Planning Your Exit Strategy in a Land Investment

When investing in land, your exit strategy is an important consideration.

Timing is everything, particularly in how investments pay off. The investor in raw land needs to know when the asset will increase to its optimum sale price.

The goal of all investing is to make money, to sell at a price higher than that at which the investment was purchased. But that simple formula fails to factor in the extremely important matter of timing: how long it takes for the investment to achieve that optimal price, as well as how the timing affects the investor. Taking a good profit in one year might be disadvantageous over taking it in another, largely due to taxation.

The essential nature of timing – when to invest and when to disinvest – affects all classes of investments, both those in the traditional markets (stocks, bonds, REITs) and the less traditional real asset categories (strategic land/hedge, property funds, precious metals, minerals, rarities such as antiques and fine art, etc.). Much of that has to do with the intrinsic (some might call it organic) nature of the investment and how it relates to macroeconomic dynamics, while external factors such as government subsidies and regulations can affect it as well.

A good example is renewable energy in Germany. A robust government sponsored program (“100,000 roofs” and the Renewable Energy Act) fostered small and medium-sized companies (as well as university research in partnership with them) to develop photovoltaic, wind, biomass/waste and hydroelectric electricity sources. With government supports and guarantees, investors had a good sense of where things were going and when. The timing of their disinvestment and payback carried more certainty, which of course attracts more investors.

Notably, in German investors in solar PVs and wind can expect the timing of their returns to be shorter than those in hydroelectricity. It simply takes more time to achieve a favourable return-on-investment from dam construction.

In a different asset category, raw land in the UK, the macroeconomics are well understood: the UK population grew 7 per in the decade to 2011, even while the nation’s home builders have not been increasing residential inventory to keep pace. Consequently, there is a housing shortage that will need to be filled eventually (and the sooner the better). The government plays an important albeit indirect role in that local planning authorities are now given greater reign over decisions about land use designation. In other words, if a local planning authority strongly identifies an area for home building or other development, it is far more likely to happen.

To the land investor, ceding land use planning from national to local authorities is very important to timing – and was long awaited. The Kate Barker recommendations in 2004 (the Barker Review of Housing Supply) looked at rising housing costs and the inadequate supply of new homes to meet the need. The Barker recommendations were factored into the modernised core UK planning principles, which include:

• Objectively identify development needs of an area (housing, business, etc.)
• Drive and support sustainable economic development, which includes the delivery of homes, businesses and industrial properties 
• Provide the necessary infrastructure to support new developments
• Account for market signals such as land prices and housing affordability, and set strategies for allocating land in sufficient quantity to meet the needs of people and employers

The well-managed land investment can meet these criteria, and as such is more likely to qualify for expedited approvals. The ability to deliver value to investors sooner rather than later is a clear advantage of this.

Individuals involved in any type of investing should get solid counsel from a personal financial advisor. This investment professional should work independently of any financial instrument to holistically review your investments, goals and anticipated expenditures to determine where an asset would be timely.

Investing in Rarities Such as Antiques, Art and Wine Follow Different Dynamics Over Land Development

Real assets including raw land, art, antiques, fine wine and antique cars are attractive to emerging wealth. But the factors affecting value growth of each are vastly different.
In late 2011, even while dealing with the after-effects of the 2008 financial crisis, the interior minister of Iceland rejected an application by a Chinese billionaire to purchase 300 square kilometres of land. The property was landlocked, and the investor claimed he wanted to build a golf course, but its close proximity to deep-water ports worried the Icelandic government. The minister said their weak currency crisis made them vulnerable to a “fire sale” acquisition, which they did not want to do.

What was going on here is actually related to a lot more than a rocky outcrop in the North Atlantic. Chinese investors are using their new money to buy up property and strategic land everywhere – in London, in Africa, Singapore, New York and around the world. But they are also buying art, antiques, rare coins and fine musical instruments, among other real assets. Each category is increasingly seen as an advantageous complement or alternative to market-traded securities, given the recent volatility and poor performance of stocks, bonds and new-to-the-UK real estate investment trusts (REITs).

How those assets have performed for investors is a mixed lot, although all did well. FT.com (Financial Times online) reported in February 2013 that individuals of high net worth have driven the market for all kinds of rarities and collectibles, including gold. Citing the Knight Frank Passion Index, a performance measure of fine art, classic cars, watches, stamps, coins and fine wine in the 2002-2012 time period, price growth for these assets is reflected as follows:

Asset                                                  10-year price appreciation (%)

Gold                                                                  434

Classic cars                                                       395

Rare coins                                                        248

Residential property* Hong Kong                     221

Stamps                                                            216

Residential property* Sao Paulo                      211

Fine art                                                          199

Fine wine                                                       166

Jewellery                                                       140

Residential property* Paris                             117

Residential property* London                         103

Watches                                                          76

Residential property* New York                     72

*All residential properties are upper-end

The FT.com article reports that 64 per cent of Chinese millionaires are collectors, which tends to boost prices of real assets. In classic supply-demand dynamics, the addition of thousands of investors from the BRIC sector (Brazil, Russia, India and China, where high-net worth households are growing fastest) drives demand and therefore higher prices for these finite-quantity goods.

FT.com also notes that with property investments, the largest cities have the natural upper hand. They are great places to live and regardless of where you grow up, you know where London is – as well as New York, Hong Kong, Paris and Sao Paulo, etc. But the children and grandchildren of investors in these well-known cities might be more adventurous, taking their money to invest outside of London, for example, “expanding as far as Richmond, Putney and even to the Docklands,” says the writer.

What should be noted, however, about comparing these different types of real assets is that the value of most is determined by factors outside the control of the investor. When a wave of interest in gold watches somehow washes over BRIC millionaires, for example, the price appreciation might double and triple in a year or two. Reportedly, Chinese wine collectors had a love for Chateau Lafite – until they didn’t. This led to a 19 per cent drop in price between 2011 and 2012.

Raw land investments, as with most real estate, defy strict apples-to-apples comparisons. Where land was developed before, during and after the economic crisis, are large variables. But agricultural land in England trebled in the decade preceding 2012, with the average currently more than £6,000 per acre.

Built real estate offers some opportunity to increase its value when an owner improves it or perhaps conjoins adjacent condominiums or buildings – although, that can decrease the value/square foot in many instances. Un-built property, raw land, can increase in value when local planning authorities can be convinced that development (typically, providing badly needed housing) will be a net benefit to the existing community. Fine wine, classic cars and rare stamps in comparison cannot be rezoned.

Potential investors in real assets need to be sure their investments are complementary and balanced within their portfolios. All investments should be made with input from an independent personal financial advisor who can access expertise on traditional and non-traditional assets for their investment potential.

How UK Land is Rezoned

More than ever, rezoning is a key consideration in UK land investing.

New zoning laws in the UK have ushered in a different set of land use planning rules. Now land investors work with local authorities to address community concerns.
The Localism Act 2011 brought a significant change to how land is rezoned in the U.K. Essentially, town and country planning throughout the U.K. is now under the control of 421 separate Local Planning Authorities (LPAs), a stark change from the regional authorities that formerly held this responsibility under the Town and Country Planning Act 1990.

Localizing authority has an impact on UK land investment dynamics. LPAs are organized at the borough, district council or unitary authority, where decisions about land use and building are considered along with other community interests and with input from local citizens. Given the general growth of the population in England and Wales (about seven percent over the decade preceding 2011), a need for housing makes this a pressing issue. Rezoning is sometimes necessary to enable developers and investors to build where housing needs are most critical.

The criteria that LPAs follow include:

•    Follow a general scheme – Before any requests for zoning changes are made, the local authorities must develop a general plan for land use, growth and use designation changes.

•    Submit information about plan revisions (rezoning) to public scrutiny – Regardless of whether an appeal to change a particular tract’s zoning comes from private parties or agencies in the public sector, those changes must be published for general public review and criticism.

•    Assess environmental impacts – In particular, the requirements of the Environmental Impact Assessment and Habitats Directives must be met, particularly with regard to the suitability of the land for infrastructure projects, such as how new roads, sewers and utilities would affect watershed, protected species and so forth.

•    Consider the social and economic impact of zoning changes – In the bill, the Community Right to Challenge (Chapter 3) provides that the LPA is required to consider social and economic impacts of any zoning alterations.

These considerations are important to investors interested in how the value of land can change with rezoning. Professional land investment companies understand the zoning process and will study the local economic conditions and LPA receptivity to land use designation changes. To the individual investor, it is important to consult a personal financial advisor, who can assist study where investments in real assets such as land factor into overall wealth management.

How UK Cities Realize Economic and Community Benefits from Housing Construction

The burst of the housing bubble in 2008 put many UK homeowners and taxpayers on guard against building. But the benefits of building are hard to ignore.

UK planning minister Nick Boles told The Guardian in early 2013 that Margaret Thatcher’s vision of a nation of property owners will fail if “home ownership will revert to what it was in the 19th century: a privilege the exclusive preserve of people with large incomes or wealthy parents.”

What he was speaking to was the current housing crisis, where only half as many new homes are being built as should be to accommodate the growing British population. With a projected growth rate of 27 per cent over the 25 years between 2008 and 2033, new homes are essential. And yet due to a variety of factors - the credit crunch is cited most often in the wake of the financial meltdown in 2008 - much-needed homes are not being built.

Certain schemes such as the “Help to Buy” programme may work - early reports are that it’s better than nothing. An expanding economy, however, is what would help the most. But of course the two are interrelated - what is good for the housing industry is almost always good for the economy overall (short of housing bubbles, of course).

A report from the Scottish Government: Communities Analytical Services (“What does the literature tell us about the social and economic impact of housing?” 2010) provides an interesting and fairly comprehensive look at the community benefits of a revitalized housing sector that can easily apply to England and Wales as well. It argues that the construction industry overall has a disproportionately large impact on the economy, relative to other industries. The benefits break down into three basic components:

1.    Direct economic benefits - In Scotland, construction comprised 10 per cent of the GDP in 2009, employing 5.4 per cent of the total workforce that year. Fiscal stimulus programs in the recession were judged to have saved a proportionate number of jobs in the private sector. The most meaningful impact of additional house building is to improve affordability - something that is critically problematic in England and Wales, where the prices of home are beyond reach of more people than just eight years ago (the portion of housing that is rented has risen by 17 per cent in just seven years). But renting is not a decisive negative: private renting, on the rise in England as well as Scotland, contributes to labour mobility. And key to homebuilders, the impact of all new home building is greater in areas of expanding markets versus those that are on the decline.

2.    Indirect economic benefits - Housing wealth as measured by house prices translates into new business collateral (supporting start-ups and self-employment) as well as other forms of credit access. New home building can advantage one city over others in attracting and retaining a skilled workforce. And housing policies that lead to greater ownership rates have an inverse effect on old-age poverty.

3.    Social impacts - While the study acknowledges there is a “lack of relevant housing data on the economic impact ... of housing on health, education and so on,” it references extensive research that shows the correlation between overcrowding - what is happening throughout the UK due to under-building - and poor “self-assessed physical health as well as stress and mental health problems.” Poor housing also correlates with run-down estates, homeless and low educational attainment.

In March 2013, John Cridland of the Confederation of British Industry (CBI) made an appeal for building 100,000 new homes, with £2.2 billion earmarked for government spending in “high growth areas,” creating 50,000 affordable (lightly subsidized) homes. His push for affordable houses are about making London and other city centres affordable to essential service providers, such as nurses and firemen, as well as the construction jobs created along the way. Worth noting is that this runs counter to the Cameron government’s determination to rein in spending.

The political debate will rage on, of course - the tenets of Thatcherism remain an unsettled dispute several decades after the fact. But with a clear need to build in several critical cities and counties, there should be good data collected over the next several years to feed the discussion - as much as new home construction might feed the economy itself.

Investors are increasingly drawn to the housing market in multiple real asset classes - REITs, via homebuilding companies and those who invest in strategic land that can be designated for zoning changes to residential and commercial use. As with any investment, interested participants should discuss opportunities with independent financial advisers who can determine acceptable risk.

Eurozone Crisis and UK Land Values - What Might Happen?

There are increasing questions and developments around UK land and the Eurozone crisis.

While the UK population swells, very little is being added to the country’s housing inventory due to economic uncertainty. It is a mixed picture with emergent ideas.

As the Eurozone crisis continues to hover over the Continent as well as the United Kingdom, a mix of factors is affecting the value of built property and land. In some ways, one could say the increasing demand for places to live is akin to water rising behind a dam. The question is where will that water - people who hope to own houses sometime soon - be let loose?

The Royal Institution of Chartered Surveyors said early in 2012 that “something bold is desperately needed,” as new home building is at about one-third of what would be necessary to meet demand. So where are the supply-demand dynamics of our economic system? Blame Greece, perhaps, as lenders are spooked by what might happen if the EU collapses. No one knows at the time of writing what exactly is in store, so at best we can examine certain key dynamics relative to housing. From there, the value of strategic land can be somewhat projected.

Population increase, and pensioners are staying put - The UK Census 2011 showed an overall population increase of 7 percent over the previous decade. This leads to a natural increase in demand for new housing, but another factor adds to that: older members of the population are healthier and therefore remaining longer in their homes. This reduces the supply of granny flats opening up to young couples – which, reportedly, are living with their grannies.

Wealthy foreign buyers attracted to London - Savills reports that well-off Europeans are fleeing France, Spain, Portugal, Italy and - irony alert - Greece over worries related to the Eurozone crisis. They are buying higher-end properties in London, which explains why prices remain strong there and in the South East of England.

Low interest rates driving some buyers - It is a great time for homebuyers because mortgage rates are low. The caveat on that is, of course, that the buyers must have a good credit history and a healthy established deposit, at least 10-15 percent and more if possible. Without that, buyers are unlikely to get a loan from banks that have scaled back lending due to - you guessed it - the Eurozone crisis.

Some investors building-to-let - In August 2012, The Guardian economics writer Patrick Collinson noted, “demand is there, but the supply is not forthcoming. The obvious reason is finance.” He argues for relaxation of the green belt rules, but notes this is not the core of the crisis. Instead, he offers, “one solution, barely tried yet in the UK, is build-to-let…[it] is about increasing supply, which should cap rents and soften house price increases.” He adds that Hearthstone Investments (fund managers in residential property) and Aviva (insurance) are cumulatively raising £1.5 billion to invest in new builds for letting. This mirrors some markets in the U.S., where developers are finding a stronger rental market fuelling new construction.

It’s too early to predict what, when and how the Eurozone crisis will subside and what exactly will happen with land values. But the UK continues to be an attractive draw to immigrants, and the making-babies business shows no sign of subsiding. The finite amount of land available for residential construction suggests the supply-demand curve will continue intersecting ever higher.  Those looking to make alternative investments should take note.

Demographic Trends Pushing Land, Housing Values Up

Land and housing values are affected by certain demographic trends.

Housing values are affected by many factors: the economy, the availability of financing, building, population growth and variables of age and ethnicity.

For those considering making an alternative investment in strategic land, it is worth understanding the housing shortage in the UK.  It’s a classic case of short supply, high demand - and increasing prices. Perhaps less well known are the underlying factors, particularly population trends:

Net increase in population for England and Wales

Unlike other parts of Europe and Russia, there are clear population increases now and likely into the future:

• The population grew by 3.7 million people in 2001-2011, a rate of about 7.1 percent.Growth was largely due to inward migration, higher birth rates and a lower death rate in the elder population.

• There is projected population growth of 4.9 million in the current decade, and by 6 million additional residents between 2020 and 2035.

• England and Wales are now populated by 56 million people, the highest ever recorded. Concentration and growth rates are highest in London and the East Midlands, lowest in the North East.

Influx of professional class immigrants

Part of the growth of population can be attributed to troubles in the Eurozone:

• Anecdotally, we know of working professionals moving to the UK because of the Eurozone crisis. The Financial Times reported in June that the posh neighbourhoods including Mayfair, Belgravia and Knightsbridge were destinations for well-heeled foreigners looking to establish a London address (this is being curtailed by a stamp tax imposed by the chancellor, George Osborne).

• Savills, the real estate firm, has data that reflects these increases: Buyers from Spain grew by 14 percent in 2011; from Italy, by 46 percent and from Portugal, by a whopping 153 percent.

• London real estate prices, atypical of the housing elsewhere in the UK, maintain their value perennially. Save for a dip in 2008 and 2009, prime Central London home prices have continued on an upward swing that is divergent from the rest of the country since 2005. As it is said, there will always be London.

• The children of working class immigrants, many of whom arrived during the Thatcher era or before, are experiencing better-than-average social mobility, adding to the class of people who are likely to purchase homes.

Population is aging - but not moving

Hooray for the pensioners in that they are living longer and more vital lives. However, that means they are staying in their homes longer, which keeps their flats and cottages from coming available on the market:

• As a share of population, people aged 65 and older constitute the largest ever portion at 16.4 percent

• In the 60-64 age group - baby boomers - the number of individuals increased by 800,000 between 2001 and 2011. The total in that category is about three million.

• The largest proportion of older people live in the South West; proportionally, London has the fewest pensioners.

Rental rates are up (£750 per month in private housing, on average), which usually precedes greater demand for home purchases.  But developers are not finding loans nor are younger buyers able to find mortgages due to tight credit markets. Consequently, there is building demand for housing – but the demand is not being satisfied.

Does this portend explosive growth once credit is eased? The factors are all there, but the question can only be answered by the banks... and time (something those hardy, long-lived pensioners, many of whom lived through the War and shortages in the aftermath, might be able to tell us about).

Can the UK Housing Crisis be Eased with "Hard Money" Loans?

The housing crisis in England and Wales is one where too few homes are being built because would-be buyers can’t get loans. "Hard money" loans as a solution considered.

“Hard money” loans - more commonly issued in the U.S. but which exist in UK lending between private parties, for the most part - allow lending to individuals and companies that may not be able to get traditional loans from a bank. They are collateralised, where an acceptable amount of equity in an asset will assure the lender that their loan is protected (a loan-to-value ratio of 60-70 per cent, usually) in case of a default.

With lending at the crux of the UK housing crisis, can these hard money loans help ease the problem should they become more prominent? Will homebuilders or homebuyers be able to achieve financing with these subprime loans where they could not through traditional channels?

Most analysts do not think so. First, as private deals, hard money loans are unlikely to happen on a mass scale absent a larger, established lending institution. And the value of land, being what it is, as the basis for the collateral is unlikely as well - who can own land and yet not afford to build (other than, perhaps, inheritors of land)? Also, so-called hard money loans are typically made with short-duration terms, three years or less – good enough for a builder, perhaps, but hardly enough time for a home owner-occupant.

There are reasons to think that Brits would be able to start building and buying more homes. A poll of market watchers taken by the Reuters financial news agency in February 2013 found some hopeful signs:

• British home prices have not crashed as deeply as those in America. People who owned houses before, say, 2007 are in a good position to trade up if their income allows.

• While the threat of a triple-dip recession looms, more people are working in the UK than ever before.

• Interest rates from the Bank of England have remained steady at 0.5 per cent for those who qualify (which usually requires a good down payment on the property they wish to purchase).

• At the end of 2012 mortgage approvals rose to 55,785 and are expected to climb steadily higher in 2013.

• The government’s Funding for Lending scheme (FLS) may find greater use among lenders as time goes on, according to Nicholas Wrigley, chairman of Persimmon PLC, a leading residential housing developer (there are those who disagree with this, but time will tell).

The Guardian reported also in February 2013 that house sales are on the rise, according to the Royal Institution of Chartered Surveyors (RICS). But the organisation warms that the recovery is fragile and remains uninviting to first-time buyers.

Other means by which housing construction can commence to meet the growing UK population is for builders to elect to construct to-let housing where it is needed most. With so many young families looking for space, renting is increasing while home ownership is on the decline. “Triple dip-induced paranoia appears to be stalking the market, with many would-be buyers in the family sector choosing to rent for the time being,” said the principal of a Wakefield-based estate agency.

Another agent in Maidenhead, Berkshire, observed, “Buy-to-let investors are coming back to the market noticeably.” The Guardian reports that in the fourth quarter of 2012 that buy-to-let mortgage loans reached a 16 per cent growth over 2011, constituting 13 per cent of all mortgages granted last year. Building societies (BSAs), mutually owned by members who historically encourage individual home ownership, are increasingly extending loans instead to landlords; this is due to both demand factors and because higher fees from buy-to-let customers net better revenues for those societies.

It appears that investors in strategic land and housing development are exploring various means by which to increase housing stock and achieve asset growth in the process. Before embarking on such an investment, individuals should work with a personal financial advisor who can weigh risks against alternative investments in a holistic manner.

What Are the Current Prospects for Investing in the Private Rental Sector?

Rental residential property has ascended to a level of importance among real estate investors due to a growing share of to-let housing properties.
The numbers that show the relationship between available housing and the growing population of the United Kingdom are nothing less than dramatic. The country’s population will increase from 63 million today to 70 million by 2021, according to the Office of National Statistics (September 2012), a stunning 11 per cent growth rate that exceeds the 7 per cent growth measure for the decennial ending in 2011.

This suggests that the UK needs about 225,000 new homes be built each year, notable in that 70 per cent of those will be one-person households. And yet, in 2011 only 113,000 housing completions happened, already short by half of what is needed with the current population. This supply-demand imbalance means the first-time buyer needs, on average, a deposit of £26,000, which seriously limits how many buyers actually qualify.

Which is the primary reason that the UK has a burgeoning rental housing sector. In the past decade, more than 1.8 million new private rental households emerged, raising that share of the total housing market from 10 to 17 per cent in just ten years. The Building and Social Housing Foundation, an independent research organisation, projects that this proportion of housing in the to-let sector will increase to 20 per cent by the year 2020.

For investors, such as those interested in real asset funds, this is a clear opportunity. And fortunately this is well past the talking stage. A legal and financial framework is already in place to facilitate investment in the sector. The two most influential programs are the following:

Build to Rent Fund – Launched in 2012 by the Homes and Communities Agency, this loan fund promotes the construction of new, privately rented homes. The fund was increased already in 2013 from £800 million to £1 billion, as the first group of projects are expected to deliver 10,000 new homes already because the reduction in risk to investor-developers.

Debt guarantees – The Department for Communities and Local Government also supports building new homes for the private rented sector. This is a direct government guarantee on debt that should reduce borrowing costs and effectively increase the number of homes built. It is specifically designed to attract investors who want a long-term return on investment that is stable and not exposed to residential property risk. Borrowers need to demonstrate a solid management structure, a viable exit strategy, suitable asset cover, a clear plan for how debt will be raised and a well-researched understanding of rental demand in the market (while national numbers are robust, areas where employment or student housing are strongest will consequently have the strongest rental demand).

The success of residential housing is nothing new, in both the to-let and for-purchase sectors. IPD, which provides performance analysis in the UK real estate industry, found that residential properties overall outperformed all other real estate categories (retail, office, industrial, commercial) in capital growth and rental value growth between 2002 and 2012. Land investment advisors are always on the lookout for such performance figures.

What has traditionally held back investing in residential markets are the higher operating costs associated with rental properties (e.g., 27.6% versus 7.2% in retail and 8.9% in office properties). This is why some investors instead work in the earliest part of development, such as with strategic land investment funds where land is acquired where housing is needed. These capital growth funds work to get land use designations changed and then create the infrastructure necessary to support housing. The land is then sold to homebuilders who specialize in construction and selling, in some cases to rental-management companies.

No investor should go about any real estate programs without first discussing their interest with an independent financial advisor. The investment needs to fit comfortably within an overall individual financial planning structure.

Be a Land Investor, Not a Real Estate Speculator

With demand for housing at an all-time high in the UK, it is easy to become enthusiastic about land investing. Just be careful about over-exuberance.

The data analytics company Hometrack showed an interesting and perhaps alarming trend (depending on how you look at it) in home sales in May 2013. While the sales agreements for the month were up 8.2 per cent, new homes being built were only up 2.8 per cent. Does this outsized demand level not only push prices upward, but up into a real estate bubble once again?

Certainly, to Londoners that may seem to be the case. Central London home values recovered very quickly from the financial crisis and its aftermath in 2007-2010. But much of the demand driven there in that pricey market is a function of it being London: home to the international well-to-do, many of them from other countries who are here seeking a more stable society and economy. The same phenomena are observed in international cities that include New York, Tokyo, Hong Kong, Sydney and Melbourne.

But contrast that to home values in the rest of England and Wales. In the prosperous South East, prices are up but far from the levels seen in London. The Midlands and Wales have continued to see slow growth. The Funding for Lending scheme from the UK government, and historically low interest rates from the banks, are helping create some of that demand.

This is not surprising considering how there is wide concern about a third recession in 2013. In the economic seesaw seen over the decades, worries about the economy reduce purchasing of all kinds. When prices are low enough on such things as real estate, property fund management teams often swoop in to buy at the lowest prices in anticipation of a solid growth in asset value in the near term.

Land speculation is rarely a beneficial phenomenon in the long term. It generally means land prices rise above the productive value of the land itself – for example, when £10,000 per hectare is the going rate when under any zoning circumstance (agricultural, commercial or residential) the land cannot produce that much value. When the bubble – more a psychological matter than good sense investing – bursts, lenders to speculators cannot recover the loans, which then creates serious problems in the financial markets.

It should be noted that land speculation typically and quite obviously occurs when demand outstrips supply. And in the UK, where 130,000 fewer homes are built each year than are needed, that indeed is the case. What holds back speculation from happening now is the recent experience of a burst bubble – this factors heavily into private investor and financial institution thinking. No one wants a repeat of 2008.

No one – not governments, not homebuyers and most investors – likes a rapid rise and rapid fall. This kind of volatility leads to big winners, big losers and a generalised instability. The more solid land investment operates on a different model, where reasonable and logical strategies lead to a slower degree of growth.

So where do land investors wanting capital growth find those solid returns? Real estate investment trusts (REITs) have had at best middling success since being introduced just prior to the recession. They seem more subject to the dynamics of market trading than land and building supply and demand.

Strategic land investors working with land development experts often do so in micro-markets. In areas where employment is growing, for example, there may be strong incentives for local planning authorities to grant land use changes from agriculture or industrial to residential (to accommodate economic development). A strategic land investment will necessarily require work on the part of the investors (or their joint investment advisors and agents) to achieve the zoning change, design and develop infrastructure, then sell the land to homebuilders. This process is perhaps too slow for speculators, taking 18 months to five years to complete and to achieve a return on the investment.

Even with the more strategic approach to land development, an investor is strongly advised to work with an independent financial advisor. This helps the investor weigh the relative risks and rewards of land development against his or her capital growth planning and make decisions based on objective criteria.

There are Hopeful Indicators for Investors in the National Planning Policy Framework

How does the UK Government’s National Planning Policy Framework favourably affect land investing?

The new rules from the NPPF, published in 2012, provide a kinder, gentler approach to growth. Cooperative efforts to satisfy environmental goals are recommended.

The UK government’s booklet on the new National Planning Policy Framework, published by the Department for Communities and Local Government in 2012, identifies that first and foremost, “the purpose of planning is to help achieve sustainable development.”

Should the use of the word “sustainable” send off warning bells to investors and businesses in the development sector? Probably not. Instead what the plan is meant to do is empower local communities in helping them build competitive economies, which clearly are part of the sustainability equation. Economic growth often requires some shifting of land to development, or at the very least allows for repurposing of existing properties for something new and needed.

The NPPF stresses many things that should cheer existing residents, local officials and strategic land investors and developers alike:

• Enable local creativity in how a community is fashioned to develop new residential housing stock.
• Encourage economic development as a priority.
• Use high quality design, including the best thinking on affordable sustainability.
• Promote urban vitality concurrent with supporting the sustainability of rural communities.
• Promote mixed-use development.
• Conserve heritage sites in proportion to their significance.
• Encourage growth that makes optimal use of active transport, including walking, bicycling and public conveyances.

With a clear understanding that these are the objectives, investors and communities should be able to come up with solutions that are mutually beneficial. Already the NPPF and the Localism Act, which as the name implies distributes power away from regional planners, are credited with improving the rate at which councils assemble local plans. More than 100 local authorities were working with front-runner communities on neighbourhood planning by mid-2012.

The most important benefits to land investors are the speed of approvals and greater power at the local level. Authorities who are now charged with approving zoning changes and related projects have a far keener appreciation of the needs for housing and commercial development in their towns. They understand the imperatives of employers who need people living in close proximity to their workplaces. They might also recognize where certain sections of dedicated greenbelt lands fail to achieve the green objective, and might be rezoned in innovative ways that meet both development and environment goals. And where to-let housing might be needed more than owner-occupied structures, then that may be what is built.

Land investors looking for capital growth are likely to work in partnerships with other investors and land acquisition and development specialists. Persons interested in joining such partnerships should speak with an independent financial advisor; their mission is to assess all investment vehicles relative to the individual’s ultimate financial outcomes.