Epsilon Archive for Student Projects

Abstract

People who invest capital in promising projects as a profession are called venture capitalists. They are constantly looking for new investment opportunities. Recently, media have observed a growing interest in forest land as capital investment. This is because several fund and investment company market the possibility of safe return through investment in woodland, both in Sweden and abroad. When an investment in forests is seen as an acceptable investment option, focus turns to nearby areas, namely agricultural land. Over the last 15 years, the average price of Swedish agricultural land has more than quadrupled.

The question is whether the venture capitalist can find positive effects by including agricultural land in their portfolio. Answering this question requires an understanding of how the value of agricultural land occurs. If these factors are identified, investors should be able to better anticipate market developments and thus make rational judgments before making an investment decision.

The purpose of this study is to examine how value is created for agricultural land and to some extent explore the possibility of agricultural land as part of a portfolio. The study therefore has two research questions, which will be answered with the help of a literature review of scientific papers and journals:

 What factors create value of an agricultural property?

 Which of the agricultural land values may appeal to institutional investors and why?

The results show that production-related factors such as soil yields, has got a major positive influence on the value of agricultural land. External factors, such as average income of the municipality, grain and cattle prices, population density and population growth also affect the value positively. Increased interest rate affects the value negatively. Recreational factors affect the value of land in different ways, depending on the type of buyer. If the buyer has a personal relationship with the vendor, he or she pays a lower price for the land. The price is also lower in cases where the vendor does not hire a realtor, or if the land is offered for sale to a limited amount of potential buyers.

More venture capitalists should look to the possibility of investing in agricultural land, in particular the venture capitalists that have expertise and experience in the agricultural sector. Purchasers of land should also have social capital in the area where the land is acquired. This helps to get a better idea of actual soil characteristics of those who live in the area. If there is lack of social capital, the purchaser must rely on the realtor's expertise and marketing materials.

Agricultural land provides diversification of a portfolio to some extent. The return of the land is negatively correlated to the stock market. This diversification, though, has recently come to lose weight. Agricultural land has instead come to yield more, to the price of reduced diversification opportunities. This is a result of improvements in the agricultural sector and farm products which have become more sensitive to market trends.