How does tenancy affect farmland prices? Effects of lease status, lease term and buyer type

Purpose - Lease contracts at the time of sale influence buyers' expectations about future returns of farmland ownership and may thus contribute to price dispersion. This paper investigates the conjecture that existing land lease contracts influence buyers' and sellers' costs of being information deficient and thus their bargaining position, their expectation formation about future returns, and thus ultimately the farmland price. Design/methodology/approach - The authors link different levels of information, search, and bargaining costs to three buyer types and their land use intentions. Relying on a rich dataset of farmland transactions in the German Federal State of Saxony-Anhalt from 2014 to 2019, the authors use a hedonic pricing model to investigate five hypotheses applying multivariate one-sided tests. Findings - The authors find buyer-specific effects related to lease status and lease term of a lot. Tenant buyers pay less than non-farmer buyers for leased lots, whereas non-tenant farmers pay a markup. While prices decrease for all buyer groups with an increasing lease term, this effect is the strongest for non-tenant farmer buyers. This study’s results suggest that an existing lease contract impacts buyers' costs of being information deficient, their bargaining positions and expectation formation, and ultimately the price discovery process. Originality/value - To the authors’ knowledge, this is the first study that decomposes the effects of tenancy on farmland prices by buyer type and lease term. The study provides insights into price dispersion for identical characteristics of farmland and explains why empirical studies have found mixed or no empirical evidence that lease contracts influence the price discovery process.