Where Raw Land is the Investment Chosen by Institutional Investors

Interest in real estate is building again. A survey of professionals finds that, while muted in some respects, institutional and other investors “are in” for 2013.

We tend to look at institutional investors as among the most savvy and informed players in finance. And there is little reason to challenge that maxim.

For those looking to invest in real assets such as strategic land, a report titled, “Emerging Trends in Real Estate, The Second Act: Optimism Returns 2013 Europe,” says that real estate as an investment in Europe is one of the brighter spots in the Eurozone Crisis environment. Half the respondents to the research for this report affirmed that they are optimistic about real estate in very general terms. Relative to institutional investors, the report offers the following:

• Europe largely remains a difficult sell to the more conservative international institutional investors from the United States and Asia, which would have traditionally invested in the region through core funds.

• One in five (21 per cent) institutional investors in real estate businesses say that sustainability (environmentalism) will have an increasing impact on their business, and this isn’t necessarily a negative. “Sustainability is also about how that shopping centre works with the community around it,” said one respondent. “What role are you playing in the local life of that place? This is the next stage of the sustainability debate.”

• Undervaluation of some properties enables productive investments with little risk. “Banks are pricing good assets with just one or two impairments as secondary because they are worried about values falling further on account of these issues. But investors say they’re attractive because all they need is a touch of TLC to improve prospects.”

• “For residential investors, especially in the United Kingdom and Germany, 2013 will be a key year,” says the report, providing the following quotes from survey respondents: “Residential is the best bet, as a basic need” and “We believe in residential assets in stable E.U. countries. This will only get better over the coming period.”

• Developers and institutional investors, as well as REITs, are following the wisdom of small landlords by increasing participation in the private rented sector. The bet factors in a protracted period in which working young professionals may not be able to buy but instead can afford higher rents. Also, “there is a lot of latent demand for purpose-built stock that allows tenants long leases.”

• Local authorities have begun working closely with pension funds and institutions to build housing on public lands to meet the exceptional social need.

So while institutional investors pursue a mix of real estate asset types, there clearly are signs that this is a category of interest and widespread participation. As should be clear, raw land as well as built properties are far from passive and liquid investments - professionals are required to guide the investment through its various stages over multiple years. Individuals who are interested in raw land investment are encouraged to work with professional, independent investment advisors to identify if and when a land investment fits into their investment risk matrix.

*Compiled and reported by the Urban Land Institute and PwC from completed surveys of 500 industry experts, including investors, property fund managers, developers, property companies, lenders, brokers, advisors, and consultants.

What Are the Cost Considerations For Developing Land into Housing in the UK?

Investors in raw land, looking to develop it into much-needed housing, are also responsible for infrastructure development. But to what extent?

For those looking to make alternative investments into UK strategic land, it is worth noting that Conservative MP Nick Herbert raised a few difficult issues - along with unpleasant scenarios - when he published an opinion piece in the Daily Telegraph in late 2012. In it he suggested that some communities are failing to build adequate infrastructure (read: sewers, schools and roads) as they accommodate residential development.

Herbert is quick to acknowledge the pressing need for housing in the UK, as most expressly indicated by Census 2011. But he cites scenarios where inadequate wastewater systems, overcrowded schools and clogged highways show a lack of planning and appropriate resource allocation in the development process. Implicated are, of course, the investor-developer-builder teams who bring about these developments. Herbert introduced an amendment to the Growth and Infrastructure Bill debated in the House of Commons that requires planning authorities to ensure sufficient infrastructure be included in new development.

The costs associated with providing adequate infrastructure in a rapidly-growing population are always a point of debate. Apart from Herbert’s arguments, there are several factors at work in the UK and around the world to consider where it comes to defining what infrastructure entails and how to achieve it:

The UK’s Community Infrastructure Levy (CIL) - Newly created to be faster, fairer and more transparent, the CIL is an option for local councils to charge developers and land owners for the added community costs of new developments. Monies can be used for new roads or road improvements, new health centres and park improvements - per the discretion of local authorities. It also ensures a predictable fund stream that enables effective planning, as well as accountability to local (extant) residents as to how the levy monies are spent. (Note: Herbert is sceptical that this new levy will be sufficient because it carries no mandates for local planning authorities.)

Larger, exurban lots present lowest upfront costs (U.S.) - A paper published in 2009 (Rayman Mohamed, “Why do residential developers prefer large exurban lots? Infrastructure costs and exurban development”) in Environment and Planning B: Planning and Design looks at data from public records of construction costs in South Kingstown, Rhode Island in the U.S. Of course the American approach to development differs and they do not have some of the constraints and levies that exist in the UK. But when the lots are large so too are the prices, while infrastructure costs are only incrementally more. This difference takes on greater contrast when compared to the urban, vertical-built opposite.

But dense cities offer most sustainable complex costs - The “new urbanism” movement popularized in the UK, Europe and the Americas seeks to reverse the suburbanization and ex-urbanization sprawl patterns with a densification of population, transportation, commercialization and city services such as sewers and all other public utilities. The differences from the South Kingstown study (above) is that this looks at the longer-term resource consumption of development (which nets out in favour of densification). Some argue that it creates a lower quality of life, however that is subjective and open to much debate.

Infrastructure in “community assets” - The Joseph Rowntree Foundation (JRF), which endeavours to support resilient communities, argues that community infrastructure ideally incorporates intangibles such as “social capital” (those things that foster connections between individuals), “social networks” (inter-dependencies between individuals and organizations) and civil society (faith-based organizations, political parties, voluntary and community organizations, etc.). JRF makes policy recommendations relative to the affordable housing, with a focus on house price volatility - a matter that is easily connected to sustainable development.

As Herbert, a Conservative, argues in his Telegraph piece, there ultimately is an ongoing juggling act where it comes to infrastructures and its costs, short-term and long-term. “We should not deny young people the chance we’ve had to own our properties,” he says. “But it also means taking care not to damage the countryside. And at the very least, it means ensuring that where such housing is needed, there is adequate infrastructure to support it.”

Be it for market rate, affordable or social housing, significant questions ultimately find answers in those willing to invest in critically needed development. Any and all building will alleviate the pressure from its current state, but of course quality of life issues must be considered along the way. Investors in market housing need to consider all costs - including those cited above - when determining the risks inherent in those investments.

The Controversy of UK Agricultural Land Conversions to Housing

What are seen as the controversies around converting land from agriculture to housing?

The value of UK Green Belt and agricultural lands is undisputed. But the environmental costs of modern farming and housing needs are part of the conversation as well.

Anybody considering making an alternative investment in strategic land will know that Britain unquestionably needs more homes to accommodate a growing population. According to the Office for National Statistics, more than 4.4 million homes should be built by 2016, largely in response to two factors: A decennial growth rate of 7 percent, as measured in Census 2011, and lagging new home construction that fails to keep up with this population increase, largely attributed to the stringent lending standards of banks following the 2008 economic crisis.

At least one group claims the solution is to build on Green Belt land. The Policy Exchange, a centre-right think tank, said in late 2012 that the supply of land near cities that is kept unbuilt is a drag on the housing market. They argue that swaths of English countryside that typically surround towns should be opened up for development. The fourteen Green Belts in England cover about 13 percent of the country, enveloping about 60 percent of Britain’s population (about 30 million people).

The Policy Exchange faces plenty of headwind in its positions. Since the “garden city movement” of the early 20th century, the effort to combat urban sprawl led by such groups as the Campaign to Protect Rural England (CPRE) and the London County Council sought to maintain open spaces dedicated to recreation, forests and agriculture as a social good. But the Town and Country Planning Association has proposed since 2002 the adoption of more flexible policies toward Green Belt lands, suggesting that instead of a growth-stifling “belt,” that “wedges” and “strategic gaps” might allow a natural expansion of urban areas.

Famously, the head of Natural England, whose charge is entirely to ensure protection and improvement of flora and fauna, said in 2007 “we need a 21st century solution to England’s housing needs which puts in place a network of green wedges, gaps and corridors, linking the natural environment and people.”

Agricultural land outside of Green Belts

Of course, land away from the major cities is green as well, much of it in use for agricultural, forestry and recreational purposes. More than 80 percent of the landmass in England and Wales, 12 million hectares, are used for farming and forestry. Local planning authorities can more easily rezone the lands outside Green Belts when market factors, such as the demand for housing development, call for it. Since 2000, about 1500 hectares of agricultural land has been converted to housing development every year.

Of course, similar sentiments understandably still exist relative to the bucolic perceptions of farming in the U.K. But environmentalists take exception to how modern agricultural methods, which include excessive application of fertilisers, can actually burden nature with its by-products:

• Toxic build-up. 100 million tonnes of sewage sludge, compost and livestock manures applied annually to agricultural lands is leading to a build-up of potentially toxic elements such as zinc and copper, and more than half of sensitive wildlife habitat experiences harmful acid and nitrogen pollution, according to a paper published by Environment Agency UK.

• Loss of soil. About 2.2 million tonnes of topsoil is lost each year due to intensive cultivation, some of which is instigated by compaction from heavy machinery and livestock, which precludes plant growth and leads to runoff in rain. (source: Environment Agency UK). To be fair, some runoff is noted as well from building sites before landscaping is completed.

• Water quality compromised. About 70 percent of sediments found in water come from agriculture, and those sediments can carry metals, pathogens, pesticides and phosphates.

Such problems due to modern agriculture plague the planet, as similar pollution levels are reported throughout Europe, Asia, North America and Australia. Africa, Brazil and Argentina, the newer frontiers for agriculture, are expanding arable croplands to meet global food demands but also exhibit a host of environmental sins.

The food-housing tug
There is no denying that the housing needs in the UK must be met - and soon. A whole generation of families are postponing children or living in cramped quarters, awaiting homes they can afford or at least rent to accommodate their members.

But Brits need to eat as much as sleep. So how to balance the use of land for each?

A number of approaches are being tested. One is to encourage development of so-called brownfield lands, which include properties that may require remediation from previous industrial uses. These lands are often within towns or immediately adjacent to them, some with excellent access to existing urban infrastructure while others are cost-prohibitive for a variety of reasons (no existing infrastructure, undesirable locations for housing or extensive environmental remediation required).

Sustainable Build.co.uk is a web publisher that considers the balance between development and environmental sustainability from a very pragmatic standpoint. The site offers several points on how land conversions to development can have a negative effect, which include: converted green fields are quite unlikely to be converted back to nature; there is inevitable loss of habitat for animals and plants; a loss of employment for agricultural workers; and a loss of Green Belt land that provides geographical definitions and separations of cities, towns, villages and hamlets (i.e., American-style urban sprawl).

Answering the problem of diminishing agricultural lands is a nascent movement to small-scale, organic agriculture on greenfield lands. Sustainable Build notes, “There are greenfield sites that are not being used for any purpose, for whatever reason. Development must consider all human and environmental factors, not just consume land and space for short-term solutions. A sustainable vision would look at all the options for land use, human population expansion, urban sprawl, economic considerations as well as environmental needs.”

Which, in a country with a growing population and a concurrent appreciation for the environment, is perhaps the most realistic and pragmatic approach.

Identifying Qualified Land Investment Agents: What To Look For

What qualifies as competency for land investment agents?

Land investments are a promising, alternative means to achieve growth under current market conditions. Working with qualified agents is key to managing risk.

Due to rising interest in alternative investments - a response to the middling performance of market-traded securities - there has also been increased concern about the legitimacy and transparency of many of these assets. For example, the broker-dealer Ponzi scheme of Bernie Madoff may go down in history for both its size of losses as well as its instructive value.

Preceding Madoff’s spectacular debacle in 2008 was the 2005 Langbar International fraud. Here, the Nominated Adviser failed to carry out due diligence while the London Stock Exchange concurrently neglected to check compliance with Alternative Investment Market (AIM) rules.

In the wake of events such as these, many investors - and certainly many investment advisors - have had to increase their skills at identifying where and in whom to seek real asset growth with minimized risk.

Land investments should be approached with the same kind of scrutiny, as should land investment agents. There is increasing interest in raw land, due to how the population increase in the UK has not been adequately met with sufficient home building. The consequential pent up demand for housing is spurring Local Planning Authorities to consider rezoning some tracts of land. To the investor, this is an opportunity to create significant asset growth in a relatively short period of time.

The wary investor is wise to go about this with caution. Several fraudulent schemes have been unleashed on less-sophisticated investors, garnering much attention in the press. But individuals (typically investing a minimum of £10,000) working through a third-party financial advisor should inquire about a property fund’s management team.  That conversation might cover the following:

•    Track record - What successes does the land investment agent have on its record? What about failures, or poor performers?

•    Education/Experience - While many professionals endeavour in the land investment field without a university degree in that specific area, they should have accumulated knowledge in their work. The excitement of rapidly appreciating land values sometimes draws in unqualified people only recently landed in the industry.

•    Expertise - Land investment is not a simple buy-sell proposition. In fact, a team of experts typically needs to work together to turn a property into something of greater value. That includes individuals who can provide the best analysis for selecting land that is ripe for acquisition, for negotiating a workable purchase price, for development planning, site assembly and to strategically time the forward sale, all in the interest of maximum returns.

•    Transparency - All accounting of activities, expenditures, milestones, transactions and returns need to be reported on a quarterly if not more frequent basis, audited by a third party.

Not all variables can be predicted in land investments just as uncertainty exists in all types of investments. With the use of a qualified financial advisor - whose job includes clearing qualified land investment agents - an investor can at least reduce the risk of working with the wrong parties in this alternative investment.

Reasons Why the Time is Right for Land Investments

Now May Be the Golden Moment for UK Land Investments

Key economic factors including population growth, a housing shortage and a recovering economy can lead to rapid land asset value growth.

Almost everyone in the UK with assets to invest has some experience of buying built property. Whether in London or Manchester or Cardiff, the suburbs or the countryside, we are familiar with how to price comparable residential properties, how to estimate what needs to be spent to upgrade the property and what growth potential exists in a particular home and its surrounding neighbourhood. But when it comes to purchasing undeveloped land as an investment, much of this experience does not apply. There is a whole different set of variables that make it a different and, arguably, more challenging acquisition/investment.

That said, it is a good time to invest in undeveloped strategic land. Several factors combine for a “perfect storm” of advantages to the land investor. They are:

•    When land values are in a trough – There has been a great deal of loss in the global recession that began in 2007. But from every down comes an up, in this case the depressed prices of much all real estate necessarily precludes a future recovery.

•    The protracted nature of this recession – While each investor acts according to wherewithal, objectives and opportunities, the economic downturn has altered how investors think. Most are dissatisfied with the volatility of market-traded securities (stocks and bonds), such that many have migrated to alternative investments. Those who opt for land either have a honed acumen for real property or they work with property funds that are professionally managed.

•    When demand for land development is high – There can be any number of factors that drive a value increase in any particular property. But the key driver in the current economy is population and a shortage of housing. Companies looking to establish operations have to consider the available labour pool; in some municipalities there may be an actual shortage of human resources due to a dearth of appropriately-priced residences. These municipalities welcome development and are more inclined to change the land designation to residential and commercial from other uses, such as agriculture.

•    Where special regional factors can create particularly strong investment opportunities – The scenario for the housing-worker equation is different from, say, what is available in London versus towns in the southwest, in Wales and the Midlands.

The importance of working with professionals in making an investment in land cannot be overstated. Undeveloped land is a specialized area that offers great opportunities through land site assembly, but an individual investor is strongly advised to speak first with a qualified personal financial consultant to understand the options, risks and rewards.

Do Real Asset Funds Make Sense in the Current Economy?

How Current Economic Conditions Can Favour Real Asset Funds

Real asset funds in land offer advantages not found in market-traded securities. Current economic conditions in particular provide distinct value growth opportunities.

Every time period offers value growth opportunities for investors. Implicit in that, of course, is the fact that many variables make for a dynamic investment landscape – what worked two years ago may not work well today. Factor in as well that no two time periods are ever exactly alike. A professional analysis of every property is necessary, and investor expectations need to be in line with the nature of each investment.

A Reuters news agency report in late September 2012 cited “big falls in trading over the [preceding] summer” on the London Stock Exchange, which it attributes to economic uncertainty in the Euro Zone (a trend that began in earnest four years earlier).  This then leaves investors with a dilemma: if the exchanges provide little opportunity to make money on stocks and futures, where does an aware investor go to invest?

The answer for many largely lies in real assets and real asset funds. Real assets range from art and antiques to hedge funds, built commercial property and undeveloped land. This latter category lends itself to ownership in funds, as when a consortium of investors purchases property for either holding to lease or sell at a later date, particularly if the property can be rezoned for different purposes. This latter scheme allows the UK land investment fund to increase value under the right circumstances.

Land value growth is very property-specific, of course. Consequently, several factors need to be considered when making a land purchase:

•    Is land value loss possible? Some properties can decrease in value, which a professional land investor should be able to avoid. Municipal decisions on zoning can adversely and positively affect value growth, which again is the province of a real asset fund that is competently managed.

•    More people, inadequate housing. Two important and related factors in the UK economy are population growth juxtaposed with a housing shortage. Even in recession, the overall population grew from 2001 to 2011, an overall increase of 7 percent or about 170,000 people per year. The recession has slowed construction of new homes, however, exacerbating the shortage – and creating pent-up demand.
•    Business cycle recovery, increased demand. A 2012 Financial Times global survey confirmed that, as a rule, population increases are a fundamental part of economic expansion. In towns and counties where employment is growing – most growth cycles still have geographical winners and losers – the demand for land development is particularly keen.

All of this suggests that very real opportunities exist for real asset value growth that is concentrated in undeveloped land and, perhaps as much, in developed real estate. The key task for would-be investors is to find the professional fund managers who understand property, municipal inclinations to growth and where regional economic factors (such as employers with ascendant enterprises) favour a concentration of growth. This is often referred to as land site assembly.

For more information on land asset funds and strategic land development, contact a qualified personal financial consultant.