Agricultural lands for Energy: The new investment bubble awaits its victims

Romanian agricultural land was a “bullet proof” investment during the last four years of the economic crisis. Prices have remained steady or increased, while the rest of the market witnessed serious declines.

(Of course some “experts” have announced that the prices increased 3 – 4 times since 2007, trying to attract speculators rather than investors. They say that prices went from 600 – 800 Euro per hectare five years ago to 3.000 / hectare nowadays. Let me remind you that these are the same people that were promoting agricultural lands in 2007 with 2.500 – 3.000 Euro / hectare as well. But no journalist will ask them about this).

The problem today is not that everyone wants to invest in agriculture. This is healthy and it may shift the country’s future, providing Romania with more branded products, added value in exports etc. The true agricultural lands and forests investors cannot hurt the market and its future potential.

The real danger is a different one and is called: Renewable Energy. This important sector (without the players’ intention) is ready to create a new minor investment bubble: Agricultural lands with prices that are 3 – 10 higher than the real ones. Why is that?

1.      Any investment in Renewable Energy requires land to serve as an investment location. From Photovoltaic to Wind and from Hydro to Biomass and Biogas, every project needs hectares in order to be developed.

2.      As it was expected, all kinds of amateurs and people without business education entered the market, promoting all kinds of projects to investors.

3.      They calculate the prices and the potential income taking into consideration only the most positive income scenario, underestimating the costs (because they simply don’t know).

4.      Then they discuss with agricultural property owners and explain to them that they can easily sell their land not for 2.000 – 4.000 Euro / hectare (today’s average price) but for 10.000 – 40.000 Euro / hectare (!). “Even with this price, the investor still makes a profit. So we can sell it for even more”.

5.      It is true that in some cases there are lands which deserve a higher price, due to the fact that they offer an easier solution to connect to the grid. But this does not mean that their prices should include the total “potential savings” of an investor. (Because by including it, there is no more interest for the investor to buy them. As simple as that).

So thousands of hectare are blocked, with their owners dreaming (once more) of lots of easy money, waiting for the investors who will pay a huge price in order to construct a project.

“And what should the State do about this? It is a free economy” one might say. I consider that the authorities have many “weapons” within their reach, to be able to prevent this problem. But I will not go into details now; I don’t think that someone wants to listen. We are just a few months away from elections and I am sure that eyes and ears will remain shut.

Are you an investor in the Renewable Energy or the Agricultural sectors? In this case my small experience of 8,5 years in the Romanian Investment world would suggest to you:

·         Not to accept to pay “the owner’s weight in gold” for a land.

·         Not to believe the “promises” of sellers and their “representatives”. They will probably all disappear the moment you will need them the most (and then more money will be asked, somewhere, somehow)

·         Not to pay everything upfront, in case you wish to proceed.

·         To remember the experience of the Real Estate market: The investors who followed just the positive scenario were the ones who cried the most afterwards

Still, the right land is a vital element for a successful investment in the above mentioned sectors, so it may be logical to pay a bit more for it. But the arguments should be very strong.

Success can be carefully prepared. Bubbles can be easily avoided. It is simply up to you, as an investor, to avoid them.

What is your opinion?