ARR.News Ed: A reminder to all readers that this article is for information only and is not intended as financial or legal advice. Readers are advised to do their due diligence and seek professional advice.

Rent land, don’t buy it. Produce agricultural raw materials, don’t process agricultural products. By following these rules of Ukrainian farmers, foreign investors might achieve great success in Ukrainian agriculture.

Agricultural land market in Ukraine

The war reduced the volume of agricultural land sales in Ukraine by 75 per cent. However, such a decline in sales did not change prices significantly.

Here’s what the official government website “Opendatabot” says about it: “Before the attack of the Russian Federation in February (2022), on average, 10,000 hectares were sold per week, currently sales have fallen 4 times to 2,500 hectares per week. In total, as of the end of October (2024), 289,000 hectares were sold, which is less than 1 per cent of the total area of ”‹”‹42.4 million hectares of agricultural land in the country. The average price of a hectare for the entire time of the land market is about UAH37,000 per hectare. In the first month after the resumption of work in May 2022, prices reached UAH43,000 per hectare.”¹

In Ukraine, due to the small volume of sales, the average price of land can vary greatly in some months. For example, in October 2024, the average sale price of agricultural land was UAH51,194  per hectare. According to the official exchange rate, US$1 is worth  UAH41,31.² That is, the average sale price of 2.47 acres (1 hectare) of land in Ukraine was about US$1,300.

The price of land in Ukraine also depends heavily on location. And this factor, unlike the volume of trades, has a long-term significance. Depending on the region, the cost of land can differ by five times! Traditionally, the most expensive region is the Kiev region. In the capital region, the average price of agricultural land in October 2024 was UAH140,490  per hectare or US$3,400 for 2.47 acres. The cheapest land was sold in the south of Ukraine in the Nikolaev region. There, the average sale price was UAH 28,987 per hectare or US$701 for 2.47 acres.

According to “Opendatabot”, the average sale price of agricultural land in October 2024:

• Zakarpattia region US$1665 for 2.47 acres (UAH 68,792 per hectare)
• Ivano-Frankivsk region US$2756 for 2.47 acres (UAH 11,3878 per hectare)
• Lviv region US$3180 for 2.47 acres (UAH 13,1375 per hectare)
• Chernivtsi region US$2128 for 2.47 acres (UAH 87,942 per hectare)
• Ternopil region US$1600 for 2.47 acres (UAH 66,120 per hectare)
• Khmelnytskyi region US$1237 for 2.47 acres (UAH 51,112 per hectare)
• Volyn region US$1468 for 2.47 acres (UAH 60,645 UAH per hectare)
• Rivne region US$1,347 for 2.47 acres (UAH 55,673 per hectare)
• Vinnytsia region US$1,341 for 2.47 acres (UAH 55,400 per hectare)
• Zhytomyr region US$852 for 2.47 acres (UAH 35,233 per hectare)
• Kyiv region US$34,000 for 2.47 acres (UAH 140,490 per hectare)
• Cherkasy region US$1,207 for 2.47 acres (UAH 49,888 per hectare)
• Kirovohrad region US$928 for 2.47 acres (UAH 38,376 per hectare)
• Odessa region US$818 for 2.47 acres (UAH 33,800 per hectare)
• Mykolaiv region US$701 for 2.47 acres (UAH 28,987  per hectare)
• Kherson region US$1021 for 2.47 acres (UAH 42,183 per hectare)
• Zaporizhia region US$885 for 2.47 acres (UAH 36,577 per hectare)
• Donetsk region US$1044 per 2.47 acres (UAH 43,165 per hectare)
• Dnipropetrovsk region US$860 per 2.47 acres (UAH 35,532 per hectare)
• Kharkiv region US$947 per 2.47 acres (UAH 39,136 per hectare)
• Poltava region US$1579 per 2.47 acres (UAH 65,244 per hectare)
• Sumy region US$820 per 2.47 acres (UAH 33,887 per hectare)
• Chernihiv region US$789 per 2.47 acres (UAH 32,605 per hectare).

Pricing secrets

Location affects the cost of land due to an unusual factor. Agricultural land is most expensive where this land is not used for agriculture. In the Lviv and Kyiv regions, the high cost of rural land is explained by the fact that this land is bought for real estate construction! Incredible! In places where there is very little free land, developers are forced to buy agricultural land for construction. Construction brings in more income than agriculture. Therefore, farmers sell their land to developers at a high price. Farmers do not want to lose the opportunity to earn money! In the Lviv and Kyiv regions, 80 per cent of agricultural land is sold for real estate construction!³ That is why land prices are so high there.

However, in other regions, land is comparatively cheap. Ukrainian agricultural land is cheaper than land in Europe, Australia or North America. This is despite the fact that Ukrainian agriculture is very developed. Ukraine is a major global exporter of agricultural products. Why is land so cheap? The answer is unexpected. Agricultural land in Ukraine is cheap because national agriculture is focused on the production of agricultural raw materials, not the processing of agricultural products. A practical example.  If a farmer grows wheat for sale, it is profitable for him to rent fields for this. If a farmer grows wheat to produce flour and sell flour, it is profitable for him to buy land. Buying agricultural land is not popular with Ukrainian farmers. That is why the selling price of land is so low.

The problem of processing agricultural products was the topic of our two previous articles. Weak capacities for processing wheat⁴ and milk⁵ have a negative impact on agricultural producers and ordinary citizens of Ukraine. However, the situation is not improving. Farmers do not have the money to build processing plants. And the state does not strive to effectively help farmers develop agricultural capacities.

For a long time, the reasons for such domestic policy were unclear. However, time has given the answer. The Ukrainian government decided to allow foreigners to buy agricultural land. Ukrainian officials did not develop agricultural processing in order to maintain low prices for agricultural land. Ukrainian authorities think that foreigners attracted by low land prices will buy fields in Ukraine and develop agricultural processing. Foreigners can do this without the support of Ukrainian officials. After all, foreign investors are much richer than Ukrainian farmers.

But the Ukrainian people and the political opposition changed the plans of the Ukrainian authorities. Ukrainians have traditionally opposed the sale of land to foreigners. For example, in 2019, 81 per cent of Ukrainians surveyed were against the sale of land to foreigners.⁶ In 2021, 79 per cent of Ukrainians were against the sale of land to foreigners.⁷ The government had to take into account the mood of the population. In practice, the land market reform began almost four years ago. However, it is still not clear that foreigners will have the right to buy land. Here are the main stages of the land market reform in Ukraine.

The land market in Ukraine officially started on July 1, 2021. Until 2024, only natural persons-citizens of Ukraine could buy agricultural land with a limit of 100 hectares. From January 1, 2024, the second stage of the land market started in Ukraine. Now legal entities have the right to buy agricultural land of no more than 10,000 hectares “in the same hands”.⁸ The ban on the purchase of land by foreigners remains in force. Opening the agricultural land market in Ukraine for foreigners can only be based on results referendum, which is prohibited by law under martial law.⁹

That is, the problems for foreigners in the Ukrainian land market are increasing. Now it is not only the will of the people, but also the war that prevents the people from making a choice.

What should foreigners do if they want Ukrainian land?

The situation would seem hopeless. But achieving success in a hopeless situation is a Ukrainian way of life. If foreigners want to achieve success in Ukraine, they must master this Ukrainian skill.

Foreigners can become successful in hopeless Ukraine in two ways. The first of these ways is to buy land. It makes sense to do this if a foreigner wants to start producing and processing agricultural products.  That is, if a foreigner follows the path that the Ukrainian government tried to create for him, but failed.

The legislation excludes the direct possibility of a foreigner or a legal entity created by him acquiring the right to agricultural land and provides for the confiscation of land acquired in circumvention of the ban. If a foreigner inherits land, he must dispose of it within a year. Such prohibitions exist in many countries, but there are a number of options that allow foreigners to gain indirect control of land. A foreigner can buy land in three ways.

1. The so-called trust ownership of land.

It can be structured as follows: a citizen of Ukraine creates a legal entity in Ukraine, and this legal entity buys land. A citizen of Ukraine and a foreign investor conclude a trust agreement under the legislation of a third country, which regulates the relationship between them, the rights and obligations of the citizen of Ukraine, who will act in the interests of the foreigner.

This structure is not ideal, because before the opening of the land market for foreigners, according to the results of the referendum, the person who owns the land will only be able to sell land or alienate shares to a limited circle of subjects: citizens of Ukraine or legal entities whose participants are only citizens of Ukraine. That is, foreigners will not be able to initiate a deal before the referendum.

2. Structuring through the pledge of corporate rights.

A citizen of Ukraine establishes a legal entity that attracts financing for the purchase of land. Creditors pledge a share in the authorised capital of such legal entity.

In the event of default on the loan, the creditor has the right to foreclose on shares in the authorised capital by selling the collateral and sell such shares to another citizen of Ukraine. Structuring in this scenario requires careful legal work and is not foolproof for the lender.

3. Conclusion of a contract for acquisition with a delaying circumstance.

Under such a contract, the buyer (a foreigner or a Ukrainian legal entity founded by a foreigner) becomes the owner of the land after the ban on its purchase is lifted.

The disadvantage of this option is that there is uncertainly, not only as to when or whether a referendum about the sale of land to foreigners will be held, but what the outcome of the referendum might be.

The legislation does not establish any deadlines for its holding and does not empower any branch of government to initiate such a referendum. According to the law, such a referendum is appointed by the President of Ukraine on popular initiative.

That is, for his appointment, an initiative group must appear that fulfills a number of conditions. In particular, it will collect at least 3 million signatures in two-thirds of the regions (at least 100,000 in each). However, in the conditions of martial law, holding a referendum is prohibited, and there is still no hint of the end of martial law.

Giving legal entities the opportunity to buy agricultural land from 2024 is a significant step forward, which will contribute to the development of the land market in Ukraine and its commercial circulation. Despite the ban on foreigners owning agricultural land, this step creates legal opportunities for building structures of indirect ownership and attracting foreign capital.⁹

The second way is to rent land. This is the way that the Ukrainian people prefer. In the current situation, this is a more effective solution than buying land. Firstly, it is easier for foreigners to rent land than to buy land. Secondly, renting land allows for a flexible response to the results of military operations in Ukraine. The battle line is constantly changing. For this reason, about 67,441 square miles (174,000 sq. km) of Ukrainian land (28 per cent of the country’s total area) are currently mined. Removing mines and ammunition is very expensive. The price of clearing 2.47 acres of land ranges from US$3 to US$30,000.¹⁰ This is 3-30 times more than the cost of buying land!¹

Such an increase in expenses can ruin even a very rich investor. To avoid this risk, large market players prefer to rent land, taking into account the development of hostilities. The further from the battlefield, the more profitable. This strategy is implemented by all large agricultural holdings in Ukraine. These enterprises were created with the participation of foreign investors. Since 2021, agricultural holdings have been renting, but not buying land. For example, since this date, no transactions have been recorded for agricultural holdings to buy land from farmers.³

Unlike the purchase market, the agricultural land rental market in Ukraine is very developed. The land rental process is democratic, fair and efficient. Lease agreements are concluded based on the results of public auctions in the state system Prozorro.¹¹ There is a special section for transactions in the agricultural sector. This section has different subsections. For example: “Animal feed”, “Plants”, “Agricultural services”. There is also a special section for the rental and sale of land plots.¹²

Last year, the average number of participants in land lease auctions was three. However, some plots were bid by 5 to 16 tenants. This allowed the rental price to increase significantly. The average increase in the rental price during auctions last year was 3 to 4 times. However, in some cases, the land rental price increased 5 to 7 times.

Despite this, the rental price remains very low. Even in war conditions, Ukrainian farmers and agroholdings easily pay rent; 99.9 per cent of tenants pay for land on time. There are no problems with payments. But in the near future, the rental price may increase by 10-15 per cent.³

In the second quarter of 2024, the average national rental price of agricultural land in Ukraine was US$85 per 2.47 acres per year (UAH 3,550 per hectare).¹³ This is 5.1 per cent more than a year ago. The average rental price is 15 times less than the average sale price of agricultural land in October 2024. Then the average sale price is US$1,300 per 2.47 acres. That is, at current prices, it will take 15 years for the rental price to become equal to the sale price of land. However, in some regions the difference is greater. In the Kyiv region, where the sale price is the highest, it will take more than 30 years for the rental price to become equal to the sale price of land.

Average rental price of agricultural land from January 2021 to May 2024:

• Zakarpattia region US$60 per 2.47 acres per year (UAH 2,497 per hectare per year)
• Ivano-Frankivsk region US$52 per 2.47 acres per year (UAH 2,185 per hectare per year)
• Lviv  region US$78 per 2.47 acres per year (UAH 3,249 per hectare per year)
• Chernivtsi  region US$85 per 2.47 acres per year (UAH 3,527 per hectare per year)
• Ternopil region US$94 per 2.47 acres per year (UAH 3,913 per hectare per year)
• Khmelnytskyi  region US$83 per 2.47 acres per year (UAH 3,450 per hectare per year)
• Volyn  region US$65 per 2.47 acres per year (UAH 2,713 per hectare per year)
• Rivne region US$83 for 2.47 acres per year (UAH 3443 per hectare per year)
• Vinnytsia region US$88 for 2.47 acres per year (UAH 3655 per hectare per year)
• Zhytomyr region US$62 for 2.47 acres per year (UAH 2583 per hectare per year)
• Kyiv region US$104 for 2.47 acres per year (UAH 4311 per hectare per year)
• Cherkasy region US$104 for 2.47 acres per year (UAH 4315 per hectare per year)
• Kirovohrad region US$60 for 2.47 acres per year (UAH 2485 per hectare per year)
• Odessa region US$56 for 2.47 acres per year (UAH 2345 per hectare per year)
• Mykolaiv region US$45 for 2.47 acres per year (UAH 1893 per hectare per year)
• Kherson region US$51 per 2.47 acres per year (UAH 2131 per hectare per year)
• Zaporizhzhia region US$51 per 2.47 acres per year (UAH 2113 per hectare per year)
• Donetsk region US$56 per 2.47 acres per year (UAH 2323 per hectare per year)
• Dnipropetrovsk region US$63 per 2.47 acres per year (UAH 2615  per hectare per year)
• Kharkiv region US$68 per 2.47 acres per year (UAH 2826 per hectare per year)
• Poltava region US$100 per 2.47 acres per year (UAH 4171 per hectare per year)
• Sumy region US$69 per 2.47 acres per year (UAH 2885 per hectare per year)
• Chernihiv region US$70 for 2.47 acres per year (UAH 2919 per hectare per year).

As we can see, renting Ukrainian fields is much more efficient than buying them.

Despite the efforts of the authorities, the Ukrainian agricultural land market fully complies with national specifics, and not international rules. This can be said about both prices and the specifics of doing business. Therefore, the secret of success for foreigners in Ukraine is very simple. Foreigners need to mentally become Ukrainians and act like Ukrainians. Then the business will be successful despite all the problems!

References

1. https://opendatabot.ua/open/land
2. https://bank.gov.ua/ua/markets/exchangerates
3. https://kurkul.com/interview/1536-volodimir-nagorniy-maloymovirno-scho-inozemtsi-otrimayut-dozvil-kupiti-zemlyu-v-ukrayini
4. https://arr.news/2024/03/04/the-ukrainian-grain-market-withstood-a-coordinated-attack-from-friends-and-enemies/
5. https://arr.news/2024/05/07/the-war-made-dairy-retail-cultureless/
6. https://ratinggroup.ua/en/research/ukraine/otnoshenie_ukraincev_k_vnedreniyu_prodazhi_zemli.html?fbclid=IwAR2b-W80wQ47POdWgBhF91tkQVdRNbYyXSqz8DgN1032D_Dehd9MZ0l0LZg
7. https://ratinggroup.ua/research/ukraine/otnoshenie_ukraincev_k_vvedeniyu_rynka_zemli_23-27_aprelya_2021.html
8. https://www.epravda.com.ua/news/2024/01/9/708537/
9. https://www.epravda.com.ua/columns/2024/02/16/709981/
10. https://datadriven.group/ua/defence-and-demining
11. https://prozorro.gov.ua/uk
12. https://prozorro.sale/orenda-ta-prodazh-zemli/
13. https://landlord.ua/news/rynok-zemli/v-ukrayini-znyzylysya-cziny-na-zemlyu-nova-vartist-gektariv

ARR.News Ed: A reminder to all readers that this article is for information only and is not intended as financial or legal advice. Readers are advised to do their due diligence and seek professional advice.