Strategic Land Investment Versus Stock and Bond Markets – A Comparison

How Do Traditional Investments – Stocks and Bonds – Compare to Strategic Land Investing?

Investors are looking outside of stocks, bonds and REITs for better returns. But the alternatives, real assets such as strategic land, defy apples-to-apples comparisons.

The performance of stocks, bonds and REITs (real estate investment trusts) is based partly in the companies they represent and partly in overall market trends. This has proven to be dissatisfying to many investors in recent years because, net-net, those types of investments have shown little overall growth amidst a sea of financial volatility.

An alternative, strategic land investing, is attracting disenchanted investors because, simply, such investments are able to outperform the securities traded on the London Stock Exchange, the New York Stock Exchange, the SEHK and other trading organisations.

What makes for this difference? Why would an investment in land be advantageous over something as apparently similar as a REIT? And doesn’t the general health of the economy affect demand for land in a similar fashion to demand for stocks. These are important and natural questions, best understood by considering the following premises:

•    Strategic land versus REITs – Most real estate investment trusts hold commercial property such as office buildings, retail centres and warehouses. Strategic land, however, is primarily made up of acreage that is unbuilt but ripe for municipal repurpose designations. The strategic land fund, a conglomeration of investors working in partnership with land acquisition and development professionals, will purchase the land and improve its value by various means such as rezoning and infrastructure development (“land site assembly”), then sell the property when its value is sufficiently increased (often, within two to five years).

•    Strategic land versus stocks and bonds – Investors in market-traded securities follow trends, which often supersede the intrinsic value and worth of individual companies. REITs, also traded on the exchanges, are subject to the same generalisations. But strategic land values rise and fall on the acumen of investment property specialists – in how and when they purchase property, their success at rezoning, skill at cost-effective infrastructure construction and identifying the optimal time to sell.

•    Strategic land relative to the general economy – The general economy may be in the doldrums, yet specific tracts of land in select locations might concurrently be highly desirable due to area-specific factors.

These are each reasons why strategic UK land investment specialists hold great value with their investors. But before you embark on a strategic land investment, speak with your personal financial advisor who understands your own investment goals, timeframes and tax considerations.

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.

How the Localism Act Can Affect Land Values

Land Investment in the UK Can Be Affected By the Localism Act 2011

The decentralisation of decision-making relative to land use, as provided in the Localism Act 2011, might help or hinder land investors’ return on investment.

The Localism Act 2011 is, like any piece of sweeping legislation, both prized and pilloried, depending on whom you discuss it with. It is welcomed by many in its intent, which includes providing residents the power to initiate local referendums. This can apply to any local issue, and it includes the power to veto council tax increases (expected to be very popular over time).

With regard to land and housing, there are some key points of the Act that can affect owners, investors, developers and the eventual occupants of land and property. Essentially it decentralises decision-making for land use and infrastructure development, taking it away from the now-defunct Infrastructure Planning Commission. It also allows community residents, not a centralised commission, the following:

•    Levies. Local councils can impose a Community Infrastructure Levy on developers to pay for infrastructure improvements that will accommodate development.

•    Community voting. Allow neighbourhood plans that are approved by 50 percent or more of votes cast in a referendum.

•    Local decisions. Such neighbourhood-approved developments can be implemented without the requirement of planning consent.

For the land investor a natural question may simply be, “Is this a good thing?” The answer may lie in the skills of the investor (or the investor group and its professional land acquisition and development advisors) in working with communities. Are investors able to make a convincing case for development, for example, in a situation where land use zoning needs to be changed? While the intent of the Act is to expedite the development process, will that in fact happen in all cases?

To the matter of the Community Infrastructure Levy, this of course impacts the expense side of land investors’ balance sheets. It may well be affordable to pay for the development of roads, sewers, water supply and the like within a complex land site assembly plan. Or will a community activist, intent on blocking development, push for unnecessary and exorbitant community features that effectively stop development plans?

For the local communities, the questions also arise as to their capacity to effectively use the powers of the Localism Act. Do they have the capacity within community and voluntary organisations to produce smart neighbourhood plans? Will some factions wield asymmetrical power over others such that non-democratic outcomes result?

These and other questions may well find answers on a project-by-project, community-by-community basis. In some scenarios it might increase the overall return on investment for the land investor. Elsewhere, it may decrease it. The difference might lie in the skills of the investors themselves, able to anticipate both opportunities and problems created by the Act.

For the individual who contemplates becoming a strategic land investor, understanding the significant opportunity to invest in land that draws from the economics and housing needs of a growing population, these are important questions. Such individuals are advised to work with their qualified financial advisor to sort through the risks and rewards present in the current economic environment.

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.

Building Depreciation Versus Land Appreciation

Buildings Can Sometimes Lose Value While Land Investment Values Grow

The characteristics of property that contain buildings are different from undeveloped land. These differences affect value growth of both asset classes.

Real estate investors are growing in number under current economic conditions due to several factors. One is that traditional investments in the stock markets are providing disappointing yields. Another is that real estate overall suffered in the global recession and properties of all types are potentially undervalued.

But land that is undeveloped differs significantly from that which has buildings and infrastructure components (water, waste removal and utilities) and is proving to be one of many viable alternative investments.

So why do changes in the value of undeveloped land not mirror those of developed land.  There are several factors at play here:

•    Simple physics – The principle of atrophy applies very directly to built property. In addition to the costs related to routine maintenance, all buildings require major repairs over time. The costs can be a significant factor on landowners’ balance sheets.

•    Adaptability to market needs at time of sale – In addition to a propensity to age and break down, built property is inherently inflexible. For example, a structure built to be a hospital can only become a residential building with extensive renovations. However, undeveloped property can provide optimal economics to builders, buyers and occupants at key moments. By engineering smart site assembly, the investor can accomplish strategic land development that efficiently meets market needs.

•    No tax benefit to building depreciation – American investors are accustomed to a depreciation formula on investment property, which unfortunately is non-existent in the UK tax laws.

•    The beneficial value of new – Some buyers want to be the designers and first occupants of structures. This is even more pronounced in this era of green building, where structures today are significantly more energy efficient and sustainable than those built as recently as five years ago.

Of course, this is not an either-or scenario. Different investors work according to different strategies, asset allocation/diversity and on different timelines. Also, some investors have the technical knowledge to manage and improve a property, while others work with consultants or fund managers (when an investment is made with several sources of funding in collaboration) or through joint ventures. For more information on the type of land or property investment in the UK that might be right for you, contact a qualified personal financial consultant.

Does Capital Growth in Strategic Land Require Building Structures?

Learn how building structures can affect capital growth in land.

Strategic land investments are affected by many factors, primarily in adapting to the strongest market needs in the present. Existing buildings can diminish value.

The Daily Telegraph reported in October 2012 that a jump of 1.3 percent in house prices at the end of the summer was more an anomaly than hopeful trend. The article quoted Robert Gardner, chief economist at Nationwide (which issues monthly house price surveys) as saying “we should never read too much into one month’s data…the housing market is firmly in the doldrums, although the national average does mask significant regional differences. That said, in parts of London where there is a shortage of decent family homes for sale, there is still significant competition from buyers and prices are holding quite well.”

Gardner’s comments did not address specific properties outside London, but investors looking for capital growth in land understand there are opportunities elsewhere. The seven percent increase in population across the U.K., as identified in the 2011 Census, is a strong indication that new homes need to be built, particularly in towns where the local employment base is expanding.

But the matter of existing homes and buildings raises important points of discussion for the land investor. Typically, land investment involves raw properties, perhaps zoned for agricultural purposes but where the local authorities are predisposed to a zoning change. The astute investor – increasingly, land investors join together in joint partnerships that include an advisor with extensive experience in land capital growth – typically looks for undeveloped land.

The reason for this is simple: existing structures and the community infrastructure built for previous purposes may not serve current-market needs. There is less growth potential for the investor if, for example, 30-year-old multi-unit structures occupy the property because those buildings might require expensive renovation or demolition. With undeveloped land, the buildings, street configurations and utilities can be designed to meet modern needs.

This does not mean that historical buildings necessarily have to be demolished. Some developers are able to save barns and other aged structures to provide a development with character. For example, the Reigate & Banstead Borough Local Plan Policy on redundant rural buildings (in conjunction with the Department of the Environment Planning Policy Guidance Notes’ PPG7, “The Countryside and the Rural Economy” and PPG2 “Green Belts”) advises that barns of specified vintage and characteristics be preserved, preferably for industrial or commercial use. In such a case, it is entirely possible that a structure could be woven in as an integral economic component of the new community built around it.

As the economist Gardner stated, there are specific regions where demand defies the broader market downturn. In such cases, the capital growth-minded land investor is wise to work with experienced strategic land investment advisors who understand where opportunities exist and where they do not. The investor should also consult with an independent financial advisor to discuss where land investments might fit into an overall personal financial plan.

Do All Joint Venture Participants Bring Expertise to the Investment?

Expertise is critical to joint venture investments – from any participant.

Joint venture land development investors are largely involved to earn a favourable return on their capital. Most investments benefit from third party expertise.

Joint venture partnerships (JVP) between multinational companies and in-market owners of capital, brands or knowledge, are a proven successful formula. This is particularly evident in the global economy. The McDonald’s Corporation’s expansion to scores of countries, many in the developing world, has been monumentally successful because the company typically works with an investor-manager in each of those markets. The restaurant company understands how to effectively run its establishments, while the JVP ensures that customers, employees and regulatory agencies are working with locals who understand their region’s needs and interests.

Joint venture property funds can follow a similar model, but not all investors necessarily bring land expertise to the table. The nature of buying, repurposing (through the planning process) and reselling property absolutely requires that the team has expertise in those particular tasks. Indeed, successful independent real estate investors can amass significant wealth when they have these skills themselves or within their staff. But many joint venture participants only bring capital, not land-specific expertise, to the investment. The investment and the task to grow capital are left to one or more, but not all, parties in the investment.

Whether or not this is an optimally beneficial arrangement is subject to circumstance.

Consider two different joint venture land development investment scenarios:

Scenario 1: Some but not all investors are the land specialists. A degree of trust needs to be established between all parties when some investors lack knowledge on how to make strategic land investments.

Scenario 2: An independent land investment advisor works collectively with joint venture participants. Because such advisors attract investors over time, they need to establish a track record that demonstrates their ability to maximise their returns to investors’ capital. That track record over previous investments is how they establish the trust that investors place in them to grow their assets.

The points of expertise required for strategic land investments are as follows:

1. Acquisition of land – Only properties that show strong and probable asset growth potential are considered. Sometimes the land tracts are held by several owners, which consequently requires acquisition negotiations on several fronts (not necessarily an easy task).

2. Site assembly – Achieve granting of outline planning consent by the local authorities, clearing the way for repurposing and building on that land. While this is typically understood in advance of the acquisition, the process needs to be managed carefully, working through the proper channels (e.g., submitting an optimal design) to a successful outcome.

3. Sale of the property – The moment at which the investment can provide a return on investment – according to the original joint venture asset growth goals – is when the investors benefit from their advisors’ expertise.

As should be clear, individuals wishing to learn more about a joint venture in strategic land should discuss their specific and overall investment goals with an independent, qualified personal financial advisor.

Where Does Strategic Land Rank Among Alternative Investments?

Alternative investments such as strategic land should be comparatively evaluated.

While fraught with apples-to-oranges comparisons, would-be property funds investors should consider all alternative investments.

The Reuters news agency reported in October 2012 that the lustre of hedge funds is diminished. The reason, according to one prominent financial advisor cited in the story, is that hedge funds basically became too popular. They attracted institutional investors that have effectively reduced risk taking. While hedge funds gain on market inefficiencies, those inefficiencies are effectively “ironed out” by the proliferation of participants in this type of asset – ironically reducing the net return from the funds.

The primary reason investors went to hedge funds in droves over the last several years is because of the poor returns they were finding in traditional market-traded stocks and bonds. So what about other alternative investments? Do land, developed real estate, precious metals, art and antiques (including antique cars and rare coins), commodities, energy or natural resources yield managed risk and above-market returns? Consider the news on each (as of the third quarter 2012):

• Gold – After rocketing to historic highs in mid-2011, the only investors who are assured a good return on their investments are those who purchased the precious metal in 2008 or earlier, according to the head of a private banking firm.

• REITs – Real estate investment trusts are tied to large portfolios of developed or developing properties, primarily commercial buildings. The natural fortunes of REITs rise and fall with the markets, tied both to vacancy rates (which roughly correlate with the market) and the general performance of stocks and bonds.

• Undeveloped land – Strategic land investments, approached as property funds, allow small groups of investors to work with a land development advisor to convert unbuilt tracts to more productive uses. With the UK population increase (7 percent in the last decade) and housing shortage, market demand for housing should buoy asset growth in this category.

• Antiques, rare coins, art and antique cars – For the aficionado, rarities such as these can be an enjoyable avocation as well as a good investment – spectacularly good in some instances. Emerging wealth in China and India is placing upward pressure on the finite supply of rarities. But each investment must be made with expertise. Whole movies have been produced around art heists, rare book forgeries and falsified provenances of Stradivarius violins, telling the sad tales of rarities investments gone wrong.

• Agricultural commodities – Climate change is a significant factor relative to agriculture, with drought plaguing some areas and excess rain, shortened growing seasons and premature spring hitting others. FarmingUK.com reports, “The poor [2012] UK harvest compounds a series of challenging weather events for farmers around the world, most notably drought in North America. The resulting tight supplies of many feed grains have driven up the prices of agricultural commodities around the world. These UK harvest results will do little to alleviate the global dynamics of commodity prices, with the prospect of relatively high commodity levels through to 2013." What is bad for consumers may be better for investors, but the inherent uncertainty of weather is unnerving to many investors.

• Energy – Volatility defines the world price of petroleum, and uncertainty has led key players in the offshore wind industry (General Electric, Doosan Power Systems and Vestas) to shelve plans in 2012 to build turbine capabilities in the UK. “Renewable energy in particular needs the policies that are investment grade,” says Dr. Rob Gross, director of the Imperial College Centre for Energy Policy and Technology, who argues that carbon pricing will not be sufficient to drive demand for renewable energy development. Political factors cloud one’s vision as to what might happen next.

Alternative investments can provide significant asset growth, but clearly one needs to approach them with expertise. Every investor’s goals, timing and wherewithal varies, therefore it makes sense to weigh personal variables with the advice of a personal financial counsellor.