Business opportunities in the Hungarian agriculture land market

Summary

Dear Investor,

The Hungarian land market provides an interesting, exotic investment opportunity. Prices are c. 10-20% of the West-European average and are at level of EUR 1,800-2,200 per hectare. The regulations close out the legal (even local) entities and foreign investors from the market until 2011, which results depressed prices. So price change highly depends on regulation and if it happens can cause dramatic 50-100% increase. A such increased price would still have a significant discount comparing to neighboring Austria and Germany (EUR 6,000-16,000).

Until the price increase, leasing of land can provide a comfortable, predictable cash flow for financial investors. From this year the leasing fees are generally connected to the central subsidies of land and are c. 50% of it. The subsidies are growing by 5% every year (in 2005 we are at 60% of EU level). It results a c. EUR 80 per hectare per year leasing income. In case of an at least 5 year contract the leasing fee is tax free so since there is no cost on lessor side it is net profit or 4-5% return in real term since land prices can grow at least by the inflation (3-4%).

At the moment only Hungarian citizens can buy land up to 300 hectares. A foreign citizen living in Hungary at least three years and dealing with agriculture activity is judged as Hungarian citizen. The are sometimes offers of companies owning legally land. In this case the company can be bought freely by legal entities or foreigners but prices can be higher.

So for foreign investors today have two alternatives. Buying companies owning land or the lands are bought by Hungarian contacts with background agreements.

The parcels can be in sole ownership or can be owned by number of owners. The certain percent of ownership does not limit the leasing contract. If somebody has the majority, that results a control position.

Földbróker.hu can provide nationwide offers, consultancy and assistance in transactions.

Contact: Zoltan Fur, +36 30 950 6037, info@foldbroker.hu, www.foldbroker.hu

Prices

The prices are in the range of €1,800-2,200 per hectare. On the western part of the country (Transdanubia) and around Budapest prices are generally higher. In southern Transdanubia and in the northern part of the country prices are lower.

Leasing fees will bring in 2-5 % income from the original investment.

The characteristics are the following:

  *: Gold crown value

Comparison of prices on the international market

Prices are on average 5-10 times higher in the EU than in Hungary, in the EU hectare prices can be found in the range of €8,000-20,000.

Price increase estimates

It can be estimated that Hungarian and EU prices will get nearer to each other in the coming years. According to our conservative estimate, prices will go up at least 2-3 times in the next 2-3 years in Hungary. That means 30-40% per annum, the compounded interest taken into account. This income is remarkable comparing to the 10-20% income of alternative investments.

Important dates and timing

2008: EU review of derogation for limitation for foreigners to buy agricultural land
2010: new government
2011: End of limitation for companies and foreigners to buy agricultural land

Liquidity

The continuous demand will provide reasonable liquidity on short-term basis as well. Lands with large size (over 100 ha) and clear ownership structure are and will be more marketable than small areas. There could be even a shortage of large plot of land in comparison to the demand, which can also provide good liquidity.

Transaction possibilities for foreign citizens

Since only Hungarian persons can buy land up to 300 hectares at the moment, foreign citizens have only two alternatives:

• Hungarian companies owning land can be bought by foreign persons or foreign companies
• A Hungarian person can buy land financed by informal and formal agreements of foreign citizen. This transaction does not create ownership, but it can efficiently control the investment action.

Risks

• Political

While the present purchase limitations are upheld the prices will not go up dramatically because there are fewer number of buyers with the right amount of capital. If it is allowed for Hungarian legal entities or companies to buy land, then all the agricultural firms (cooperatives, limited companies, other companies) and Hungarian and foreign financial investors (through Hungarian companies) can appear on the demand side and that can push up the prices. This regulation issue highly influences the prices.

• Agricultural profitability, ownership situation and land supply

The land based agricultural supports has doubled the profitability. This has increased the demand for the land. On the other hand, the lack of capital in the Hungarian agriculture can lead to the large number of smallholders being left out. Due to privatization of land elderly country people and their inheritors own vast amount of small plots of land but cannot make use of it. This provides a continuous supply, which can influence the prices.

• Change in the support system of the EU and EU prices

If the EU decreases the support of agricultural producers from 2014, a crisis period may start, when land prices may fall, likely in Western-Europe so concentration of lands may accelerate.

Agricultural land

The size of land is measured in hectare (ha).1 ha=100x100 meter. 100 ha=1 sqkm. The quality of soil is measured in Gold crown value (GC). The scale ranges from the poor (5-15 GC), medium quality (15-25 GC), good quality (25-35 GC), to excellent quality (35> GC). An analogue point system exists in the EU. The formula is approximately a Gold crown + 45 gives the EU point value, e.g.: 25 GC is around 70 points in EU.

The gross landmass of Hungary is 93,000 km2, of that 80,000 km2 is arable land. There are four main agricultural areas: ploughland (4.8 m ha), meadow (1.1 m ha), orchard (0.3 m ha) and forest (1.8 m ha). 

The ploughland and meadow can be considered as subject of real estate investment while buying orchard or forest is an investment to “crop” since the value and time horizon is defined by the plant cultivated there.

The following points should be taken into consideration regarding the situation of land:

• in which part of the country the land is situated
• distance from city, main road
• approachability
• system of irrigation
• weather and surface conditions, slopes
• which way it faces
• buildings and infrastructure.

Ownership

Approximately 88% of the land belongs to private persons. More than 90% of the agricultural land is in private ownership, in case of forests this is lower. After changing from the previous political regime (1989) to the present government, most of the land got into private hands, which resulted 2 million owners (!). There are 920,000 small individual farms as well, 99% of which exist on an area less than 10 hectares.

• Private ownership

• private person can obtain land the following way: buying, gifting, inheriting, state compensation sceem.
• multiple ownership: a piece of land belongs to many owners.
• private land in foreign hands: inheriting or before 1994 foreign companies could legally buy land in Hungary.

• State property: land cultivated by state farms

• Property of agricultural firms

The former cooperatives transformed in agricultural companies, firms that bought land before 1994.

Size of plots

The average size of farms is much lower than in the EU. Only 18.5% of the whole land consists of fields greater than 50 ha, and 52.1% of the lands is smaller than 10 ha.

Agricultural producers and economical circumstances

The main types of producers are the following:

• private farmers (60%): they farm either their own land or leased fields (5-100 ha), the technical level of production is poor or medium.
• agricultural cooperatives (24%): they lease fields (1,000 ha), with good or medium quality technical equipments and method
• agricultural companies (10%): farm on their own and leased land (50-500 ha), medium or good technique.
• state farms (6%): they farm huge areas (10,000 ha), they apply modern technique, and methods.

Most of the cooperatives, companies, and a smaller part of private farmers lease the land they cultivate.

Leasing fees will bring in 2-5 % income from the investment. The bigger the leaseholder the safer the payment of the leasing fee.

Legal regulations

• IV/1959, Civil code
• LV/1994, “Act on land”
• LIII/1996, Environment protection
• CXLI/1997 and 109./1999. (XII. 29.) FVM decree on Registration of farming
• CXII/2001 modifying LV/1994, Family farms, preemption rights
• CXVI/2001, National Land Fund foundation
• XXIII/2002 modifying LV/1994, new order of preemption rights

Square Measures

Important Notice

We are engaged only to provide land-agency services to our clients. Nothing we say or do (whether in this or any other communication) is intended or should be understood as advice to anybody on the investment merits of acquiring or disposing of particular investments or as an invitation or inducement to engage in investment activities.