What you need to know before buying farmland in Argentina
Sounds depressing, runaway inflation, the devaluation of the peso, the tax pressure and the effect of uncertainty generated by an election year, all delay decisions. However, there are opportunities.
Just like the residential real estate market, rural real estate is no stranger to challenging issues in Argentina. Inflation, the devaluation of the peso and the high tax pressure all affects profitability, but also creates a complex scenario to generate new business which in itself is an opportunity.
However, industry stakeholders agree that 2018 was better than 2017, with more attractive periods at the beginning and end of it. Leveraged in here was some hope of the triumph of the current business-friendly ruling party in the upcoming legislative elections.
But it was the large devaluation that paralyzed the farmland market.
Rural real estate activity has dropped to reduced levels, with operations that took place in a range of values that varied between USD 1 and USD 3 million.
Larger operations became increasingly infrequent, although there have been some operations between USD 5 and USD 10 million, according to reports from the Argentine Chamber of Rural Real Estate (CAIR).
But today the market foresees some recovery, so much so that in February there was a slight month-on-month variation of 11 % in rural real estate activity.
“In December, sales activity had registered the lowest value of the last five years and it is only now, in April 2019 and after the seasonality characteristic quiet of the summer months, we see a 30 % variation,” says Javier Christensen, President CAIR.
But if there is something that has attracted attention it is the scant entry of new players into the market, since 90% of the buyers of farms were current producers increasing their holdings.
Dennis O’Keefe, Manager of the Rural and Industrial Division, O’Keefe Rural and Urban Real Estate, distinguishes three current profiles in the turnover of farms: the current farmer, who today due to the low profitability of farming is not making many purchasing decisions, but rather contemplating selling.
Another is the buyer who has another business activity that generates cash surpluses who wants to invest in a place which has high protection of capital and which does not take too much time or effect to continue producing income in its own. Farms have an income that although is not high is safe and normally regular.
In these cases, it is a buyer profile that is fully aware of the situation and only invests if there is a great opportunity. ie a bargain.
And finally, the foreign investor who is on the sidelines waiting for the political direction of the country to be decided in October. A return of a Peronist/Kirchner administration would be seen likely to end in default and a return to high levels of corruption and a further weakening of the rule of law.
“During 2018 the land values had an average drop of 15% to 20%, which is added to the same percentage of fall between 2013 and 2016.
At the time of analyzing the different regions, the operations are concentrated in the central nucleus, which includes areas such as Rojas, Salto or Pergamino, that make up the region of the Humid Pampa.
Investors, far from wanting to face risks and high costs, are betting on the safest, most productive agricultural land with the most stable yields. In this way, this area currently has the highest values, with average prices of between USD 15,000 to USD 20,000 per hectare (Ha), according to Lucas Desalvo, from the corporate business area of the consulting firm Serinco.
On the other hand, the extra Pampean region has a more flexible negotiation margin, although there is little buying and selling activity.
Then in sectors around Buenos Aires city, there are values that can reach USD 35,000 / Ha, but in many cases, there is a potential for real estate developments such as private neighbourhoods, country clubs or subdivisions that affect these values.
In the rest of the area, values for agricultural land range between USD 2,500 and USD 5,000 / Ha.
In the Mesopotamian region, (Mesopotámica, Entre Ríos, Corrientes y Misiones), the prices go from USD 500 to USD 4,000 / Ha. Generally red soils of clay texture for the production of tobacco, maté, rice or forestation, mainly destined for pines, and eucalyptus trees.
Farms located in the region of Cuyo, have values that start at USD 2,000 and can reach USD 20,000 / Ha.
In this zone, the differential factor is always the right to irrigation given by watercourses or underground. “Syntactically we can conclude that the land has a value that is formed over time depending on the demand, productivity and climatic risks in relation to exposure to different types of risks, then in the “frame”, ie Today’s outlook, the value situation is not affected so much, except in specific situations where the seller has the urgent need for sale and in those cases discounts can be given that vary between 10% and 15% on the asking price, “says Desalvo.
“Selling a farm has never been easy and at this moment it is even harder, but it was worse when you cannot get fuel to travel, an erratic exchange rate, default rumours, unrealistic asking prices, resulting in current investors having little interest in buying in Argentina, so we hope to be able to adjust to the current reality by transmitting to all the parties tranquillity and the necessity of a shared effort to find a way to move forward, “says Christensen.
“The country is not going to disappear, crises end and we have to know how to anticipate changes, identify opportunities and take advantage of what experience gives us,” he adds.
In terms of profitability, O’Keefe points out that the overall net profit of farms in Argentina is at its lowest point in the past 20 years.
“Farms historically returned 5% annual yield in US dollars and today it is more like 1.5 %”, he said.
Farm leases are tied to the price of the farmland and to the value in US dollars of what the land can produce and at present, it is difficult to anticipate if there will be changes in relation to the prices of grain, as there has been with meat.
“I believe that the lease values, due to the high production costs and without foreseeing an increase in US dollars of the end products, will not improve in the short term and in terms of leasing values they will continue in the same level until the elections are defined, then it will depend on the results, “predicts O’Keefe.
The broker returns to the table the issue of values and explains that in the comparison with the years in which there was a great demand for farmland and high prices (2011-2012), there was a decline in the sales that fluctuated between 20 % to 40% in US dollars.
“Today in the Nucleus Zone farmland with a productive capacity between class I and class II, manages values of between USD 12,000 and USD 15,000 / ha, with a price of soybean of USD 220/ton, when at the time this type of farmland touched a ceiling of between USD 18,000 and USD 22,000 / Ha. when soybeans were selling for USD 600 / ton, “he says.
Source: Part of an article translated from La Nacion
Comment: Foreign investors in our opinion are best to look at farmland in out of favour areas of Argentina that development potential. Not only are priced lower than ever before they have the most upside if the current administration remains.