Overcoming Difficult Landowners In Strategic Land Investment Transactions

Strategic land investing can often entail buying from difficult landowners.

Landowners’ financial, occupational and emotional conditions affect their willingness to sell property … and the land buyer benefits from knowing this.

Investing in raw land for the purpose of strategically increasing its value in a relatively short period of time – typically, turning unused property into housing or commercial development over a period of 18 to 60 months – involves several moving parts that require expert management. One part is to achieve a planning authority change, allowing development where it was previously disallowed. Another part is to develop it for what the market needs (for example, the UK’s housing shortage strongly suggests that residential development is in greatest demand). But a third part is actually the first critical step, to acquire the land at a feasible price.

In most instances, this means that someone, such as a strategic land investor, will need to buy from a farmer or other landowner. This farmer or other landowner may well be content with the land’s status, probably across several generations of ownership within the same family. Acting rationally, the landowner (which is sometimes a group, such as family heirs of a recently deceased owner) will clearly wish to be paid an optimal price for the land.

This becomes a problem when the landowner’s expectations are greater than what the market will bear. They may have heard planning authorities are considering changes in land designation that would increase the value of their specific land tract. He or she may hear of quarter-hectare properties selling in nearby towns for £20,000 or £30,000 to developers. And yet they do not realize those prices come after several costly improvements are undertaken, such as site assembly and infrastructure additions (roads, water, etc.).

In such scenarios, the landowner(s) might retain legal counsel to either resist selling or to hold out for a higher price. There is nothing illegal or unethical about that, of course. But the land investor needs to be a skilled negotiator, which includes having information about the seller’s position. For the buyer, there is great benefit in knowing the following:

• Taxation on the landowner’s proceeds of a sale – The sale price hardly represents a clean economic gain for the seller. In most jurisdictions they will need to pay taxes on the sale, hence the buyer should be sympathetic to that argument. The amount they must pay can be ascertained with minimal research.
  
  
• Sense that the value will likely increase in the future – As landowners are aware of the increasing value of land and the critical need to build more housing in the country, they may subscribe to the idea that the longer they hold the property the greater that value will be. Challenging that notion, however, is the fact that land valued almost across the board decreased in the recessionary cycles since 2008. Regional shifts – and the investor having options to buy elsewhere – can affect this.
  
  
• Patience (or impatience) at turning the land into a new asset – A long-held property in the hands of one owner or a family may have outlived its use to them, the obvious case being land held by a retiring farmer. But some sellers are perfectly happy holding onto land for its use, or non-use, and therefore are less motivated to sell. Often, heirs who have recently received the land are the most motivated to sell the property – in particular if taxes on the property exceed its value to them.
  
  
• Sellers’ emotional attachment to the land – Not all land is held for rational purposes. If an individual holds an emotional attachment to property, perhaps because that person is the last in a long line of several generations of owners, they will be less motivated to sell.

Some of these factors may kill the deal, but in many situations they can be overcome and intrinsic to the negotiation. Skilled land investors never bet the bank on a single piece of land, opting instead to conduct simultaneous discussions with different landowners in different areas of a town or borough.

Investors in land funds are similarly wise to consider all investments within their portfolio with the help of a personal financial advisor. Strategic land investments can yield strong returns, but are less liquid than REITs and other market-traded securities.

How to Mitigate Risks in UK Land Investments

What are UK land investment risks and how are they mitigated?

Three factors improve land investments for housing: Funding for Lending, local planning authorities and splitting risk between investors and builders.

The rate of building new homes in the UK should be about 230,000 per annum, and yet the country’s homebuilders are constructing only about half that number. Naturally, that translates into very high housing demand – which to the alternative investor in any form of development (including those who acquire raw land to develop into residential property) should be indication of a pretty good financial bet.

But the housing market can be tricky. First, there are many who are quick to criticise the government for failing to provide programmes that can effectively restart the housing sector. Second, planning authorities answer to local political considerations more than investors’ needs to seek a return on their investment; they often cite greenbelt traditions and restrictions as reasons not to grant zoning changes that would allow development. Third, building structures on speculation there will be buyers may not be the land investor’s best talent.

These tend to be problems encountered by the unseasoned investor, however. Note that while inadequate, about 100,000 homes still are built every year. How do professional land investment fund managers do it? The answer largely lies in how each of those confounding factors are mitigated:

• Government programmes – The Funding for Lending scheme, instituted in 2012, is beginning to show signs of having a positive effect. Unfortunately, it hasn’t unleashed a boom in homebuilding and home buying just yet and is criticised for its downward effect on returns to savers. That said the stakes are high in political circles to find solutions that will truly stimulate the economy. To the land investor, perhaps the best advice is to acknowledge the government might be able to help things along, but it would be unwise to depend on it.

• Local planning authorities – It would be foolhardy for any investor to purchase land without some knowledge on how the local planning authorities would rule on a petition for a zoning change (note: generally speaking, a use re-designation can be a very fast way to add value to some properties). Professional land development specialists have relationships with the political structure and members of the LPA that allow fair knowledge on what might be granted.

• Building on speculation – While in past eras the land investor covered the full range of development, from dirt to doorsteps, the process has been bifurcated to allow homebuilders to assume some risks and rewards. Investor groups, working with specialists, can acquire land and build infrastructure to support building (roads and utilities, primarily). But the actual home building and capital it requires can be handled by homebuilders. This not only mitigates risk, it brings in two sets of business analysts to assess the potential for the property at an early state.

What should be apparent is that land investments are like any other asset: there will always be some risk. Would-be investors are advised to speak with independent financial advisors to determine what degree and type of risk is tolerable in their portfolios.

How to Identify Qualified Joint Venture Partners in Land Investments

Qualified land investment joint venture partners a lynchpin of smart investing.

The history of land investment and developed real estate are instructive. Having the right joint venture partners is a key component.

In the UK, Canada and American real estate circles, the 1980s story of Olympia and York (O&Y) is often cited as a lesson learned. The highly-capitalized firm ran into an unfortunate set of circumstances with its Canary Wharf (London) and Manhattan properties in the late 1980s and early 1992, ultimately declaring bankruptcy with $20 million in arrears to various banks and investors.

The family running the firm, the Reichmanns, were seasoned real estate professionals. However they were overleveraged in two markets that were going through a pronounced slump. Their story provides a sobering picture of how even experienced investors can get involved in property and land investments that sometimes fail spectacularly.

Still, real estate in general is the means by which many of the world’s greatest fortunes have been built. And it’s not a game of Monte Carlo-like chance: there are key characteristics of joint ventures in land that increase investors’ odds of achieving asset growth. They include:

• Experience in the type of land investing being undertaken – There are many ways to invest in real estate: existing commercial properties, raw land, industrial warehousing, residential development and real estate investment trusts (REITs). One or several partners in a joint venture should have expertise in the type of investment where you put your money.
  
  For example, a raw land investment would best be managed by professionals who understand how to turn otherwise dormant property (or what might be currently used for agriculture, for example) into viable residential development. This requires acumen with local planning commissions, being able to judge the likelihood of a zoning change that would benefit the local economy. It is not a task for amateurs.
  
  
• Shared ROI interests – Some investors expect a return on their investment in one year. Others are patient to wait two, three, four or five years or longer. What doesn’t work is when a joint venture partner is on a different schedule and therefore wishes to exit the investment early. Investment managers should be able to project when a real estate investment will provide an optimal payout – and then deliver on that projection.
  
  
• Appropriate allocation of funds (e.g., focus on a single property) – To avoid the mistake made by Olympia and York, it is important that the fund investment managers have a demonstrable track record of success. Just as important, their funds and managerial attention should be focused on properties where economic factors are promising. For example, in the UK market a growing population and under-investment in the housing stock during the past ten years is driving high demand for housing. Whether those properties are built for sale or to let is a matter for further discussion, but suffice it to say people need to live somewhere and that need shows no sign of abating.

Ultimately, remnants of O&Y recovered some of the company’s fortunes in the UK and Canada (but not the US). They and their investors learned their lessons – and prove once again that great fortunes can be achieved with real estate and land investment.

Be certain to work with a personal financial planner when considering any type of investment, be it in real assets or traditional market-traded securities.

How Property Fund Investors Can Fare Better than Real Estate Developers

Are real estate developers disadvantaged relative to property fund investors?

Most real assets are performing better than the volatile stock market. But for some, property funds hold greater attraction over developed real estate.

Since the financial crisis of 2008, investors have soured on traditional investments due to factors of poor performance. Instead, they’re turning toward alternatives that include land investments and property funds. The reasons for this are easily understood: The growing housing shortage in the UK portends good near- and mid-term value growth for all aspects of residential real estate, particularly in light of robust (7 per cent since 2001) population growth.

Of course, not all real estate is the same for investors. Within real estate are two distinctly different types of investments, built properties and raw land. Some investors choose built properties or to invest in the developer who is managing the construction and sale of homes and commercial structures. An option to that is raw land, ripe for plan rezoning from, say, agricultural to residential-designated land.

Both have their merits, of course. But land investment might hold the advantage for at least three reasons:

• Adaptability to market needs – Raw land can be converted (pending approval of Local Planning Authority approvals, of course) to the use that is most critical to the local economy. This flexibility allows the land investment fund to prepare parcels for what will be needed in a relatively short period of time. On already-built property, investors have only what is there unless circumstances allow for the extraordinary expense of demolition and rebuilding – which only rarely makes sense from an asset growth perspective.

• Less investment in development (and associated risks) – The boom-bust cycles of the past several decades remind us of how a billion Pounds can be squandered rather quickly when a large property comes online at the precise moment when no one wants it. See “Canary Wharf, Olympia & York” for a spectacular illustration of how badly property investments can fail.

• More liquidity (but still not volatile) – Perhaps the Achilles Heel of real land assets is the illiquidity of land, with or without property. But land investments that at most involve the light infrastructure required of residential neighbourhoods (roads, sewers and other utilities) are much more easily sold than property involving structures. While that pales in comparison to real estate investment trusts for liquidity, real property is not nearly as subject to market fluctuations as are REITs.

To be sure, both investors in property funds and land investments tend to achieve asset growth in well-managed situations. But from land to property development, the path is quicker. With a seasoned team of land investment professionals, a joint venture partnership can identify and manage properties for maximum value appreciation and resale between 18 months and five years after acquisition.

All investments carry risk and should be considered in relation to one’s full portfolio of financial instruments. Be sure to contact a personal financial consultant before embarking on any investment.

How Much Communication Should You Expect from a Joint Venture Planning Team?

Joint venture planning teams should communicate frequently with investors.

Financial laws in the UK require a certain degree of transparency with all investments. With JVP land investing, on-going communications is essential.

The best investment understood by smart investors. In contrast, financial turbulence and numerous cases of fraud in recent years has sent many investors back to study prospectuses with their financial advisors, eager to minimize risks and to manage their expectations. This is even more so the case, as financiers are drawn increasingly to alternative investments, such as land, precious metals, minerals and hedge funds. Alternative Investment Funds (AIFs) are market-traded securities of smaller-capitalisation firms, also an option for investors who reject the poor performance of traditional stocks and bonds.

Of course, it helps if a fund management firm is both in compliance with the law and oriented toward servicing investor information needs.  A consultation paper (CP12/32, “Implementation of the Alternative Investment Fund Managers Directive”) – compiled by Financial Services Authority in 2012 – makes non-binding recommendations that apply to AIFs but could and should also be used to evaluate the likes of joint venture planning.

In other words, the general directive is to provide clear and periodic communication to investors and regulators on the status of investments.

The matter of communications is frequently described in financial circles as a matter of transparency. FSA says that investors should expect ample information in three moments of the investment:

• Investors should be informed before they invest.

• Investors should be informed on a periodic basis

• Investors should be informed when significant changes occur relative to the investment.

The types of information that should be disclosed in advance of the investment (pre-sale disclosures) are far ranging. That includes a full disclosure of the investment strategy, as well as restrictions to the strategy. The use of leverage in the investment should be well documented and conveyed. The investment should have fully-detailed liquidity risk management arrangements. All fees and charges should be disclosed. Valuation procedures, net asset value, procedures for the issue and sale of shares and third-party service provider arrangements all need to be shared.

On an on going basis, disclosure requirements include an annual reporting, as well as notifications when liquidity arrangements are permitted. Remunerations to staff – broken down by fixed and variable remunerations, as well as senior management and staff – should be provided as well.

Joint venture plan teams for land investments have every incentive to provide frequent updates, given the two to five year life cycle typical of such investments. A well-managed plan run by experts in land acquisition will frequently have milestones to report, including those relating to site planning, commercial development, risk analysis, negotiations and planning applications.

Individuals who invest in joint ventures should do so with counsel from a personal financial advisor. Expectations for asset growth, risk tolerance and timing each factor into a decision to participate in such investments.

How Land is Purchased at an Optimal Low Price

Purchasing land at an optimal price requires timing and skill from the investor.

Several factors can affect the current and future of undeveloped land, not the least of which are specific characteristics of the property itself and the overall economy.

The first aphorism of investing is simply this: “Buy low and sell high.” The second may well be, “easier said than done.” Both apply to the business of strategic land investment in the UK.

First, understand that investment in land, particularly undeveloped tracts, is growing due to key factors: a net population increase of 7 percent over the past decade, plus a housing shortage that is already facing pent-up demand that might reach dizzying heights with a post-recession economy. Add to that the Localism Act of 2011, which alters the rules by which land use designations are changed (i.e., more power to local councils). Decisions are now made by local councils that were formerly the province of regional agencies; this can help or hurt investors’ chances for achieving optimal return on an investment.

It may help to break the equation into four distinct considerations:

• Look for the dips that precede demand – Basic, and that’s exactly where we are at now. Land prices are low as a result of the economic downturn. The economy still has a long way to go to achieve full recovery, and population increases will multiply the effect that has on housing demand.

• Anticipate the needs of the seller and the eventual buyer. The seller may be a single entity (a farmer or inheritor of a land tract, for example) or several parties. What are their financial needs? Why would they choose to sell – or not? Can a good price be negotiated? As for buyers, it is about anticipating demand for the land’s ultimate use designation, be it commercial, residential or industrial.

• Even in a heated market there are opportunities. Where specific properties offer strong upswing potential.

• Have good local knowledge on the property in question. Towns that can provide housing will also be able to attract employers, but not all local citizens want or need such local development. Before buying a property, it helps to understand the local mood and propensity to see development as a good thing, then create a land site assembly package that fits the extant neighbours’ needs.

The most effective means for those looking at alternative investments is to work with land acquisition and development specialists who do extensive research on properties that meet each of these considerations. The potential investor should seek objective counsel from a professional financial advisor to understand where land might fit into their overall financial planning.

How Have Property Funds Performed Since 2010

To understand property fund performance since 2010, one must look back to 2007.

Investors in property development are presented with a very mixed picture in 2013. Several variables suggest it’s a tricky market – with a few bright spots.

It almost goes without saying that the past five years, since the financial crises of 2008, have yielded poor returns on investments in virtually all asset classes save for the countercyclicals (which include gold and its highly aberrant returns). The economic recovery – in the UK, the broader Eurozone, the US and elsewhere – has been spotty and irregular. In response, investors have migrated away from market-traded securities to real assets, including raw land and built property.

So what has happened with real estate in its various forms in the last two or three years, as the shocks of 2008 settled in and recovery began in fits and starts? The performance of real estate must necessarily be subdivided into its distinct sectors for a reasonable analysis, which is in many respects an apples-to-oranges comparison. Following is a hodge-podge overview of oft-cited indicators:

Housing prices are an indicator of not just land values but the economy as a whole, and yet several external factors confound drawing broad conclusions from “people are paying to purchase a home. By the fourth quarter of 2012, reports Savills, average UK house prices were still below their September 2007 peak. In real, inflation-adjusted terms that actually is a 24 percent drop.

So why is that not a clear indicator? Mortgage finance and an inability for would-be homebuyers to come up with an adequate deposit mean that there are buyers who simply cannot afford to get mortgages. In the past decade, the average first time buyer deposit requirement has risen from £12,000 to £58,000 – tough work when so many young people are struggling with employment and lower salaries. Fix the lending standards and perhaps there will be more movement in this regard.

Institutional investment in real estate is meaningful, given how the Pension Real Estate Association, which covers £1.5 trillion in assets under management, found that its members hold about 10 percent (£155 million) in real estate in one form or another. But a May 2012 study out of Maastricht University found that across the Eurozone the only indication of performance by assets in real estate is the allocation of funds placed into such investments (that is, returns on those investments are unknown). Growth in allocating funds to real estate investments leading up to 2008 was strong, but dropped by more than 30 percent by mid-2010.

House building is yet another indicator, which Savills reported near the end of 2012 as sluggish, but with several reasons for optimism. Starts are less than 55 percent of what they had been in 2007 throughout England, Scotland and Wales (however, Central London is a different story altogether, with prices and new construction climbing).

Land values as measured by Savills shows reason for optimism, with late-2012 growth of 0.4 percent of urban land in the third quarter of the year, and a 0.7 percent price growth for greenfield properties (in London, the quarterly growth was an outsized 4.6 percent).

Several media organizations offer up both criticism and optimism for investors in land, citing first the government’s Funding for Lending scheme, which was unveiled in the summer of 2012. Reporting in The Telegraph in January 2013 suggests the six-months-old program was not effectively delivering looser financing for homeowners from the government’s infusion of £80 billion in state-backed loans, however the full effects cannot be measured until at least a year into the program (by mid-2013). For homebuilders and land investors, the cost and slowness of the planning system is also thwarting activity.

The forecasts for strategic land development into residential property can be driven by a very different and powerful dynamic, which Savills calls “Generation Rent.” Priced out of ownership, the concentration of 20-34 year olds living in major metropolitan areas are settling into a rent-it mentality. While the largest landlord group are private individuals, who themselves cannot get adequate debt funding, larger organizations with cash are the more likely builders of to-let properties (i.e., building for renters). The demand is certainly there: a 7 percent increase in population in the UK between 2001 and 2011 has pushed a critical need for housing that is currently unanswered by woefully slow building during the recession.

How Climate Change is Affecting Strategic Land Investing

Savvy strategic land investing now must consider climate change.

Two factors face land investors and developers: How to minimise their impacts on the environment, and how to mitigate potential damage from a changing climate.

The year 2012 was the wettest on record for the UK, according to the National Flood Forum, a coalition of community groups throughout the country. The organization warns that flooding is possible anywhere – flooding in never-flooded-before West Sussex in June of that year provides an instructive example – and should be considered a top emergency priority.

Part of what is so surprising about this is the drought that preceded these floods by mere weeks; widespread hosepipe bans were in place as recently as March 2012. But by the end of the year, nine people had died from excess rains and runoff. Such is the experience of weather volatility under conditions of climate change.

Meanwhile, the UK is undergoing a housing crunch that calls for no fewer than 4.4 million new homes to be built by 2016. Housing traditionally taxes both the demand for water, a problem during droughts, while concurrently establishing hardscape land (surfaces that do not naturally absorb rain) that exacerbates storm water runoff.

The Committee on Climate Change (CCC), an independent group that advises the UK government on means to prepare for and manage climate volatility, stresses that land use planning should be factored into national policy. “Climate risks appear not to be fully incorporated into some major strategic decisions,” the organization said in a report titled Adapting to Climate Change in the UK/Progress Report 2011. “Embedding climate change more fully into decision making could reduce future adaptation costs, such as building new flood defences and maintaining existing defences, and also ensure that climate risks are appropriately balanced against other risks and benefits.”

Of course, England is cited worldwide for the construction in the 1970s and 1980s of the Thames Barrier, which prevents flooding in London during exceptionally high tides and storm surges. Used only once each year up until 1989, it was closed six times in 1990, 9 times in 1993, 6 times in 1999, 10 times in 2000, on 15 occasions in 2001, 19 times in 2003 and 11 times in 2007. The Barrier responds to ocean conditions, a different dynamic but also a function of a warming planet. This is a country that can mount heroic efforts to deal with natural forces, and perhaps similar tasks can be accomplished throughout the country.

CCC notes that water supplies are near their lower limits in some regions, and are more vulnerable to patterns of development and demographic trends. To mitigate this, they recommend several measures be taken:

• Improve water use efficiency, which can include lower-flow bath and kitchen fixtures, and the use of rainwater catchments for landscape watering and other uses. Up to 45 percent of water resource zones will be at risk of shortages by 2035 if remedial actions are not taken.

• Reduce building vulnerability to flooding by situating new development appropriately and by designing homes that can withstand flooding when it occurs.

• Design water absorption systems (bioswales and rain gardens) that naturally absorb storm water in situ that precludes flooding.

The UK Green Building Council certifies construction of residences and commercial structures according to the LEED (Leadership in Energy and Environmental Design) standards used around the world. The organization also celebrates the UK government’s Code for Sustainable homes, introduced in 2006, which calls for “zero carbon” homes by 2016. Hundreds of buildings in the country have been certified in the LEED system while many others apply these standards without applying for certification. The net result includes development of materials and techniques that often becomes standard for all construction.

To those involved in land investment, a conversion of unbuilt to built property is typically the goal and end result. Building according to LEED standards may be exactly what the market calls for, although the bulk of homes and businesses that achieve certification tend to exist at the higher end of the cost/value spectrum. These structures operate at lower energy costs, so a longer-term perspective by buyers might drive more sustainable building methods; ROIs are achieved anywhere between three and 20 years into the future, depending on technologies used.

Investors who are considering land as an alternative investment should consider also the questions of sustainability. Be sure to discuss it with experts, just as any financial decisions should be weighed with the advice of a personal financial advisor

Fraud is Driving Investors from Precious Metals to Land and Other Real Assets

Real assets – including land – are providing safer haven to investors wary of gold scams.

Gold, silver and other precious metals historically hold unique attraction. But recent experiences with fraud lead investors to other real asset investments.

The soaring price of precious metals, gold and silver in particular, has lured millions of investors from around the globe who are fatigued with poor performance of traditional investments and who regard them as a hedge against economic uncertainty. But just as a hot commodity is attractive for its ability to deliver rapid asset growth, so is it able to attract frauds and scammers.

In mid-2011, the American newspaper South Florida Sun-Sentinel reported that more than 45 companies were selling precious metals in just two counties (Broward and Palm Beach counties) in that state. Because there are no licensing or reporting requirements for that industry, it has been easy for individuals to open up telemarketing and web-based businesses there, doing business around the globe including in the UK. Many of the individuals who run these telemarketing firms have criminal records, and have subsequently been arrested for running Ponzi-scheme operations that collected investor money but never owned the gold they claimed to customers.

This is nothing new. Gold and silver have a long history of investment scams, in part because it has been universally valued for centuries, and because it is highly portable and liquid. On some levels to certain individuals, it can be a wise “safe haven” investment; its meteoric rise in price has exaggerated these notions in the past few years. Individuals who might not invest in traditional stocks or bonds might be lured by aggressive marketing into precious metals investments. Fraudsters use a variety of schemes to get money from investors without actually delivering bricks of the metal, arguing that shipping and security costs would be prohibitive, and claiming that this is the way wealthy investors own gold.

Alternative investments to gold: Real assets, such as land

Economic conditions always drive the long-run returns on all investments. While broad market factors uniformly affect the day-to-day prices of company stocks, for example, those companies’ valuations ultimately are determined by the firms’ abilities to turn a profit. But each of these has their pitfalls as well.

Investors in alternative investments – which range from hedge funds to fine art to raw land, and yes, precious metals – need to be savvy. Consider the ways to win or lose at any of them:

Hedge funds – When they were novel, hedge funds were the province of the rich to (as the name implies) hedge against losses with private, actively managed funds that are designed to deliver a positive return, regardless of market rises and falls. But because these funds are private, they are not as transparent and are thus subject to abuse and fraud. The Bernie Madoff Ponzi scheme was essentially a hedge fund.

Rarities (art, antiques, jewellery, antique cars) – The rise of wealth in China and other countries have driven up prices for many segments of the rarities markets. After all, it’s about increasing demand with a finite number of available goods. But to buy art, antiques, jewellery or cars takes expertise in each category. The new collector is easily fooled.

Land – It’s possible since 2007 to buy real estate on the exchanges through real estate investment trusts (REITs) in the UK, although the nature of the investment almost qualifies it as a traditional versus alternative investment. Compare REITs to buying strategic land, where investors select sites where they are confident a zoning change will enable development to occur. When that happens, the asset value can increase dramatically.

Individuals who are considering land or any other type of investment need to pursue it with care. All investors should work with a personal financial advisor who can independently advise clients on their full investment portfolio – which includes allocating risk among different investment types.

Would Alternative Investments Be a Good Long-Term (10+ Years) Strategy?

Should a 10-year investment strategy incorporate alternative investments?

Alternative investments that might include art, classic cars, rare diamonds or raw land have performed well in the past decade. Can the asset growth continue?

The performance losses of hedge funds in 2012 set off warning bells for many investors as they look for smart investments in 2013 and beyond. As Reuters reported in July 2012, “performance losses at many funds resulted in total industry assets shrinking.” The financial news agency quotes Hedge Fund Research, which noted the average fund dropped by 2.7 per cent in the second quarter of that year alone, a time marked by net outflows in the billions from all types of funds. Some analysts attribute this to the sheer proliferation of hedge funds, reducing their vaunted performances earlier in the nineties.

All investing involves risks and rewards, ideally in commensurate quantities. As traditional market traded securities have proved volatile and ultimately disappointing since the financial crisis of the past several years, many people have turned to alternative investments. These include hedge funds, but can include art, fine wine, classic cars and precious metals, as well as real estate and land investments, among others. Most of these have performed well against the stock market – but will they in the decade to come?

Of course, the owner of the crystal ball that holds the answer would ultimately be the richest person on earth. Lacking that, the best we can do is to look at the history of alternative investments and factors that may favour or diminish their prospects in the years to come:

• Wine – Bordeaux reds tracked by the Liv-ex Fine Wine Investables Index between 1999 and 2009 found a 138 per cent return on such vintages as Lafite Rothschild 1982. Of that variety, 12 bottles purchased for £2,613 in 2000 sold nine years later for £25,500. In other words, pick your wines wisely and you can do extremely well.

• Art and jewellery “passion” – Fine art requires an expert, as with virtually all investing, to predict which artists may perform well over time. They can prove to be spectacularly wrong: Mega-selling artist Damien Hirst, whose provocative use of dead animals and even a human skull (encrusted with diamonds) has earned him US$350 million in his relatively short career thus far,  saw some of his earlier work plummet in price by 30 per cent in 2012. Yet, London-based Emotional Assets, which promotes itself as the “convergence between collecting and investing,” is part of a category known as “passion funds,” which claim returns that best investments in stocks and bonds. KPR Capital, a Cayman Islands investment firm launched a rare diamonds fund that returns between 15 and 17 per cent per annum in 2007 and 2008.

• Classic cars – The largest classic car auctioneer in the UK, Coys, says the value of cars  – including the brands Ferrari, Mercedes Benz, Porsche and Aston Martin – has gone up since 2000 by as much as 200 per cent. That said, a firm spokesman told The Guardian that a Jaguar XJ220 that sold for £120,000 has not increased in value at all, and a Ferrari Daytona sold in 2008 for £190,000 was worth £30,000 less in 2009. Again, expertise on the part of a buyer or a buyer’s consultant is advised when looking at this type of investment.

• Raw land – Land that is poised to be rezoned – typically, from agricultural or commercial purposes to residential – offers the most likely upswing in value. Because the characteristics of land are so variable, it is difficult to cite broad investment returns from one location to another. But advice and management of the investment by seasoned property fund managers are more likely to yield a favourable return. The 7 per cent growth rate of the UK population over the past ten years while housing stock did not increase commensurately all suggest that land investments should perform well for the foreseeable future.

The characteristics of best performers in almost all alternative investments include a finite supply, attractiveness to foreign investors from developing countries (China, in particular) or increasing natural demand (e.g., the increasing UK population needing housing).

No investment should be undertaken without the counsel of a personal financial advisor.

What Incentives Do UK Housing Investors Get From the Government?

Lending schemes from the government might be helping buyers, but the real way to increase housing stock might lie in programmes that grow rental inventory. 

The Guardian columnist Matt Cavanagh wrote an article in 2012 criticising the Chicken Littles of Britain who worry population growth is out of control and leading the country to ruin. “Should we see a rise in our population as a problem, or an opportunity?” he asks. “Are we simply ‘too crowded’ to cope with more immigration?” he continues, before proceeding to provide his own data and opinions that refute the worriers.

Cavanagh concludes that UK population growth has been decried for the past 100 years, and that with smart planning, lots of building and technological innovation – already underway – those problems can be mitigated.

Part of the writer’s argument is that England is not static, that the country has historically done well as it adapts to change. Also, that the land mass can support a larger population quite handily. One such change already underway is the shift from an ownership to a renter society, as illustrated by how things have changed in the past ten years. A decade ago new housing included about 10 per cent of inventory for rental; today, that number is closer to 17 per cent, and it’s projected to rise to 20 per cent within the next decade.

HM Treasury, the government’s economic and finance ministry, issued a report in 2010 (“Investment in the UK Private Rented Sector”) that acknowledged a plethora of factors favour increasing the country’s stock of rental housing to ease the burden of a housing undersupply. These factors include macroeconomic stability, meeting peoples’ housing aspirations, creating sustainable communities and establishing labour market flexibility. By increasing to-let housing, the country will get more affordable homes overall.

Since then the government has created two programs to encourage investors (such as those who seek UK joint venture land opportunities) to put money into both social and private housing development. One, a scheme for affordable housing with debt guarantees, enables the raising of debt with government backing. This effectively makes it possible to build more new rental homes because borrowing costs are lower. For building in the private rented sector, investors are also given similar debt raising support with the same expected outcome of additional building.

The Royal Institution of Chartered Surveyors (RICS) is proposing some new ideas as well to goose the rental housing market. In a report released in June 2013, RICS recommends new tax bands for higher-value properties, and it suggests providing incentives for pensioners to downsize to smaller homes. RICS was critical of much ballyhooed government schemes that help homebuyers, arguing that those are most beneficial to people who could afford to buy anyway; until there is an increase in he housing supply, millions will continue to be shut out of buying altogether.

Instead, RICS proposes releasing public lands for more residential development, which could accommodate building up to 250,000 new homes in the next few years. Another proposal is that developers be required to build within three years of receiving planning consent. Also, RICS proposes a scheme to enable lower-income renters to accumulate a “portable home ownership discount” over time that would ultimately enable them to buy their homes.

RICS also suggests that self-invested pensions (“Sipps”) could be directed to investments in new-build residential property.

Cavanagh, the Guardian columnist, acknowledges that population growth will require not just housing but investments in infrastructure and public services. But he doesn’t read these as insurmountable problems. Rather, it would take the creativity of ideas such as those provided by RICS to figure out solutions to these concerns.

Investors in the housing market – be it for-let or for sale – are advised to keep current on such lending schemes and the direction of policymakers on the local and national level. When determining to invest in strategic land or real estate, such as with capital growth investments (in a Sipps programme, for example), the advice of a personal financial consultant should be enlisted to ensure a good balance of risk within an overall wealth development plan.