Agricultural land valuation methods used by financiers: the case of South Africa

Abstract

Agricultural land is the preferred form of collateral used by financiers to finance South African farmers. The objective of the paper is twofold; firstly, to determine the valuation methods used by financiers in determining the value of agricultural land used as collateral, and secondly, to determine the correlation between the agricultural land value and the amount of financing provided. Interviews were conducted with five respondents representing the Land Bank, three of the four largest commercial banks and an agricultural company. It was found that the market value approach and the income capitalisation approach are considered to be the most suitable valuation techniques. It was furthermore found that the amount of finance provided is based on varying percentage adjustments made to the value of agricultural land. The practical policy implication is that it is imperative that reliable governmental statistics on agricultural farm values and sales be re-established to encourage conformity among financiers in market value valuations.