Print this article

Guest Comment: Preserving Wealth In The Fields Of Romania

Norman Paske

Mintridge International

2 July 2013

At a time of continued interest in so-called “real assets” amid fears about what the economic outlook will be, this publication sometimes hears about the benefits of agriculture and associated farmland assets. This article, written by Norman Paske, managing director, Mintridge International, examines the case for Romania. As always, while the views expressed here by a guest contributor are not necessarily shared by this publication’s editors, we are grateful to share these insights if they are of interest to readers.

In 2003 I came across an opportunity to invest in a farming business in Poland. For some time I had been looking at investing in the sector, either in the UK or abroad, with the view to creating a profitable farming business that could one day be passed on to my son. With up to 100 per cent relief from inheritance tax, farmland presents an opportunity for individuals and families to preserve wealth through an intergenerational business.

Farmland in the UK was already well-priced 10 years ago and at the time I felt the UK’s economy indicated that yields might not hugely surpass inflation over the coming years. In Poland, however, the comparatively low entry cost together with the size and scale of available land represented very good value.

10 years on and I’m seeing similar – if not better – opportunities now in Romania. The country has benefited from its 2007 accession to the EU. €8 billion of grant funding was allocated for improvements to the agricultural sector through the European Agricultural Rural Development Fund . Romania has also strengthened its international trade links in recent years, having a significant impact on its ability to both import and export.

Agriculture is at the heart of Romanian business and culture. It contributes to 12.8 per cent of Romania’s gross domestic product and makes up 29 per cent of the workforce. Average land prices are at around €2,700 per hectare, as opposed to the UK’s price of up to €30,000 per hectare. For forecasting purposes, I look back at Poland, where prices for its most fertile arable land have risen by 15.4 per cent annually since its own accession to the EU in 2004. Prices then were the same as Romanian land is now – yet most of the land in Romania is better. The Chernozem soil found extensively in the south of the country is widely regarded as some of the most fertile soil in Europe.

To run a successful arable farming business requires strong management. Only about 25 per cent of investment-driven farming businesses in emerging markets typically succeed, and this is invariably a result of the management choices made.

Fragments

Land fragmentation is a common feature of the agricultural landscape of Romanian. The majority of the country’s farmland was restituted back to local families in small parcels of less than 10 hectares following the fall of communism. This has led to a huge number of private landowners across the country many of who have no interest in farming the land themselves and are happy to sell whenever they need to realise funds.  

With such few large scale freehold farms available, purchase and aggregation of such plots offers investors an opportunity to immediately add value to the land they are purchasing by creating a scarce asset of consolidated and operationally efficient freehold farmland. Professional management of this acquisition and consolidation process is key, as is interaction with the local community and mayor’s office, who assist in the purchasing, leasing and swapping of existing title agreements. 

This process does take time and it is therefore ideally suited to private investors who generally have more flexibility over the placement of their investment, in contrast to most institutions who would be looking to invest significant sums in large scale projects from the outset – something that, given the current scarcity of such opportunities, is difficult to achieve in Romania.

Commodities

The success of a farming business is not solely made up of the capital appreciation of the land. Demand for commodities will increase with an expected two billion extra people globally by 2050 and financial commodities markets have been surging on the rising price of food. Farming presents private investors with an attractive way to take advantage of this without entering into the institution-dominated trading of financial markets.

Capitalising on this growth again comes back to management. In 2010, the country’s average yields for the most commonly farmed crops of wheat and maize were approximately 3 and 4 tonnes per hectare respectively. Compare this to the yields produced by the larger, more technically efficient farming companies – these were 6 and 9 tonnes per hectare.

Excellent trade routes via the Danube and the Black Sea will accelerate this shift. EU and government funding has already seen improvements in local infrastructure with several grain storage and handling facilities along key transport routes. Many international grain traders now own silos across the south of the country, driving Romania’s ability to swiftly and efficiently export produce beyond Europe and to the likes of Africa, the Middle East and Asia.

As an agricultural investment opportunity, I’ve yet to see one more compelling than this currently. With an increasing clamour in the investment community for real asset based investments, farmland is more and more becoming an attractive investment option. Romania is ideally suited to private investment where flexibility in both the acquisition of land, and the structure in which the investment is held are achievable. Currently, under the terms of Romania’s EU accession the only restriction a foreign investor faces is the need to set-up a Romanian-registered company in order to acquire the land, but even this will no longer be the case from 1st January 2014 when legislation preventing foreign individuals from buying land is relaxed.

For private investors and family offices there is also one final but significant benefit to investing in farmland in Romania. Providing appropriate company structures are put in place, the investment can benefit from 100 per cent relief from inheritance tax.

It all makes for an exciting and timely opportunity to invest in agriculture at a more affordable entry point – one where families can protect and preserve their wealth for generations to come.