and the resources and confidence of the shareholders. We have an impeccable reputation built for 13 years now by Karoll. We started from scratch and in less than three months we have managed to buy such a large amount of land. This makes it possible for us to sit and talk with the farmers and help them absorb these funds in a normal manner.
Q: After our accession to the EU do you expect the lease for agricultural land to increase?
- I suppose so, because one can much more easily negotiate a lower lease amount when one is faced with a large number of individual owners of small plots of land. At present many of the farmers face serious financial difficulties, they have obsolete equipment and numerous lease contracts. If the land is consolidated, the equipment and methods are upgraded, then the lease amounts will be due to change, too.
Q: Do you think that a tax should be imposed on disused land?
- Of course, if a tax on barren land is imposed, this will strongly enhance the trade. In my view it is only a matter of time for such a tax to be introduced, because it is not acceptable to have only 52% of the arable land in Bulgaria being actually farmed, and the rest left barren; to import agricultural products while we can produce them locally.
Q: Do you expect land to become more expensive and how do you think its price will fluctuate?
- The price of land is a function of what it generates. If the land is barren, there is no reason for its price to grow. If the manner of land use is changed, then it may be expected to have a higher price due to transforming it from barren into arable land and because it generates some income. At the point in time when some land is consolidated, its price immediately increases several fold.
