When you search for a subject, you will almost only find, like gold investment, that this is the safest investment that is facing a huge price explosion, the only sure point to withstand any crisis and guarantee a return. Risk-free and available for sale at any time, there is always demand. With rising populations, food prices are rising and so is the return on land. After 5 years, profits from price increases are tax-free, as is the case with real estate. According to the FHB land price index, the price of Hungarian land has doubled in the last 11 years, which is why it is a big deal to get on.
One of the reasons for this price explosion is that in 2014, legislation to prevent foreigners and companies from gaining access to land is expected to be abolished. (Note in brackets, originally this should have been done in 2011, now the new date is 2014. Question is this the final date?)
Foreign land prices are several times higher
Another reason, which is partly related to the first, is that foreign land prices are several times higher than the Hungarian, for example, in the Netherlands, land is twenty times as expensive as ours. Consumers are speculating that foreigners will want to buy large quantities of Hungarian land, even at higher prices than today, so they can make a nice profit from the increase in the purchase price.
The third reason is the generous land-based agricultural support system of the European Union, which in itself produces a good yield every year.
Before we turn to the specific numbers, let’s look at what to look for when buying a piece of farmland?
The first is that buying requires a lot of expertise, much more so than buying a car. A very large category of land, other than pasture, orchard, arable land, available yields and purchase prices, can be a good investment if you do not know that the land is covered by inland water every spring or is too saline or rocky, virtually no or barely usable for production. A canal may cut off the land from the village, so although it is seemingly close, the canal would have to cost the lessee 20 kilometers a day, who would not do it, and other things that only a local expert would know. Of course, in this case too, we use our common sense, for everyone, the best land to sell. But if we find the right specialist, pay for his expertise. For example, companies that sell gold and farmland at the same time should be forgotten. (There are a couple of these on the net.)
For example, accessibility to a forest is important, proximity to buyers, when the forest will be mature, how many cubic meters and what kind of wood it currently has, etc. It doesn’t hurt for an orchard to have a clue when it will need to be replanted or which one to sell, green or red apples.
Size is very important, letting a serious farmer rent only large, large plots of land, because an agricultural machine cannot work on small plots economically. It is not by chance that much smaller land is scattered. The real manageable size starts somewhere around 50 hectares. (One hectare is 100 meters by 100 meters.)
Ownership is also an important consideration, as many land is in common ownership and it is virtually impossible to agree with all owners. Therefore, always ask for your property list beforehand and thoroughly examine it to get rid of a lot of inconvenience. It is also worth paying attention to rights of way.
Is there a tenant currently on the land? If so, how much do you pay? What contract do you have, can we get rid of it if we are disadvantaged by the current contract? Are we going to find a tenant on the ground?
What is the quality of the land, how many gold crowns? What are the terrain, soil structure, etc.?
So, it’s not easy to find the right area.
After that, let’s look at the return on investment and how realistic the optimistic vision is.
Let’s start with European land prices. There are indeed places in the Union where the price of land is up to 10-20 times that of Hungary, but let’s also add that in the surrounding states (except Austria and Slovenia) it is cheaper or not (significantly) more expensive, but the same is true for much of France and Spain, for example. Poland, for example, has lower prices than ours.
I am skeptical about whether there is a real expectation of buying foreigners in Hungary. Whoever wanted it could still buy land (everyone has heard of so-called pocket contracts) and if I was German, for example, I’d much rather buy land at the same price in France than in Hungary. If you were an Austrian, I would rather think in Slovakia or the Czech Republic, but if I did buy land there, at most, within a 50 kilometer lane.
I am not saying that prices may not rise when the moratorium expires (if it really expires in 2014), but in my opinion, it is far from what many people hope.
The Czech land market was opened to foreigners last year and so far no noticeable price increase has occurred, although in terms of distance they are in a much better geographical position for Western farmers than Hungary. (Currently, an average of 100-150 thousand HUF is more expensive per hectare of land in the Czech Republic than in Hungary.)
Let’s look at the price of land so far.
Indeed, it sounds very good to have doubled the selling price of land in 11 years, but if I look at an 8% bank deposit gaining 233% over the same period, the result is no longer amazing.
The bottom line is inflation-adjusted yield, with only 12.6% return in 11 years, or about 1% a year in real terms, and even our land is less than inflation in 8 years!
Of course, let’s not forget the yields of rent and EU subsidies (subsidies go to the tenant only), but if we ignore them now, the land barely became more expensive than inflation.
About EU subsidies: Currently, the Union spends 40% (!) Of its total budget on agriculture and this amount is constantly decreasing. Although Hungarian farmers will continue to receive land-based support until 2013, the total CAP budget is already suffering a real 8% reduction. It is a growing burden for the EU to maintain costly agricultural subsidies and for years, and even decades, to reduce subsidies on a large scale. In the current crisis, this is likely to intensify.
Farmers got money for their land
The United States has already followed the same path, and there, too, they wanted to regulate agricultural production with serious state subsidies. Farmers got money for their land, they didn’t have to produce anything for it. (Such is the current area-based EU subsidy, which currently stands at $ 58,000 per hectare for nothing. This amount will increase to € 264 by 2013.)
The effect of this was that everyone wanted to buy farmland, and the farmers pledged their lands to acquire more land. Prices soared.
Then came President Reagen, who ordered a halt to the budget’s hitherto unstoppable budget deficit and, among other things, put an end to this wasteful and unnecessary support system. The consequences are easy to guess: as prices soared and so did plummet, many farmers lost everything because of credit.
In my opinion, this risk is also present in us. If the EU gets tired of spending 40% of its total common budget on supporting a sector that provides only 5.1% of its citizens with a livelihood of 2.1% of its GDP, there will be major restructuring market, it is not unthinkable that there will be a significant fall in the price of arable land. As almost all countries of the Union are facing serious public debt and financing problems, this is a realistic option. (European agricultural support was introduced in the 1950s to prevent food shortages from occurring again after the World War. This has been the case for decades, yet its support system has survived.)
Low cost with a workforce of $ 100-200 a month
One more word about rising populations and food prices: The fact that populations are rising across the globe is less of an issue for us in a declining Europe. If we were to produce rice at a higher world market price, that would be the most important aspect. More important is the spread of vegetables and fruits produced in Morocco, Egypt, where they can produce and export to Europe at low cost with a workforce of $ 100-200 a month.
I wanted an accurate calculation of the yields available for arable land, but unfortunately due to the variety of EU and state aid I had to ask for help, but the answer did not arrive until this article was written.
But the Good Finance was kind enough to enlighten me unknowingly. As a customer I signed in, they told me everything in a very correct way. There was no misunderstanding, they were very sympathetic. What I learned from them is that only tenants are eligible for state subsidies, so it’s unnecessary to count on it. The annual rent is usually 4-5% of the purchase price of the land, if we require the services of the company (tenant search, contact, etc.), then 18% of this amount is deducted from their costs.
That is, the potential yield is 4% per annum plus the increase in the value of the land, which is slightly benevolent 5-6% per annum.
(Of course, 20-30% yields circulate on the net, but these are frivolous things. The same pages also say that the price of land doubles every 3-4 years, which is not true either.)
How much or little is that yield? I think it is realistic because, contrary to opinions, it is not a risk-free return at all, although it is a fact that a piece of land cannot be stolen or crushed, but its value is highly dependent on the level of subsidies.
With the current bank returns of 8%, considering the risks and the hassle (finding the right land, finding a tenant, etc.) is not as attractive an offer as many people want it to be and I don’t think it has any growth potential at all. but in the long run, once interest rates finally fall in Hungary and the Union does not cut subsidies, there is room for such an investment in a rich man’s portfolio. (Remember, a land worth buying starts at 7-10 million, but it’s worth double that.)