The Roles and Responsibilities of Property Fund Managers

Turning land into valuable property is neither magic nor easy. The people who manage development on behalf of investors must have several skills to achieve asset growth.

The nature of property funds - particularly how investors expect less volatility than in the financial exchanges, plus tax advantages and a good return on the investment - places certain requirements on the managers of those funds. After all, there are several other ways to invest in real estate. Property fund managers are key to making this work for the type of investor who finds developing what is typically raw land into housing or commercial property attractive.

The alternative of course is either a very short or very long-term investment. Specifically, those include real estate investment trusts (REITs), which can be traded minute by minute on the public exchanges, or owning a piece of land that appreciates over years and even decades. This latter category is how many a Briton builds personal assets with their homes or property that is purchased to-let. Each offers advantages and disadvantages.

In between - the proverbial Goldilocks’ "just right" venture for people with £10,000 or more to invest - is when a group of investors buys land that can be granted a planning authority change from a lesser-return use such as agriculture to a residential or commercial property. The value increase can be as high as a multiple of ten per hectare. Of course that involves several steps that the fund managers perform for the investor, which include:

Identification of a useful site - It’s both a science and an art to find unused land that is situated appropriately for establishing new homes. Fund managers understand the variables (relative proximity of employers, the existing infrastructure, community approval, etc.) as well as the physical characteristics of the land itself.

Negotiation of the site purchase - One or several owners may hold the tract that looks ripe for development. They or their agents or estates may present a challenging negotiation on price, which a skilled set of fund managers are able to accomplish.

Achieving planning authority approval - This is one of the most critical components of the process. UK policies favour local decision-making, such that the needs of businesses and the existing community take greater precedence over distant regional planners. National mandates to encourage housing growth generically compel local authorities to find ways to add to house inventories.

Development of infrastructure - Streets and utilities generally have to be installed into a development to make it sellable. A home building development may also place a greater burden on municipal services (government, schools, hospitals, etc.) such that a community infrastructure levy could well be incorporated into the cost structure. All of this involves fund manager negotiations.

Building, or sale to homebuilders - The biggest asset growth comes when the property is constructed, of course. A fund may oversee this process as well, however a quicker, lesser return on investment can be realised by selling lots to homebuilders. (This bifurcation of responsibilities between original investors and homeowners has become the norm in recent years.)

The smart investor should quiz a joint venture investment partnership about how they approach each of these tasks. What the firm can demonstrate from returns on past projects is of course a key consideration. But the investor should engage a neutral third party, an independent financial advisor, to examine the specific investment and its appropriateness to the investor’s own wealth development portfolio.

The Green Land Investor: How to Invest in Sustainable Land

To be a "responsible property investor" means building green. Smart capital growth land investors consider short-, medium- and long-term values of eco-development.

With all the attention on building homes to meet the housing shortage in the UK, an often-overlooked component of the story is how those homes are also likely to be more energy efficient. Aside from serving the higher goal of environmental conservation, those homes become more eminently liveable, warmer in the winter months and less likely to cause fuel poverty to residents.

To build green - even if not at the standards of a LEED certification from the UK Green Building Council or BREEAM, the Building Research Establishment Environmental Assessment Method - can make a lot of sense to an investor, such as those who prefer to put their money into real asset fund investments. In simplest terms, a home with a superior energy conservation measurement is a home that will save money on energy costs over many years into the future. Homebuyers are increasingly sophisticated about looking at such long-term costs and those investors interested in UK land investment are noticing, as are the land developers.

But building green goes beyond just energy savings. Homes and developments can be thoughtfully built with regard to other environmental needs, such as providing natural habitat and community stormwater management. The important point to be made is that while some green building features might be regarded as altruistic, those environmentally sensitive measures can still translate into real value for investors and the eventual owners. Consider the following eco-friendly home development features:

• Save energy - Research by the Sweett Group, a UK property management and construction firm, found that costs related to energy-efficient building have dropped and are now considered inconsequential to building costs, with the small amount of incremental costs related to tighter building envelopes (insulation, etc.) easily offset by energy cost savings within the first few years of occupancy.

• Responsibly balance the built environment with the natural watershed - When a building or whole development affects drainage, it can lead to flooding in vulnerable areas. To instead design a development to neutralise its affect on the watershed can also save homeowners cost and raise the value of homes. Sometimes, the inclusion of natural habitat such as retention ponds, rain gardens and bioswales that are naturalistically landscaped can add aesthetic value to a home and the surrounding community.

• Incorporate alternative transportation modes where possible - The ethos of younger people in particular is to live in bike-friendly environs. Infrastructure for riding and secure bike parking, especially in multi-unit housing, contributes to that. Being in close proximity to public transportation is also a development plus.

• Regeneration and reuse of buildings by repurposing - There are many existing buildings such as vacant manufacturing and warehousing facilities that are sitting dormant. The UK is trying to prioritise “brownfield” building; these are good uses if substance remediation is feasible and the costs of a retrofit compare favourably to new-builds. To the development investor, some such sites are both green and profitable.

• Encourage social interaction - A feature of green building is to create spaces where residents can interact. The extreme version is eco-villages, where car parking is relegated to the periphery, leaving areas surrounding homes safe for pedestrians and children at play. Simply providing pedestrian pavements in a neighbourhood is another means to help residents get to know each other - and to get exercise.

• Improve health and wellbeing in the interior - Interior materials such as paints and carpeting are now available to reduce off-gassing of volatile organic compounds (VOCs), while other measures reduce the presence of mould growth in structures.

Participants in joint venture partnerships generally listen to their topic-experts in such investments. If the market values a greener, more energy efficient home, then a premium can be derived in the sale of such homes - which of course benefits the investor. All investors are advised to speak with an independent financial advisor first to know if real estate fits their wealth management portfolio.

The Differences Between Institutional and Non-Institutional Land Investors

The nature of investing in land differs between individuals and institutions. But the reasons that real estate development is attractive to both are quite similar.

The Financial Times reported in the second quarter of 2014 that banks continue to limit their lending to property companies even now, several years out from the financial crisis of 2008. Does this mean that other investors - institutional and non-institutional financiers alike – are afraid of land and homebuilding as an asset class?

Hardly. Land is an investment well subscribed to by the wealthy and those who are steadily gaining wealth. This has been the case since the earliest days of civilisation and is no less true today than in the past. A combination of exceptional pent-up demand in combination with Government schemes to help homebuyers has triggered a strong market. Consequently, homebuilding has increased since early 2013 and more investors have increasingly set their sights on UK land.

While the acquisition of land in centuries past more likely came through conquest or inheritance, today's investors - such as those working through property fund partners - can start small and build big over time (no deaths required!). With a plethora of financial instruments, individuals as well as institutional investors (such as insurance and pension funds) can take short-, medium- or long-term positions to generate asset appreciation.

But institutional and non-institutional investors have some differences:

Institutional investors only recently re-entered housing - And for the most part, pension funds and insurance companies are looking for income from rental properties. This differs from the individual investor who more likely is looking for value increase and a relatively short (18 months to 5 years) return on investment.

Institutional investors often operate on different timelines - While the anticipated ROI for larger institutionals may be established according to sophisticated calculations, land development is driven by factors that include how local planning authorities decide on land use, plus dynamics from the demand side. Individual investors who are properly informed of these variables, before and during the process, can make decisions that create optimal outcomes.

Institutional investors can themselves be REITs - Due to a rule change in 2012, the diverse ownership rule, institutional investors can form small clubs that function as real estate investment trusts. They still need to be listed on recognized stock exchanges, but the lines between closed fund investments in land and market-traded investment have become a bit blurrier.

So while banks may be skittish about land and property development, institutional investors and private investors (working in partnership with land fund managers) are largely responsible for funding land development into built housing. They are also reaping the rewards.

While institutions employ their own teams of analysts and economists, individuals are smart to consult with an independent financial advisor. The risk profiles of investors and their families need to be factored into decisions on all forms of investments.

Is it Wise for Real Asset Fund Managers to Invest in Strategic Land Companies?

Fund managers are like individual investors: Each seeks a maximum return on their investments. The performance of the sector should drive their participation.

After the financial meltdown of 2008, investors across the globe reduced the proportion of assets held in market-traded stocks and bonds. They instead chose to invest in real assets: minerals, real estate, agricultural commodities, other natural resources, art, antiques and classic cars among them. So what do real asset managers invest in now, several years later?

EveryInvestor.co.uk reported in mid-2014 that UK pension funds, which had rapidly reduced their allocations of equities in favour of alternative investment funds in the wake of the financial crisis, had slowed that exit in 2013. But the attraction to real estate, perhaps the most prominent in the real asset category, remains a strong driver for those funds. The pressing need for housing in the UK – an estimated one million households need a home to buy or rent due to underbuilding over the past two decades – is a significant driver. Along with homes, new infrastructure, schools, hospitals and commercial properties will be developed in the next ten years.

Real estate investments themselves come in many forms to satisfy this demand: raw land for development, homebuilding (and homebuilder stocks and bonds), as well as the transactional components (lending and legal services), are all growth industries in an ascendant economy.

Of particular interest to certain kinds of investors is strategic land, where acreage currently designated for one use (most often agriculture) is rezoned by local planning authorities for other uses such as homes and businesses. This is a large part of where value is created, but it’s no simple process. Strategic land investment firms have to first identify sites where housing demand is most pronounced and where local planning authorities may be predisposed to a land use change. The existing community has to be similarly given to development, the perceptions and processes of which development specialists need to manage as well. About half of all municipalities in England and Wales have a housing growth plan in place; for those that do not, it is beholden on the investor collective to make a strong case for how the community will benefit from an expanded town.

Just as individual investors need to determine if strategic land is the type of alternative investment they wish to be a part of, fund managers should apply their own criteria to this decision. Individuals are strongly encouraged to engage an independent financial advisor to weigh the risks, rewards and timing of a land development in their portfolio, even while professional investment managers rely on their own research, strategies and guiding principles.

Strategic Land: How the ROI Differs from Other Real Estate Investments

There are many ways to invest in UK property. As house building accelerates to meet demand, it helps to study the characteristics of various investment types.

With so much attention to the housing shortage in the UK, as well as the Government schemes that help working people find homes to buy, there is naturally great interest in the UK land investment community on how to profit from the construction and transactions that will occur in the coming months and years.

Real estate is a broad, deep and complex world. There are many opportunities and commensurate risks. Fortunately, it’s rich territory for anyone with the pounds to invest - and the degree of variety means that investors of various stripes can find opportunities that fit their specific life stage and risk tolerance. A very traditional approach to real estate investing in the UK is buy-to-let, where the investor takes on the responsibilities associated with being a landlord. Other investors gravitate toward joint venture land opportunities, where pooled resources and expertise focus on a residential or commercial (or combination) development; astute management of such project can yield profits in a two- to five-year timeframe. And since 2007, English investors have had real estate investment trusts (REITs), where shares in large buildings (typically commercial, but also some residential) can be bought and sold at will just as with any other market-traded security.

Of course, the question of return-on-investment is a fundamental consideration. The following is a snapshot of what might be expected from these three real estate investment classes:

Buy residential rental property - In September 2014, the website TotallyMoney.com published a review of 192,672 rental properties in the UK. The report looked at where such properties provide a favourable yield, factoring the asking prices of homes relative to the average monthly rent. Separated by postal codes, the formula reveals that the best ROI for buy-to-let investors are in the north including Scotland (Aberdeen, Bradford and Sheffield in particular), with some of the lowest yields (but still in positive territory) in places that include Poole, Dartmouth, South Kensington and Worcester. The lone standout in England’s south was Southampton, where rental property returns are four times as much as Tonbridge.

What makes rental property so attractive is of course the rapid rise in rents that has occurred in recent years, largely due to the critical housing shortage. But as an investment columnist from Telegraph.co.uk warns, this formula becomes less attractive should there be an interest rate rise: “recent buy-to-let investors could see their costs outweigh their gains,” says Nicole Blackmore, adding that “campaigners have warned that rent rises are unsustainable, further dampening investment prospects.”

Invest via a property fund manager - This might seem like outsourcing, and in fact it can be approached that way. Property funds typically mean investing £10,000 or more in a pool managed by professionals, who focus the investment on a single, unbuilt property. The land is purchased at a low price because it does not yet have planning authority approvals. When the fund managers achieve those approvals, infrastructure (streets and utilities) are built, then the land is sold to homebuilders. The return on investment comes in as little as 18 to 24 months (or up to 60 months), with healthy double-digit gains in the most successful cases. This is subject to many factors, of course, not the least of which are the skills and proven competencies of those managers.

Invest via a REIT - While the introduction of REITs in the UK in 2007 proved to provide very poor timing as the 2008 financial crisis hit, REIT.com provides some recent performance numbers to cheer investors who choose this instrument. While it’s theoretically possible to achieve a strong ROI within a single day of trading, similar losses are equally possible in the same time frame. FTSE NAREIT, designed to measure the performance of larger and more frequently traded REITs, shows dividend yields consistently within a range of 4 to 4.8 per cent (measured annually since 2009).

Not sure which is right for you? Speak with an independent financial advisor, who can assess your wealth portfolio and short-, medium- and long-range objectives as key considerations.

How Much Reporting Transparency Should Investors Expect from Property Fund Managers?

Disclosure and transparency are on the rise in commercial real estate investment. But the same factors also drive confidence in residential development.

The global commercial real estate behemoth JLL issued its Global Real Estate Transparency Index in 2014, sharing two key observations of interest to British real estate investors. One is that the United Kingdom ranks number one in transparency, followed by the U.S., Australia, New Zealand and France. Second, investors and governments are increasingly aware of the value of transparency as a means to stimulate inward investment.

The consequence of both is that many countries, primarily those in the developing world, are striving to become more like the UK. But for property fund managers - those driving the development of much-needed housing in England and Wales in particular - this emphasis on transparency is equally urgent and beneficial.

The JLL report, its eighth annual, further breaks down the drivers for transparency that, while written for the commercial side of the business, holds similar value in housing- and land-focused joint venture investments. The report’s key observations include:

• Younger investors expect greater accountability - Perhaps due to the widespread use of social media, younger investors and homebuyers express a heightened demand for more information and authentic analyses.

• Open source/open data - Technological advancements have come about to a certain degree due to open-source structures. This same spirit of transparency engenders greater confidence and cooperation in all forms of real estate.

• Environmental concerns require greater impact disclosure - Better energy standards, the various green rating systems (BREAM, the Building Research Establishment Environmental Assessment Method, and LEED, Leadership in Energy and Environmental Design), and tools for measuring the economic performance of green initiatives, all contribute to greater confidence in new homes and the value they deliver.

• Increased scrutiny by the press - Birthed somewhat from disastrous building collapses in the Third World, a greater focus on the quality of buildings and infrastructure requires that new construction be of greater quality. The green building movement, along with greater rationality in infrastructure quality and financing, is a positive outcome in UK housing as well.

• Increasing trust levels - Particularly in the laggard countries where transparency is lacking, relationships between local authorities and citizens are poor. With greater transparency in UK land development, for example, planning authority decisions that are pro-development are better understood and find greater support.

• Increased inflow of foreign investment - Investment in London housing by foreign nationals is at historic levels. But foreign investors also recognize the strong prospects of homebuilding in the other parts of the UK, and their confidence in our system is part of what attracts their money.

• Stronger economy, increased scrutiny - With more investments to choose from in an atmosphere of improved market conditions, real estate development needs to match the transparency that characterises other investment classes.

What exactly should investors expect of alternative investment funds focused on land? They should know where the raw land is situated, how planning authorities are likely to respond to a use change petition, and why it should succeed when developed. They should know if their fund will sell developed land (i.e., with infrastructure in place) to homebuilders or to home buyers, and the time frame involved in realising the return on the investment. And while fund managers cannot predict with certainty the size of that return, they should provide a strategy for maximising it. But to be more confident about what is known and unknown in this type of investment, the investor absolutely should consult with an independent financial advisor to get an objective review.

Does a Land Investor Working with a Property Fund Manager Require an IFA?

Regardless of the type of investment you consider, your relative wealth or your age, it quite likely makes sense to get the objective advice of an IFA.

Decisions on investing are among some of the most important and stressful processes a person can undertake. This is why most people are advised to enlist an independent financial advisor (IFA) to provide objective, third-party advice on how to manage a wealth-building plan.

The overall goal of the IFA-investor collaboration is about well-timed asset growth. Every individual and family has different needs and different timing, affected by the age of the investor and when he, she or their family needs liquidity. This matter of timing can significantly shift the nature of the investment.

For example, most people in the UK are aware of the strong returns on land and real estate - particularly in light of the housing shortage. The investor’s choices include buying a home to rent out (and realise gains ten or more years into the future), investing via a land fund manager (where raw land is turned into housing, generally in under five years), or buying market-traded shares in a real estate investment trust (REIT), where valuations change by the minute. REITs are subject to overall market dynamics and the investment is completely liquid.

An experienced investor may invest in any or all of these three real estate categories. And very experienced investors may understand what they are doing enough that they do not need an experienced, third-party advisor. But what an IFA brings most investors is significant in a variety of investment scenarios:

• If you are just beginning to invest - The Citizens Advice Bureau, a not-for-profit based in London, urges investors to seek third-party counsel to answer several questions: How much risk are you willing to bear? How long do you want your money tied up? Do you want general advice or guidance regarding a specific investment?

• If you have a recent windfall - An inheritance, bonus pay, the sale of property or a business: any of these needs to be managed carefully due to tax implications and the temptation to "put all the eggs in one basket," so to speak. An IFA can temper the emotions and exuberance of such moments to guide the investor to holistically put their money to best purposes and outcomes.

• If you are entering a new life phase - There are many junctures at which one’s financial responsibilities change: getting married, having children, when experiencing career advancement, when starting a business, when selling a business, retirement, divorce, death of spouse, and old age, among others. At each point, investment strategies can change. A qualified independent financial advisor will guide the individual and dependents to identify the smartest ways to plan for and navigate through those changes.

This is not to denigrate the stewards of specific investment products. They certainly have their own reputations and asset growth successes that drive their work. The land fund manager who succeeds at turning a £10,000 investment into a £14,000 return in two years will certainly share those results with prospective investors. But every land investment is different, and the individual needs to decide if the semi-liquidity of real estate development fits the investor's own life phase timeframe.

As the Citizens Advice Bureau advises, you may pay a fee, a commission, or a fee plus commission for an IFA's services. This is wholly warranted, as your investments have a great deal to do with your future happiness and wellbeing.

What Are the Opportunities for Investors in UK Rental Housing?

For a variety of reasons more people rent their homes than 10 years ago in the UK. Developers and homebuilders are developing properties accordingly.

When Communities Secretary Eric Pickles announced in June 2014 that the Government was designating £49 million to support rental home construction, it was acknowledging a long-term trend in the UK. That is, for various reasons, a larger chunk of the working population now rents rather than owns its home.

The Government fund supports schemes under the Build to Rent programme, itself a £3.5 billion scheme targeting the construction of 10,000 new homes for private rent. It specifically helps developers to build larger scale homes for the private rental sector. Of note, these are intended to be quality homes that will help goad private investment in this sector, such as through property fund partners. The program is already oversubscribed by developers and likely to reach its 10,000 home goal.

But who are the renters - and will there be enough demand in the future?

The traditional view of renters in the private market was that they were young working people, saving up a deposit such that they could purchase a home in the next few years. But the housing crunch and stringent lending practices since the financial crisis in 2008 have changed that considerably. Some statistics worth considering:

•    The size of the private rental market has risen by 89 per cent between 2003 and 2013.

•    In England and Wales, the rise was from 1.9 million households to 3.6 million.

•    "Rental hotspots" - areas where between 20 and 40 per cent of homes are rented - numbered only eight in 2001 but now 51 areas have that high a concentration of renters.

•    Traditionally, large cities with high housing costs such as London and university towns had the highest concentration of renters. But now higher concentrations are seen in Torquay, Torbay, Eastbourne, Hastings, Bournemouth, Shepway and Newmarket - each with more than 20 per cent renters.

There are a number of ways in which investors can tap into this market. One is through a real estate investment trust (REIT), which is akin to buying a stock in a company that builds or holds rental properties. Many REITs are in the commercial property sector, but increasingly the portfolios are exclusively or at least inclusive of residential property. Another is through an investors club, where a small group of individuals pool funds to buy a single home or flat; the price of entry can be as little as £1,000, attracting younger investors who like the proximity to the investment but cannot afford a full down payment on their own. Traditionally, individuals with adequate resources would purchase a flat on their own, manage it and collect rents over time, selling perhaps at the time they become pensioners.

Another option is in the strategic land investment realm. This may not involve holding the property when it is built and then leased. Instead, property fund managers will identify a city where the local economy demands more employees and new residences need to be provided. The investors may join in for £10,000 or more, financing the purchase of un-built land, with the hope of achieving planning commission approval to build on the land. With that, the fund may invest in infrastructure (roads, utilities) and then sell to a homebuilder. At this point, the properties are built and either sold or rented to occupants.

Regardless of the path the investor takes, he or she should always consult with an independent financial advisor regarding a real estate investment. The relative risks should be considered relative to the individual's wealth building strategies.