Denmark’s DKK96 billion (US$14.59 billion) AP Pension has entered into a US$57 million deal to buy farmland in Eastern Romania under a lease-back agreement with the seller, FirstFarms.
Under the terms of the deal, AP Pension will acquire FirstFarms’ operations in Eastern Romania including 3,000 hectares of agricultural land, grain storage, and farm buildings, but not including an existing machinery park which will be retained by FirstFarms for use in the operation of the farms. The land and buildings will be rented by FirstFarms under a ten-year lease including an option to extend the term of the lease, however, at the end of the term, FirstFarm will have the option to buy back the land.
Founded in 2007, FirstFarms purchases farming companies and farmland concentrated along the black earth belt across Western and Eastern Romania. As of January 2014, the company owned 6,792 hectares of farmland in the country according to its website and the fund plans to expand on this.
“We intend to purchase land in Romania, as we believe there is a large potential for increase in the value of the land. While working on this, we will get a continuous return in the form of land rent from FirstFarms,” said AP Pension chief executive, Søren Dal Thomsen.
As this deal with FirstFarms is being finalized, however, it could face challenges from the Romanian government. Romania opened its land market to foreign investors in 2014 under pressure from EU regulations. Since then, up to 10% of the country’s farmland has been acquired by investors from outside the EU and another 20% to 30% is controlled by EU-based investors according to a report commissioned in 2015 by the European Parliament, reports BalkanInsight.
Despite half of Romania’s 19.5 million population living in rural areas, fragmentation, a lack of traceability of ownership, outdated machinery and technology, and the urbanization of the country’s youth have created a lack of domestic investment in the country’s agricultural sector – a vacuum that is being filled by foreign investors and is troubling the country’s leaders.
Under a newly proposed law, EU investors and companies will only be allowed to acquire Romanian agricultural land if 90% of their employees are Romanian, or if 30% of the capital is held by Romanian companies. In addition, agricultural production must be the main objective of ownership. BalkanInsight reportson an explanatory memorandum that states that the law would “ensure equal opportunities between Romanian and European farmers…preventing any activity of circumventing the legislation and Romanian citizens’ interests.”
This is not the first agricultural lease-back agreement for AP Pension. In January 2014, the commercial pension fund launched the Dansk Farmland Fund as an investment vehicle focused on farmland whereby the land would be leased back to operators under long-term contracts. Farmers would pay AP Pension rent equivalent to 5.2% of the total investment in the land and 6.5% of the amount invested in the buildings while keeping all business profits.