Valuating Agricultural Land. Quality really matters!

Working for over 21 years in Slovakia with land related projects I am often surprised by the wide variety of prices that are asked for and also paid for agricultural land. For sure, a lack of reliable information (transaction prices are not publicly available in Slovakia) is an important reason for this variety in prices. Another trend is that Slovak sellers try to base their asking price on prices paid in other countries without paying a close look at the quality of their own land. Sellers also often forget that foreigners (also EU residents) are mostly, by law, excluded from buying land in Slovakia making the market less transparent and less liquid.

In this blog I will focus on the theoretically explanation on valuing agricultural land, also using data from Slovakia.

Three commonly used valuation methods are:

  1. Market value
  2. Economic value
  3. Non-economic value

Ad. 1 Market Value

This valuation refers to the value of land based on the price of comparable transactions realized between informed sellers and buyers. Important is to use information from sales that are comparable. The properties and the conditions and terms under which they were sold should be very similar. To establish a good market value, it is important to have information on many comparable sales. The more information one has, the more accurate will be the calculation of the market price. Since every transaction can differ, it is necessary to look at certain characteristics of the transaction and the underlying property and if necessary make corrections to the value. Some common characteristics are:

  • Size of the property. Mostly large agricultural parcels have a (much) higher price per ha than smaller parcels.
  • Location. How close are the comparable properties located to the land that is valuated. The closer they are the more they reflect your market and thus they are more usable.
  • Soil quality. How does the soil quality of the comparable transactions compare to that of the property. In Slovakia the quality is mostly indicated by “bonita” numbers from 1 (high quality) to 9 (low quality). Important is also how well the land is maintained and if it’s farmed properly. The costs for bringing the property back to normal standards should be reduced from the value.
  • Improvements of the property. When improvements were made (for example new construction of irrigation system, drainage) adjustments should be made to the estimated value reflecting a higher price.
  • Special transaction conditions. Transactions based liquidation or transactions between relatives or close friends do often not reflect market conditions and should not be used.

In Slovakia information sources for getting comparable transactions, are very limited and the quality of available data is often low. This situation has somewhat improved. Since June 2014 agricultural lands that are not sold directly to the local farmer should be (temporarily) registered on a website of the Ministry of Agriculture, presenting exact size, location and asking price. This website is publicly available. This ministry also publishes price tables for arable- and grasslands per region. The prices are partly based on the soil quality (“bonita”) and are mostly used to set rental prices and communal real estate tax. However, they do not relate to market prices and the difference is often substantial.

Ad 2. Economic Value

This valuation gives a more reliable estimation of the underlying value. It is based on the ability of the land to generate a financial return. In Slovakia it is not often used. The economic can be calculated using the following formula:

income-from-land

The income from the land is based on long term average yields (based on crop rotation) and the long term market prices for crops. In Slovakia the buyer/farmer should use his own estimations based on what he believes is realistic and possible. In Slovakia yields are sometimes low compared to international averages for similar quality soil. This is often due to a lack of knowledge and modern technologies. From modern managed farms of which reliable information is available, historical date can be used to determine the income (and costs). Because yields and prices can differ, it is recommendable to make several calculations using different assumptions for yields and crop prices.

The costs of production should include all the costs related to the land including cash costs (such as fertilizers, labor, seeds, taxes, fuel, irrigation, etc. but excluding interest costs on loans used for buying the land) and non-cash costs (based on amortization and interest costs for the whole farm recalculated per ha). Also here the farmer should as much as possible use his own estimates based on his experiences.

The capitalization rate is technically used to determine the current economic value of the land by converting the future returns from the land. Although often a rate of return is used that can be earned on other investments (not necessary in the agricultural sector), in agriculture this is less common for farmers. It could apply to pure investors, who only look at returns and are less interested in the type of investment. However, farmers tend to have a very long-term vision and are satisfied with a much lower rate of return. As a minimum capitalization rate is often used the rate of return on state bonds, the maximum rate would be the interest rate on commercial bank loans. If we take the average interest rate for the 10 year Slovak Bond the minimum would be ca 3.8%, the maximum based on a bank loan is ca 5%.

In Slovakia the return for large fertile lands (over 25 ha) that are professionally maintained and including the subsidy per hectare (for 2014 this was € 205/ha) can reach a value of ca € 700/ha. Using a 5% capitalization rate this would mean that the land is valued at € 14 000/ha. However, for less fertile lands and lands that are more complex to work on (higher costs) the return will be more realistically around € 350 /ha. This would imply a value of € 7 000. Of course when the investor or farmer is satisfied with a capitalization rate of less than 5%, the value of the land will increase. If for example the farmer is satisfied with 3.5% these values would increase to € 20 000/ha and € 10 000/ha.

Non-Economic Value

This valuation is often the result of buyer specific reasons sometimes based on emotions and speculation. A farmer might value the land higher because it is adjacent to the land he already owns knowing that it might not come again available any time in the foreseeable future. Also non-farmers might be interested in the land, for example because of speculative reasons, putting a higher value on the land.

Conclusion

From the three valuation methods discussed in this blog, the most realistic one for Slovakia would be the economic valuation of the land. It would certainly help to also determine market value for agricultural land but only when information on transactions would be made publicly available using reliable statistics for comparable lands.

Current prices in Slovakia for agricultural land, ca € 7000 – € 10 000 for larger parcels and (€ 2500 – € 5000) for smaller parcels, seem to be fair for well maintained and professionally farmed lands. With increasing knowledge and use of modern technologies and rising subsidies per ha, one might expect that the economic value and therewith the value of land might further increase in the future.

To overcome problems in valuing agricultural land in Slovakia, it is often recommendable to hire an independent local expert who is familiar with the local situation and transactions.

In case of questions or remarks pleased do not hesitate to contact us. We would be happy to support you in setting up or expanding your activities in Slovakia.

Laurens de Man

www.propertyslovakia.com