Before Buying Raw Land for Development in the UK, What Due Diligence is Advisable?

With a press for new homes in the UK, investors are looking at raw land for development. The acquisition phase should include a thorough due diligence.

When investors look at raw land for its development potential, it can be an exciting process. But part of that excitement can mean moving fast when the opportunity is there – faster than a competing investor might be able to do.

A factor that necessarily slows this process – to good effect – is due diligence. This is the necessary probe into unseen and potentially problematic features of the property. We do not buy cars without a test drive and a thorough inspection of the vehicle, inside and out. The same can be said, writ large, on the acquisition of property.

The basic review of the due diligence process should include the following characteristics of the proposed land acquisition:

• Physical – What is topographically amenable to development, including subterranean barriers (rock that is difficult to excavate, for example), slope, wetland presence, archaeological features and potential toxic contamination? Also, a boundary survey needs to establish these topographical features and if any structures improperly encroach on others’ land.

• Legal – Aside from clearly established title, any existing covenants, liens and rights-of-way should be uncovered in the due diligence process. Zoning and site plan approvals also are critical and can sometimes be “deal breaking” considerations.

• Financial – Price and value of a property are not always the same thing. To the investor, it’s about buying low and selling high, so in the pre-purchase phase a realistic look at both parts of the equation is critical to the entire enterprise.

• Sustainability – Properties’ sustainability performance is about more than “doing the right thing,” however that still is a fine motivator and one that can favourably impact the future marketability of a property. But it can also affect the property’s economic performance in rental growth, duration to let, depreciation and the time required to sell the property. Of note, residential and some commercial built properties place high values on sustainability features, while some “green” scenarios can be a poor fit with industrial development.

• Social – How will this land transaction affect the surrounding community? And of equal importance but a slightly different question, how will the community perceive that it will affect them? Development always means change, and change almost always meets resistance. That said, advocates for affordable housing have come to be advocates for development, alleviating the outsized demand with an increased supply, which tends to lower prices.

From there, the investor can assess external factors that determine the land’s potential investment performance. This may have little to do with the land in its current state and much more to do with external variables: the potential for use re-zoning (amenability to change on the part of local planning authorities), the market needs for housing, and the economic equations under which homebuilders in the area conduct their business. Land that cannot be re-zoned, developed and re-sold is not land that is attractive to most investors with mid-term goals (i.e., to recoup their investment with growth in two to five years, for example).

While formerly the province of single land developers, individuals with £10,000 or more are participating in UK strategic land development within joint ventures. As such investment groups are coordinated by land development specialists, much of the risk is mitigated with a thorough knowledge of the industry – and application of the due diligence process. The new investor in land should weigh such ventures within the risk structure of his or her full portfolio, preferably under advisement of an independent financial specialist.