Purchase of agricultural land: 5 nuances that will affect the income on your investment

On July 1, 2021, the land market in Ukraine started. As expected, the interest of potential investors in agricultural land is growing. Let’s try to understand what agricultural land is, why it can be profitable to invest in them, and most importantly – how to choose the best option.

What is agricultural land and what restrictions on their purchase are set

There are different types of agricultural land:

  • for conducting commodity agricultural production – most often obtained during the division of collective farm lands. The most common type is shortened to “tovarka” (a part of a given land plot);
  • for personal farming. The second most common, shortened form – “PF”.

PF comes in two varieties:

  1. “Primary PF”, obtained during the division of collective farm lands. In some regions, instead of “tovarka”, PF was issued en masse;
  2. “Secondary PF” obtained either as a result of free privatization or as a result of the acquisition of “primary PF” (when the primary PF has not been banned from selling in the same way as “tovarka” yet).
  • for farming;
  • for gardening;
  • and some other less common, and therefore less interesting for us types (for subsistence farming, for producing vegetables, for haymaking and grazing, etc.).

Until July 1, 2021, it was forbidden to sell only “tovarka” and primary PF. Secondary PF, horticulture lands and other types of agricultural land have not been banned by anyone and still are not. At the same time, both citizens of Ukraine and legal entities – residents of Ukraine (except, of course, foreign legal entities) could and can buy them.

From July 1, two important restrictions on the acquisition of agricultural land were introduced:

  • restrictions on the number of agricultural lands “in one hand”, which will apply to all types of plots accumulated by citizens and legal entities – residents of Ukraine (hereinafter I will abbreviate them as “legal entities of Ukraine”);
  • restrictions on participants of legal entities. From now on, only legal entities whose participants are citizens of Ukraine will be able to buy agricultural land. That is, companies whose participants are other legal entities of Ukraine are deprived of such an opportunity.

Prospects for the acquisition of agricultural land by legal entities of Ukraine with foreign participants or beneficiaries today are quite illusory. According to the norms of the Land Code, they will be able to do it after the approval of the referendum decision.

However, it is unknown when it will be announced. The chances of holding such a referendum in 2023 or 2024 (i.e., on the eve of parliamentary and presidential elections) seem feeble. So, I would not count on the fact that foreigners or domestic companies with their participation will be able to buy agricultural land by 2025.

I do not specify other types of prohibitions established for foreign terrorists, money launderers, citizens of the aggressor country, etc. etc. So far, all foreigners and their legal entities in Ukraine have been denied access to agricultural land. Therefore, further detailing is at least premature.

It is also important that between July 1, 2021 and January 1, 2024, the sale of any state-owned agricultural land is prohibited. Therefore, all further review will concern exclusively privately owned agricultural land.

The table below illustrates how much and which agricultural land citizens of Ukraine and legal entities of Ukraine will be able to buy from July 1, 2021,.

Sale of agricultural land (in private ownership)

Types of agricultural land Period Citizens of Ukraine Legal entities of Ukraine
From July 1, 2021 up to 100 hectares (in excess of any agricultural land already purchased as of July 1, 2021) prohibited
Товарка/ primary PF From January 1, 2024 Up to 10 thousand hectares at the rate of 10 thousand hectares for each natural person-participant (at the same time 10 thousand hectares are counted on all agrolands acquired by such natural person both for himself personally and for each of legal entities where he is a participant, in proportion to the share participation), however, regardless of this calculation, a total of not more than 10 thousand hectares
Till July 1, 2021 Without limitations Without limitations
From July 1, 2021 up to 100 hectares (in excess of any agricultural land already purchased as of July 1, 2021) at the rate of up to 100 hectares for each natural person-participant (100 hectares are counted on all agricultural lands acquired by such natural person both for himself personally and for each of the legal entities where he is a participant, in proportion to the share of participation) from this calculation in general no more than 10 thousand hectares
secondary PF/horticultural land/farmland, etc. From January 1, 20214 Up to 10 thousand hectares at the rate of up to 100 hectares for each natural person-participant (100 hectares are counted on all agricultural lands acquired by such natural person both for himself personally and for each of the legal entities where he is a participant, in proportion to the share of participation) from this calculation in general no more than 10 thousand hectares

Agricultural land: what we buy

The object of acquisition is always a plot of land. Each plot has a unique cadastral number (according to which it can be found on the public cadastral map online: https://map.land.gov.ua, boundaries, area, purpose, location and owner.

Therefore, the study of any proposal for the acquisition of agricultural land should begin with the cadastral number or numbers of relevant plots. If it does not exist (because not all agricultural lands have yet received cadastral numbers), then the process is delayed for the time of assigning the cadastral number.

So, we get a cadastral number, enter it in the search for a public cadastral map and features of agricultural land as an object of investment immediately become apparent.

Nuance 1: The larger the area of ​​the plot “in one hand” is, the more you can earn on it

Each plot is part of the land (let’s call it a field). Unlike other lands (for construction, industry, energy), the value and liquidity of agricultural land is very often related to their area.

The larger the area of ​​the plot or plots “in one hand” is, the more interesting they are for farmers – their users, the better rental conditions they are willing to offer. Very often it makes no sense to drive machinery for the sake of cultivating only 2 or 3 hectares.

“In practice, land plots of 30 and more hectares are interesting for cultivation.

Yes, there are exceptions: location of plots and the presence of other adjacent, neighboring, nearby land plots in the cultivation of the same agribusiness are important. However, as a general rule, the more plots in one place are, the more liquid and potentially valuable your investment in agricultural land is.

Here it is always worth keeping the question in mind: “what will happen if the current tenant/agribusiness leaves and I will have to negotiate with a new farmer from scratch, on my own, without the owners of neighboring plots.”

Nuance 2: operator and lease terms

The operator or agribusiness that uses the plot is the main source of income for its owner and the key buyer in the event of a sale. And this is not only because by the law he has the preemptive right to buy a leased land plot, but also because it can be extremely difficult to sell a land plot in the middle of the vast steppes of Ukraine to someone else. Especially if the area of ​​this land plot (see Nuance 1) is small.

It is important to understand that almost all agricultural lands of interest to farmers are already leased to agricultural enterprises. They are all burdened by lease agreements concluded for different terms and with different amounts of rent.

Then it is one or the other – either the farmer himself will allow you to buy agricultural land (because he is not interested in it, he has no money to buy, he decided not to use his preemptive right or for many other reasons) or you will outbid him. However, the lease agreement will almost certainly remain, and you will receive the rent specified in the agreement until the end of its term (no matter how many years remain – one, two or forty-nine).

For your calculations of income on investment in agricultural land, it is extremely important to explore this aspect – the terms of lease agreements for agricultural land offered for sale. Very often, especially small agribusinesses pay landowners rent higher than that specified in the agreement.

However, in the case of your purchase of such plots, you may not make such informal surcharges. Especially if there are less than 3 years left until the end of the lease term, and you do not promise or do not agree to renegotiate the lease for a longer period, 10 – 15 years.

If the lease agreement is long-term, it directly affects the liquidity of your investment. It is good if the agreement is with a reliable agribusiness and a decent rent (i.e. at the market level and also pegged to the US dollar or euro). But if not, then there might not be people wishing to invest in agricultural land, encumbered by such an agreement (except, perhaps, the tenant himself, if he, of course, wants to buy land already dependent on him).

“Even at the stage of making a decision to purchase a plot, it is necessary to soberly assess the attractiveness of the lease terms both for yourself and for the next buyer (investor).

Given the importance of agribusiness tenant for investment in agricultural land, it is advisable to check the financial stability of the tenant and the history of its settlements with landowners.

Agriculture is first and foremost a business, vulnerable to many factors, from the vagaries of the weather to price fluctuations in world markets. It is desirable to be sure that in “bad” years, the tenant will pay for the lease of land, and not get lost “until better times.” Yes, you can terminate the lease if you are not paid. However, this will mean finding a new tenant. It is unknown when you find him, under what conditions he will agree to cultivate your land. And what if you have little land, and they are scattered in different regions, and if the soil is not the best, little rainfall…

Nuance 3: landscape and water

Not all fields are flat and smooth, not everywhere there is access to water. At the same time, landscape and water matter. Even small slopes complicate and increase the cost of land cultivation. Therefore, tenants will prefer flatter plots. And the lowlands are more often soaked and frozen. And the ravines are swampy.

In times of weather cataclysms and tangible climate change, the issue of watering and, consequently, access to water is becoming more and more urgent. In the near future, the proximity to water bodies can seriously affect the value of agricultural land.

The landscape and nuances of the location of the plots are not always clear and obvious without visiting the area. Many details are not visible, not noticeable, not clear on satellite maps, and certainly on the usual administrative ones.

“Like any real estate, agricultural land should be inspected before purchase.

This better shows the pros and cons of each plot: hills and lowlands, proximity to water, and, last but not least, the attitude of the tenant. The plot is a reflection of the state of business of the farmer who cultivates it: whether there are shrubs, weeds, remnants of last year’s plantations or, conversely, it is a neat arable land, with sprouts or well-groomed plants.

And this is also a great nuance of this investment. But will you have desire to go for 400 – 500 km for one plot?

Nuance 4: climate

The impact of climate change is perhaps most noticeable in agriculture. In recent years, even the center of Ukraine has increasingly suffered from drought. There are reasonable suspicions that in the near future climate change will lead to a significant redistribution of the value of regions for agribusiness, and thus to a change in the value of agricultural land in these regions.

There is already a growing interest in agribusiness in the more humid Western Ukraine and migration from arid southern and eastern regions.

Climate change should be taken into account when making plans to invest in agricultural land, as it is possible that the overestimated central regions in a few years may fall in price to less “promoted” but more humid neighboring regions.

Nuance 5: soil

There are many opinions about the impact of soil on the economy of agribusiness. Some say that chemistry will fix everything and compensate for the shortcomings of the soil, some say – the better the soil is, the less the same chemistry is needed.

In practice, there is a strong desire of farmers to work on better soils and a willingness to pay more for them (rent). Thus, users of agricultural land “vote” in hryvnia for better land, and there is a reasonable suspicion that the quality of soil will affect the price of plots and their liquidity.

It is clear that soil research requires special tests in laboratories. However, the public cadastral map, although inaccurately, gives some approximate opportunity to orient in what soils are most likely to be in a particular area, we strongly recommend to pay attention to this information.

Mykola Orlov, partner of Law offices of OMP
for the portal “Ministry of Finance”


Mykola Orlov (Managing partner, Attorney-at-Law)