Sold the agrobusiness: where to invest funds

Iurii Diachuk, CEO of the Investment Company INTELEVRAZ

Many farmers will remember the current 2020 primarily for extreme weather conditions and complete uncertainty in the market. To put it mildly, many farmers were disappointed with their results of the season, despite the growth of procurement prices for agricultural products. As a result, the number of offers selling agricultural businesses has increased significantly, especially in the Southern and Eastern regions of Ukraine.
What should the owner of an agricultural enterprise do, when he has decided to sell his business, how and where to invest the proceeds? In an interview with the CEO of  the Investment Company INTELEVRAZ Iurii Diachuk and  Partner of the Investment Company INTELEVRAZ  Valentyna Grechka.

How often do you have to deal with the sale of agribusiness or part of it in your practice?
Iurii Diachuk (ID): This year there are a lot of such proposals, especially in the south and central part of Ukraine, affected by the drought. In the Western Ukraine, where climatic conditions are better, there are fewer such offers. However, usually in the agricultural market, the situation is very changeable: this year in a certain region there is a drought, the next – more or less favourable climatic conditions. And it would be wrong to say that offers to sell agricultural enterprises come only in such years – they always are, and this is a normal market process.

It’s thought that agrarian businesses are sold very rarely…
ID: It should be considered that agribusiness is built on land relations: some people are currently landowners and others are users. What is agribusiness? These are the rights to lease land, machinery, buildings – fixed assets. I would like to emphasize that it is optimal to sell the long-term lease agreements because they have a price. To sell an outstanding part of a business containing less than 51% is practically unrealistic. If a person does not know his partner, he will not sell. There are situations of friendly takeovers, but investment banking is often not involved, these are closed agreements. It also happens that two partners are cramped in one company. Then a company is invited that can assess the value of their business in the market.

Valentyna Grechka, Partner of the Investment Company INTELEVRAZ

Valentyna Grechka (VG): Our main directions are mergers and acquisitions and support of these investment agreements. In particular, we have strong expertise in the agricultural sector, because we have long been engaged in such agreements and have extensive experience and, besides, we are already investing in the agricultural business. We also support investment transactions in real estate and manage this real estate. Now, these areas are developing very actively, and we see great potential to attract both Ukrainian and foreign investment.
When the agribusiness owner has already decided to leave the business, it is very important to transfer it to another investor in time, while the business is still operating. And investment advisers like us advise farmers and real estate investors, providing information on the latest market trends, investment climate and current events.

So does an agricultural company need an investment advisor constantly?
VG: Yes, it does. We communicate with the representatives of most sectors of the Ukrainian economy and are actively involved in agricultural investment agreements. We feel the market and can tell the owner how to sell the business at a good price.
An important advantage of investment advisers is that they have many contacts. Therefore, the owner does not need to personally go to neighbours or competitors – the investment adviser has already worked out this pool of contacts. He knows who buys and what, at what prices, who develops what business.

What will happen after the land market opening – will the number of offers to sell the business increase with the emergence of such a segment?
ID: It is not in agribusiness that a new segment will appear. I would say that land as property has nothing to do with agribusiness as such, except to lease rights. Commodity land is a classic commercial real estate that is leased, cultivated and from which income is derived. Therefore, the value of the land will depend on how many years the investor will be ready to spend before his money returns. I doubt that anyone in Ukraine will want to receive these funds for more than 10 years. If discounting is taken into account, the cost of 1 hectare in Ukraine should not exceed $ 1,500. After all, currently, the rental price is $ 150-200 per hectare. The cost of land may change if the constant upward trend in rental prices continues. Besides, keep in mind that our contracts are signed for seven years, but their quality is extremely poor. These nuances must pass into a more formal and commercial format. Then professional landlords will clearly record the cost of renting their land because it will be a guarantee for them to return the investment in a certain period.

The cost of rent can increase only if profitability increases…
ID: Yes. The farmer is interested in having a whole land area – it leads to the optimization of logistics and the absence of conflicts with neighbours. And this is an investment asset to obtain bank financing. No bank will finance individual pieces of land scattered throughout the village council.
Therefore, I believe that the period of 2021-2024 will be a period of land consolidation by strong farmers. And those, who can do this, will increase the profitability of their land. Such asset can be pledged to a bank or receive financing at fairly reasonable interest rates. On the other hand, the value of this land will automatically increase – that is, those who will be the first to be able to consolidate land assets, will capitalize on them the most.
There are likely that companies that specialize in land consolidation, land acquisition and resale to appear.

When a business is sold, the question arises as to what to do next with the money. What is the order of numbers when selling agribusiness and what are the investment opportunities?
ID: After the sale, I always advise taking a break for a few months to calm emotions down, not to solve “yesterday’s issues”, to put new goals and to invest accordingly.
A typical portrait is a person who has several million dollars. As a rule, 30-50% of the received funds are invested in real estate, usually in the capital. It is much harder to find real estate with good yields in the regions.
Besides, part of the money from the sale remains in the form of ordinary deposits, and part is invested in a business, as it is said, for pleasure. Among our examples are hotel owners, brewery founders etc.

What does it mean to invest in commercial real estate? What directions can you advise?
VG: We see a prospect in the production and warehousing direction, despite the pandemic and the decline in rents, as well as in-office space, as the development of this real estate market of Ukraine segment is still relatively low. As for the retail market, it is difficult to predict now: the market is changing, and so far we are not investing in retail and retail space. There is also the prospect of creating a non-residential fund, where after the reconstruction you can implement various concepts – “flexible offices”, entertainment, medical, educational etc. It is worth considering the projects of the cottage suburban development. Due to the pandemic, the demand for such structures has increased. By the way, offers of format cottage townships with an average cost per house, with a good location and infrastructure are tiny.
The request I see today from our investors is to purchase commercial real estate in Kyiv that would bring income. But we are already considering prospects and liquidity. At the initial stage, it is extremely important to assess the life cycle of this property – if after a while the owner wants to sell the asset, will it be a good price.

As for a certain shortage of supply of office centres – if you look from the outside, they are not lacking…
VG: About 70% of office real estate in Kyiv is an obsolete fund that has problems with utilities and space planning. So far, some of these buildings have changed owners, and they may be reconstructed soon. After all, tenants have a request for quality business centres of class B, B + with a rent of $ 15-20 per 1 square meter and all infrastructure included. We have a lot of class C offices, which were rebuilt from the old fund without proper infrastructure and parking. There are class A business centres – “Parus”, “Gulliver”, “Senator”, etc. with rental rates from $ 35 per square meter.
Kyiv is being built quite actively. There are many office projects among the new projects, and in the coming years, some of them are going to enter the market, but they are still not covering the demand when business activity resumes after the pandemic.
YD: In order for an object to be capitalized and give a good current return, a manager is needed. If it does not exist, then it makes no sense to invest in such an asset either. Without management, the value of the property will continue to decline. Part of the money from the rent should be invested in insurance, security measures, etc.

Are you looking for a management company or do you manage the facility on your own?
VG: Investors are interested in our specialization in real estate management because we have more than 15 years of experience. We have been actively involved in real estate transactions, we have a good understanding of this market from the inside, its trends, we have professional appraisers and professionals in general in each segment. We understand how to maximize real estate income. The management company main goal is to maximize the value of the object and achieve the highest value of the real estate.

Do you take care of everything from selling a business to investing and managing an investment?
ID: Yes, we do. In the agro-sphere, business is sold because of loss of interest, desire to do it or certain economic problems, etc. – the reasons are different. Some investors, on the contrary, buy because they see in this business opportunities to create added value. When we sell, we try to show the highest value and sell the most profitable investment. When we buy, we analyze how we can increase the object capitalization, determine how to increase its profitability through effective management. And we recommend such objects to our investors or we participate in such projects ourselves.
Before we present the object to the investor, a lot of intellectual work is done with certain calculations and financial modelling of the investment project, all risks are considered, documentation is processed. We conduct audits and inventories, examinations, based on which we are able to show the investor how he will return his money.

Source: Magazine “LandLord”, №10-11 (60-61) October-November 2020

October November

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