Why Czech Farmland Is a Better Bet Than Stocks and Bonds
Martin Burda gave up managing $8.1 billion of securities for something with better returns: dirt. In July he helped start Cesky Fond Pudy, the first investment company focused only on Czech farmland. Agricultural property in the Czech Republic, says Burda, “is among the least expensive in Europe, and it offers a conservative investor something that’s very hard to come by these days: safety and a good yield.”
Land values are rising as a result of the country’s soaring agricultural profits, which contrast with the stagnant Czech stock market and near-zero yields on government bonds. “Profitable farmers mean upward pressure on land prices,” says Burda, who was chief executive officer from 2009 to 2013 of Investicni Spolecnost Ceske Sporitelny, a unit of Erste Group Bank, Austria’s largest bank.
He expects his fund to attract more than 200 million koruna ($9.6 million) in investments by October, up from 140 million koruna now. Avant Investicni Spolecnost, an investment management company that oversees more than 10 billion koruna of assets, is setting up another farmland fund. Ondrej Pieran, a money manager at the Prague-based company, predicts an annual return of about 8 percent.
The price of Czech farmland climbed 94 percent from 2004 to 2013, according to data compiled by Farmy.cz, an agricultural property website. Cesky Fond Pudy puts the current Czech price at €6,000 ($7,958) a hectare, still much cheaper than the same amount of land in Poland (€7,500), Germany (€24,294), or Austria (€35,000).
While the value of farm sales is equal to a fraction of the country’s $31 billion stock market and $64 billion of outstanding domestic government bonds, they ranked as the most attractive investment in a survey of 197 Czech and Slovak millionaires published by J&T Banka in June. Sovereign bonds, commodities, and Czech stocks were among the least appealing, according to the poll. “It makes sense to invest in land in the Czech Republic, as it’s relatively cheap and property taxes are quite low,” says Petr Nemecek, director of real estate at Hypotecni Banka, the Czech mortgage unit of the Belgian bank KBC Groep.
The rise in Czech land values compares with a 52 percent return on government bonds and a 4.2 percent loss for the Prague Stock Exchange index of 13 stocks over a nine-year period ended in 2013, during which the country endured two recessions and the central bank cut its benchmark interest rate to 0.05 percent. The yield on five-year sovereign notes slumped to 0.52 percent, an all-time low, at the end of June. “Czech bonds won’t yield anything for a long time, and when interest rates start rising, holders may lose money,” says Burda.
The Czech Republic’s relatively cheap land has its roots in the 1989 collapse of communism in the former Czechoslovakia. The breakup of agricultural collectives created thousands of small, disadvantaged owners. When the country joined the European Union in 2004, its farmers won access to agricultural subsidies created to balance rural development throughout the European Community.
Fueled by rising EU payments to producers in former communist countries, Czech farmers’ combined profit last year rose 1.8 percent, to 16.7 billion koruna, according to the government statistics office, behind 2011’s record 17.4 billion koruna. In 2003, the year before the Czechs joined the EU, the farming industry lost 2.5 billion koruna. “The No. 1 risk for farmland investments would be a negative change in the EU’s agricultural policy that would hurt farmers’ profits and curb demand for land,” Burda says. “But that is very unlikely to happen within our investment horizon.”
Agricultural profits may also be affected by Russia’s decision early this month to ban food imports from the EU and the U.S. in retaliation for sanctions imposed during the crisis in Ukraine. While Russia is the Czech Republic’s 11th-largest agricultural export market, the imports will have an almost immediate effect on domestic prices as goods flood in from bigger agricultural producers that also can’t sell to Russia, such as Poland, says Pavla Hobikova, a spokeswoman for the Czech unit of the Globus hypermarket chain.
Still, the prospect of consolidating agricultural property is likely to “boost the future selling price,” says Avant’s Pieran. “The limited supply of farmland makes it an attractive alternative to traditional financial instruments.” He adds, “We can’t make more land.”