Jana Plogmann, Oliver Mußhoff, Martin Odening, Matthias Ritter
The price increases on agricultural land markets over the last decade have triggered a debate about land as an attractive investment opportunity for agricultural and non-agricultural investors. In a static environment, the rent-price ratio provides a first indicator of the profitability of an investment in land. In this paper, we apply the dynamic Gordon growth model to Western Germany and decompose the rent-price ratio into the expected present values of rental growth rates, real interest rates, and a land premium, i.e., the excess return on investment. This analysis reveals that the recent price surge on agricultural land markets was not unprecedented; that the land market rent-price ratio is rather low and varies considerably among federal states; and that (expected) premia for land are mostly negative. Finally, we find that changing expected present values of returns on land investments are the major driver for land price volatility.