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Abstract

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 compared to other markets and varies considerably among federal states; and that (expected) premia for land are mostly negative, rendering investments in farmland unprofitable for financial investors. Finally, we find that changing expected present values of returns on land investments are the major driver for land price volatility.

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