Radoslav Manolov, ADVANCE TERRAFUND
Date: 2 December 2015
Source: Sinor.bg
Since June this year, the investment company Advance Terrafund, which owns approximately 233 thousand decares of land in a thousand land plots all over the country, has introduced a new scheme for deferred sale of consolidated property – first of its kind on the market. This peculiar type of lease is directed mainly towards enterprising farmers and leaseholders who want to expand their business but do not have sufficient means to purchase the desired property. How this lease mechanism works and whether the farmers show interest in it – in order to get answers to these questions, we turn to Radoslav Manolov, CEO of Advance Terrafund, a public joint-stock real estate investment trust.
Mr. Manolov, could you explain the fundamentals of this idea for deferred payment in land transactions?
Over the years Advance Terrafund has bought land in various regions of the country and whenever a landowner or leaseholder decides to consolidate the arable land in order, for example, to invest in irrigation systems or simply to expand his business, we are able to offer such a deal. Thus, we perform land banking which facilitates the process of farmers getting the land.
This form of financial lease is applied for the first time in Bulgaria and our intention is to be of use to the entrepreneurs who find agriculture a good alternative.
That is why we decided to turn to the smaller landowners through the media, like Sinor.bg for example, who struggle to find funding to purchase land and we offer them land on lease.
Upon entering the land agreement, farmers pay 25% of the transaction value and over the five-year period, the remaining 75% are distributed in equal installments of 15% for each year. No rent is paid.
The greatest benefit is that even at the moment of signing the agreements the farmers are able to start using the land fully. This means that if they cultivate it, they will receive the relevant subsidies, therefore the value of this property will start repaying long before the fifth year, when the final repayment is due.
So, according to your scheme, they buy business in advance which has a great return potential, long before they become owners of the land they cultivate, is that right?
Our basic idea is to give this land to enterprising people who are willing to develop and invest in agriculture or animal husbandry, because land is farmer’s most valuable asset and it should be put to good use. That is why we decided to offer this financial lease to the general public, considering that we own consolidated agricultural land throughout the country.
At what price do you offer the property?
In 2015 the price per decar of land is BGN 1,600 but it is to be repaid within a 5-year period. And by then it is impossible to estimate whether the prices will stay the same or will increase. This asset is getting more expensive everywhere in the world, therefore such investment would be highly effective. Consider this, even today the average transaction price in Dobrich fluctuates at about BGN 1,500/decar while the payment is not deferred but is due immediately.
To put it short, you turn mainly to small-scale farmers and beginners who find it difficult to provide tens of thousands of levs to invest in new land?
Yes, that is our main idea, since large leaseholders can easily purchase land. Moreover, even now Advance Terrafund leases its land to small farmers who could apply this lease successfully and from leaseholders they may become landowners. That’s why we turn to them.
What are the terms and the interest rate on this deferred payment?
I want to make it perfectly clear that the farmers are not paying interest or rent.
Our goal is to facilitate the new owners to the maximum extent and not overburden them with extraordinary activities. This is not the same lease as when you buy equipment and people should realize this. Furthermore, famers could make the full payment for the land before the expiry of the 5-year term. In these instances they will not be subject to penalty, nor the price per decar will change – it will remain BGN 1,600 as stated in the agreement.
Another important point - there are no hidden small-print agreement clauses that set traps for the buyer. Besides, they are not obliged to pay every month throughout the year – a single annual contribution is enough. Our agreements are simplified to the maximum extent, they are exactly eight pages long and contain any and all requirements.
OK, but Bulgarians are suspicious by nature and would immediately ask themselves where the catch is and why they are offering me land at such favourable terms?
As a special investment purpose company we have shareholders who have invested with us in order to get return and that is our main purpose. By selling this land, we get fresh resource which we can then use for another type of investment or to pay dividends. That is, the secondary effect is important to us. That cash flow regulation is the usual way of working for us as financiers, and we have found the optimum balance of stakeholder interest in this financial product.
At this stage, our colleagues that deal with financing are quickly realizing the good prospects of this idea and the interest in it grows. Especially in the form of expatriate Bulgarians. They quickly realized that if, for example, they purchased 300 decars, in a five-year time the price would be much less than BGN 480 thousand, since during this period they would also receive rent, which also decreases the transaction value. Our colleagues – potential buyers quickly calculated that the only possible scenario where they would lose money is if after five years the price of land fell below BGN 1,300, which in our opinion could never happen on this market.
What is the location of the land you offer and will there be a change in price?
Advance Terrafund has property in a thousand villages within the country and we started with BGN 1,600/decar because in the current market situation our calculations have shown that this future price corresponds to the market today.
Next year we may increase the price since this is such an attractive asset and is subject to change, it’s a matter of discretion.
I would like to reiterate that our idea is to sell to leaseholders who are cultivating our land even now. This is the perfect way for young families in search of an alternative, to purchase a hundred or so decares and start up a business. Rather than looking for bank loans, which are so hard to get without a credit history, they could easily benefit from this lease. Such deferred payment scheme is applied by our colleagues who sell apartments and other real estate. But in such instances the new owners do not have businesses that would facilitate the repayment.
Let me give you an example. Vegetable producers will be able to earn BGN 1,000/decar if they grow good quality produce. Even at 30 decars the profit will be enough to cover the annual land contribution.
There are over 140 types of crop in Bulgaria that can be cultivated and that could bring good return. It was as early as ten years ago, when we commissioned an analysis, carried out by the Institute of Agriculture, which stated that there are crops of 300-400 % rate of return.
Despite the problems that horticulture faces, there are still conditions for development. The people working with us know that we are always open for dialogue should they intend to build irrigation systems, for example. Therefore, my appeal is this – if anybody wants to set up private business and needs land for this purpose, they should come to us.
What does your experience say over these four months from July to November, when you started the financial lease?
Actually, we started at the end of June. July and August, however, were harvest months and that is the reason why our offer seemed to have gone unnoticed. That’s why now we would like to address the actual farmers through the media.
When you have a good idea, it is easily accepted; we judge that by the reaction of our clients who have visited the company offices since June. In fact, the actual deals grew in number over the last month and we believe that the interest will expand further. We could easily sell 50 thousand decares to large leaseholders because they are able to quickly appreciate the logic of the investment. To us, however, the greatest positive effect would be if we give land to small and medium scale entrepreneurs. Because I am positive that only three years from now, the situation in agriculture will change and young people will enter the business.
We have extensive experience in land relations, so we are open to any and all questions. As serious businesspeople we are aware that nobody would come to us and trust us blindly. That is why we advise you to come along with your consultants if you have any concerns. That is precisely the reason we are now looking for farmers who are our leaseholders and offer them this deal, for that is where the future lies.
In fact, in our capacity of a real estate investment trust /REIT/, we are in no way competitors to the farmers in the purchase of land, because we are not entitled to cultivate it pursuant to the provisions of the Act on Special Investment Purpose Companies. Our company serves as a kind of buffer that invests means attracted on the stock exchange by our shareholders. Some of them are agricultural producers no less. And they highly appreciate the benefits from our activities because they bring them profit.
Interviewer: Ekaterina Stoilova