Why Institutional Investors are Taking Another Look at UK Land

Foreign investors – institutional and individual property fund partners – see opportunities in the pent up demand for housing.
Institutional investors from inside and outside the UK are showing signs that the high-demand housing sector in England and Wales offers a significant investment opportunity in UK land and real estate. It seems that if property funds have succeeded in Asia, in other parts of Europe and elsewhere, it should be a no-brainer to invest in a country where a million households are waiting for a place to move.
But it’s a complicated situation. Why is it that institutional investing in residential assets in the UK has lagged until recently? Indeed, institutional investors hold only about 1 per cent of the total residential stock in the country. Compare this to places such as France and Scandinavian countries, where pension funds and insurance companies hold between 10 and 15 per cent of housing.
Some say it has to do with scale, because funds are not typically drawn to smaller developments. But what may change this are government policies relative to housing and an increasing rental market. Larger multi-family construction can yield the asset growth that institutions and larger investment groups are looking for.
Financing in the form of sale-leaseback terms also offers a creative means for institutional investors to participate in housing. For example, M&G Investments purchased 400 properties for rent inside the east London Stratford Halo tower block, which it leases back to the Genesis Housing Association, which will manage it for 35 years as it makes payments to M&G. The investors maintain ownership over a longer-term, including after the end of the leaseback deal. Payments are linked to inflation, part of what makes the deal attractive to the investors.
The institutions may also see how joint venture land investment groups – the smaller pools of individual investors who buy raw land, achieve planning authority changes, build infrastructure and then sell it to homebuilders – are typically achieving healthy asset growth in a short period of time. This may not be the stream of rental income over time that some investors seek, but it can deliver substantial returns in as little as 18 months. A diversified portfolio often has room for this kind of investment.
The fact that Chinese outbound investments are up 80 per cent, year on year, in 2014 suggests there simply is more capital pushing investment – which can be good for the UK. According to numbers reported by real estate company JLL, slowing growth at home in China is pushing money overseas, with global gateway cities such as London among those receiving the most influx of cash. JLL states that while the office sector is a preferred asset class, there is increasing interest in residential development.
This of course comes a few years after investors of all types from the Middle East, Russia and elsewhere discovered that UK residential property – particularly in London, of course – can be a safe haven for their money. With greater familiarity of the UK housing development opportunities, there is increasing private and institutional investment to other parts of England as well.
Institutional investors of course employ analysts and economists to determine where best to put their money. Individual investors should instead work with an independent financial advisor to assess specific investments and to develop an overall portfolio strategy.

Why Foreign Investors Look to Invest in UK Land

The meteoric rise in London residential prices may cool with a new capital gains tax on non-residents. But foreign investment in UK house building could advance.

When UK Chancellor of the Exchequer George Osborne announced in 2014 that a capital gains tax on foreign real estate buyers would be imposed, many who felt it was long overdue cheered him. If enacted in April 2015, this will place the same tax burden on non-UK owners of second homes as is currently placed on British citizens. But will it cool the overheated London real estate market? And might it impact foreign investors in UK land and real estate?

Already, threat of the tax seems to be slowing the purchase of high-value residences in London. Some real estate companies predict that current investors – many from China, India, the Middle Eastern countries, and Russia – might sell their holdings before 2015 to avoid the tax. Others suggest that the stability of UK real estate will prove to be a bigger factor than this tax, or that foreign owners might shift their investments from second homes to real asset investing that has more to do with development and building than owning and occupying.

Offering some credence to this ‘the-tax-doesn’t-matter’ school of thought is how foreign investors are increasingly buying homes outside London. The Daily Mail reported in October 2014 that “investors keen to make a profit from the booming UK property market are purchasing homes across the country” in places that include South Wales, Weston-super-Mare, Manchester, Liverpool and Sheffield. These purchases of middle-class and starter homes are up 20 per cent in 2014 over 2013, and most are bought with cash.

What seems to be driving a spectrum of investments in the UK is simply that opportunities have cooled elsewhere. The real estate firm JLL reported in the second quarter 2014 that “major Chinese residential developers look for opportunities overseas to counteract slower economic and price growth at home,” adding that investments in residential development are up 80 per cent this year, concentrated in the UK, Australia and the United States. The office sector may get the bulk of this, but “there is increasing interest in residential development,” says JLL in its online publication The Investor. Other indicators that individuals and institutions, some working through real asset funds, are drawn to the UK include:

• Larger multi-family developments are on the rise in the UK, given the strength of the rental market. Larger investors, institutions in particular, are more interested in scaled-up properties.

• Creative financing such as sale-leaseback deals proves to be attractive to some. These might be available through housing associations.

• Basic demand for housing will remain high for many years to come – all but ensuring the market for sale or rental of properties will be there at the end of the development cycle for new-build developments. Typically, this means the 18 to 60 months it may take for alternative investment funds to acquire raw land, achieve planning authorisations, to develop infrastructure, to construction and to the sale or rental of homes (as is the practice in real asset portfolio investing).

It is impossible to predict the outcome of the proposed new capital gains tax on foreign investors, but the demand for housing is almost a future certainty given the extreme shortage in the UK. But any investor considering real estate for their portfolio needs to discuss it in all its nuances with an independent financial advisor.

The Role of Land Fund Managers in UK Land Investment

To increase the value of strategic land, investors tap the skills of professional land development managers. It clearly is not a job for amateurs.


Rare is the investment that succeeds out of dumb luck. Whether one invests in market-traded securities, mineral exploration, rarities, agricultural commodities, land or business start-ups, it’s the people who lead and manage the asset who carry the most weight in achieving good returns.

UK Land that is purchased for development is no exception. It is an asset that requires expert management through several critical stages, typically taking acreage from agricultural use or disuse to build residential communities. The value of that land could increase by several multiples when managed effectively.

But what is the role of land fund managers? What do they do to grow the asset as much as possible in the least amount of time as possible? Here is a short list of their value-adding strategies:

1. Look for opportunistic transactions – The nature of land investing involves many variables. Early in the process when homebuilding is the goal it is to simply identify where there is a critical need for new houses, usually to accommodate workers for growing firms in the area. Then it becomes a matter of finding landowners who may be in a position to sell. Both require good research as well as a network of contacts to keep them informed. 
2. Invest where value can be added – With strategic land, a change of use can increase value exponentially. But that depends on the cost of the property purchase as well as the costs associated with building infrastructure and buildings. Certain geological and topographical features can make that difficult; therefore the fund manager should be able to assess those (with professional guidance) in advance.
3. Access to local knowledge – Change of use strategies have to take into account the goals and objectives of the local planning authorities. Local politics are certainly a factor, as is the local plan for increasing the housing stock (about half of all towns in England and Wales have developed a Government-mandate plan this far). The business community too can play a role at encouraging local development. Good land fund managers have a sense of where all parties stand. 
4. Approach with rigorous financial analysis – At the end of the day, the numbers have to add up. Time factors into this as well: because development can require two to five years of time, how a fund matures is dependent in part on externalities. The manager’s analytical framework needs to synthesize all variables over the time that transpires from the initial investment to the sale of property.

Even when the land manager – quite typically working within a capital growth management group – has an excellent portfolio of successful projects in his or her experience, it makes sense for the investor to do third-party research. An independent financial advisor can provide that perspective.

What Types of UK Land Can Be Used for Residential Housing Development?

Unquestionably, the country needs more houses – and there are thousands of hectares available for building. But the characteristics of each need to be examined carefully.
Continued attention from the media and from Government about the shortage of housing leaves many scratching their heads. Why aren’t there more houses? And with so much foreign money coming into the UK to buy luxury homes and businesses, why isn’t anyone investing in middle class housing?
In fact, those investments are rising. Government schemes to help working people to take their first step onto the property ladder have enabled more people to get more mortgage loans since 2013. Homebuilders and real asset portfolio investors have consequently increased activity.
But there is a lag between demand and supply, due in no small part to the complex and diverse nature of residential real estate development. There are all types of land found throughout England and Wales that may appear to be good for building, but a closer look reveals why some sites would work and others would not. Consider four types of UK investment land and how they vary:

1. Urban-Suburban/Extant building demolition/preservation – Land that is closer to city centres will always be more valuable. But of course this means the cost to purchase will be higher, quite likely diminishing the profits to be realised from a resale (even after site assembly improvements). Further complicating matters might be the existence of structures that do not fit the development plan, such as multi-storey buildings that would be expensive to demolish or buildings of historical value and thus given heritage protection that precludes feasible repurposing.

  2. Agricultural/Existing infrastructure or lack thereof – Farmland is by far the least expensive property on which to build (after planning authority change of use is approved). But it quite likely will lack for infrastructure of all kinds – roads, utilities, schools and hospitals. The real asset funds that underwrite the development might need to allocate a greater budget to this than an alternative property.

 3. Agricultural/Relative proximity to employment – The whole of the UK is driving toward increasing the housing stock to accommodate as many as one million households that currently are sharing homes with extended families and friends. And while the central Government has tasked the local councils to write up plans for how they can add to their housing inventory, it makes no sense to build where people will be far removed from jobs. It would be better for site selection to be based on where employment is growing.

  4. Brownfield/Cost of remediation – It is generally agreed that an ideal scenario for building would be in cities where land stands vacant due to abandoned industrial and commercial enterprise. The advantages often include access to urban amenities (public transportation, shopping, schools, etc.), established utilities (especially water, electric and wastewater) and perhaps development tax incentives. Not all these factors are always there, however. But even if they were, there may still be site contamination remediation and building demolition costs (exception: when an industrial-purpose building can be repurposed to residences). Remediation of toxic contamination in particular can be significantly expensive in materials, labour and time.

As should be clear, all sites are different and as such they need to be evaluated individually by astute specialists such as experienced property fund managers. For the individual investor, consultation with an independent financial advisor can yield important insight into the appropriateness of such an investment in that individual’s portfolio.

What is the Current State of House Building Planning Permissions in the UK?

The statistics on change of use designations present a mixed picture. The process is beginning to show signs of speeding up, which helps.

In the national drive to increase the stock of housing in the UK, among the leading indicators of new-build activity might be planning permissions granted by local planning authorities (LPAs) to convert underused UK land to homes. This is of course of interest to the approximately 1 million households that are waiting for affordable and well-located homes - near their place of work – and to property fund managers as well. They are the investors who most often make a change of use request.

District planning authorities have, as of the end of June 2014, granted changes to 170 applicants out of 200 decisions made (with 42 applications still pending, as of November 1 2014), according to statistics supplied by the Department for Communities and Local Government (DCLG). This relatively high proportion of approvals, 88 per cent, might indicate a relaxed approach to authorities’ review and scrutiny of such applications. But this proportion of applications-to-approvals has remained relatively constant since before the financial crisis of 2008. Such approvals range between 81 per cent (Q1 2008) to 89 per cent (Q2 2013).

The numbers of applications – indicating effort on the part of real estate developers and their financiers – have varied a bit more. The highest number of applications made per year since 2004 was 689, in 2004/2005, dropping notably by 2009/2010 to 466 applications and to 454 applications by 2012/2013. In the 2013/2014 fiscal year, that number is up only slightly to 472.

These middling numbers since 2008 suggest several things. One is that the economic recovery has been slow, and that perhaps all efforts toward localism in the shift of authority to LPAs (versus regional and national planning) have not changed the landscape all that much. The Government schemes to make home buying more affordable have had a noticeable effect on the number of home sales, but this may be expressed more frequently in the purchase of existing homes that require no planning authority involvement.

The statistics get a bit more interesting and perhaps meaningful when broken down by the sheer numbers of dwellings and change of use. Some highlights from DCLG reports include:

• Most dwellings – Planning authorities have ruled on hundreds of homes in several standout locations include Cornwall (1,615 dwellings), Wandsworth (1,087 dwellings), Kensington and Chelsea (897 dwellings), and Cheshire East (503 dwellings).

• Most change of use – All told, the LPAs granted 23,884 use designation changes in 2013/2014. But this number includes changes to residential as well as to retail, offices, light industry, general industry, storage, distribution and a handful of Traveller caravan pitches. The largest numbers of change of use applications granted were Leeds (379 applications), Birmingham (275 applications), Liverpool (239 applications), and Leicester (207 applications). What should be noted is that the City of London granted only 67 such changes of use, which perhaps illustrates how the heavily built environments simply have less land to convert to an alternative use.

• Time required to grant a change – Much has been made of speeding up the application process, which may have been accomplished in the 2013/2014 year. Of 472 applications received in this time frame, 71 major applications were decided upon in 13 weeks or less, up a bit (from 57 and 58 in the preceding two years). Developers and their investors, many working through such instruments as real asset portfolio investing, prefer an expedited process such that they can get a faster return on their investment.

While none of this indicates an incontrovertibly robust move forward to building – sorely needed by Britain – it does suggest a trending in the right direction. More people are able to buy more homes than in the preceding five years, to which homebuilders are beginning to respond. Planning permission changes generally indicate where populations are shifting, often drawn by new employment from growing companies. Investors recognise that homes absolutely need to be built, so getting past the bottleneck often inherent in the planning approval process is one more piece leading to increasing the housing stock.

The possibility of a land use change is clearly part of the due diligence of any investor in real assets such as land and development. Individual investors need to consider this information under the guidance of an independent financial advisor.

Types of Joint Venture Land Investment Opportunities Available to UK Investors

How a joint venture partnership is structured plays a big role in liability and engagement questions. Those partnerships work best when the relationships are well defined.

Joint venture partnerships (JVPs) of several types are a popular and effective means by which individuals combine resources of expertise, money and strategic relationships to bring about business success. Look no further than the realms of UK land and real estate to understand where such partnerships can be very productive.

Those partnerships typically join professionals in the various aspects of development (acquisition of land, change of use designation, infrastructure development, construction and sale or rental of property) with investors who understand real estate in broad terms but whose expertise may lay elsewhere. Participants in such joint ventures know that their money can grow quickly in such sectors as residential development, given the pressing need for new housing in the UK.

But UK joint ventures can be structured differently. For example, a JVP company that is limited by shares enables participants to have limited risk as they would as shareholders in a company. A contractual venture is more flexible as it is not technically an entity that needs incorporation, but it also is vulnerable because it has a poorly defined structure and identity. A limited liability partnership provides participants with a legal entity, but partners are still taxed directly on their percentage of profits and losses. A fourth category, general (limited) partnership, is popular as an investment vehicle for passive investors because limited partners cannot be involved in the management of the venture.

For investors hoping to cash in on the rush for land and the exceptionally underserved housing market, each of these structures might work. But the general or limited partnership might provide the best advantages when such individuals do not work professionally in real estate or development.

But regardless of the type of JVP an investor chooses, there are at least four criteria they might apply to the partnership by which to evaluate it:

Mutually understood objectives – There are so many directions a real estate entity can go with a project: to create short-term asset growth, to hold for rental income, or even to remain flexible to determining the objective as a construction project nears completion. Whichever it may be, participants in a JVP should share overarching objectives to help guide decisions made along the way.

Clear-cut strategy – Members of the partnership should also agree on how to achieve those objectives with a coherent strategy. If external circumstances change and disrupt plans, a good strategy is to adapt and apply to leverage as possible to achieve a strong outcome. Throughout, the real estate professionals leading the JVP should communicate as needed to the other partners, financial and otherwise.

Adequate documentation – Regardless of the type of structure, a JVP is nothing without the paper. But it is not only about the documents that establish the partnership; partners should be informed of due diligence provided with land acquisitions, of applications for land use changes, and other moments of regulation and transaction that affect the cost and revenue structure.

Commitment by all parties – Just as important, a large degree of shared commitment can have a great impact on all paid staff, managers and investors in a project. Unified, the JV partners can accomplish much more than if not.

Real asset funds investments of any kind should be closely scrutinised relative to other investments. For any individual or family, counsel from an independent financial advisor is highly recommended.

The Benefits of UK Land as a Real Asset to Investors

There are many other types of real assets, some which literally sparkle. But land is an investment where the investor can play a role in its valuation increase.

A lesson in real assets has played out in the prices of silver and gold bullion in the past several years. Silver was priced at under £3.43 per troy ounce in 2003, climbing to £9.20 by 2009 and £14.74 by 2012. In 2013 the price began to drop, falling 36 per cent that year with an approximately 7 per cent recovery by mid-2014. Gold, trading as high as £1150 per ounce in 2011 dropped to £1027 by the end of 2013 and £709 by mid-2014.

The rise and fall of precious metals markets helps illustrate a few points about real assets. One is that a savvy – or lucky – investor in real assets can experience large growth in a relatively short period of time. Second, some asset classes can experience precipitous declines in an equally short period of time. And, the investor does not have very much control over these price swings.

An exception might be with land, particularly in raw land found in some parts of the United Kingdom. For example, property funds provide a means for investors to participate in real estate. This often involves property fund managers who purchase undeveloped land that then is converted to a more valuable use, such as residential homebuilding. 

Notice the key difference in land versus precious metals: land is a real asset that can be improved upon. And in that improvement comes a remarkable value increase. Metals (and other commodities) are subject to global events, the rise and fall of market-traded securities, and even rumours and emotions. 

The external factors affecting land, which should be foremost in the minds of investors, include what is happening in the UK that would lead to a rise in prices. Those factors are:

• Burgeoning population – From 2001 to 2011, the net population in the UK grew by 7 per cent, far outpacing almost all of Europe. Young families need homes, but we are woefully short of what’s needed to accommodate these many people.

• Historic underbuilding – For many and complex reasons, the numbers of homes needed to house our growing population increases by about 200,000 per year and yet we’ve been building fewer than 100,000 dwellings. This shortage was made worse in the recession that began in 2008 and has only begun to catch up since 2013. Still, demand is expected to outstrip supply at least through 2020.

• Rise of the rental class – The portion of working adults who rent instead of owning has increased by more than 40 per cent in just ten years. This signals a shift in the types of homes being built. Some real asset funds focus on multi-family housing as a result.

• Government schemes to support building and buying – The Help to Buy programme from the Government has indeed stimulated more home buying since being introduced in 2013. Contrary to the scheme’s detractors, most transactions that resulted are modestly priced homes and first purchases.

Strategic land developers are most successful when they purchase well-situated land – near areas where the local economy supports growth – that require a use change designation from the local planning authorities. With that, as well as through the development of infrastructure and home building, the increase in price per hectare is as much as a factor of ten.

Individuals considering any real asset class, land or others, should discuss their ideas and plans with an independent financial advisor.

The London Housing Crisis: Boris Johnson's Proposals and Others' Suggestions

The shortage of housing in the UK is concentrated in London. There are many solutions and all may be needed - private investors are already at work.

London Mayor Boris Johnson isn’t getting a lot of love on his solutions to the housing shortage. And the numbers as of mid-2014 weren’t helping much.

Not that it’s an easy problem, or one where there is universal agreement on the solutions – or even the depth of the problem itself. But suffice it to say there are many investors who look at the high demand for housing and ask, “Why can’t we build more to take advantage of this undersupplied market?”

Indeed, for property fund managers the scenario is tantalizing. London Councils, which represents 33 local authorities, notes that with the anticipated nine million residents by 2021, the city needs to increase its housing stock by 526,000 units (based on statistics compiled by the Department for Communities and Local Government). In addition to that, another 283,000 new homes are needed in London to answer a backlog of demand – pushing the total needed to more than 800,000 flats and homes.

The net effect of the current shortage is rapidly increasing prices for both purchase and rental rates. Most economists and social scientists agree the high cost of housing makes for a difficult economy as well as a negative influence on the quality of life. Further, it could discourage companies from establishing themselves in the city, and make sourcing important workers harder for the companies that are already there.

Several proposed strategies for increasing London’s housing supply are being discussed or already in some level of implementation:

London.gov.uk, from the Greater London Authority, extols the need and details Boris Johnson’s plans. The department is investing £3 billion in housing, including £1.8 billion for affordable homes. Some of this involves the release of publicly owned lands for home construction. Overall, the Mayor’s plan seeks to deliver 42,000 homes per year, a task shared between the city, boroughs, and both private and public sector developers.

The First Steps programme is Johnson’s effort to help lower-income Londoners to buy or rent at affordable prices, purportedly lower than renting or buying privately on the open market. The programme claims 21,000 homes have been delivered through the program up to 2014. While this is more about finding built homes than increasing the supply, it is about removing inefficiencies in the marketing process.

Housing Zones, focusing on 20 areas in London where the construction of 50,000 homes will be accelerated through expedited planning and financing measures. Construction bids for the first projects were received as of September 2014.

London First, which represents the city’s largest private employers (and who need affordable housing for their employees), pushes for a plan of greater ambition than that Johnson has offered thus far. Equating affordable and available housing with general economic competitiveness, the organisation published “Home Truths,” a list of recommendations that includes establishing new suburbs served by Crossrail 2, the proposed rail route in South East England that would stretch between Surrey and Hertfordshire. With a shorter time frame for development, the publication also urges development on publicly owned land and to enable councils to have greater borrowing power to build homes themselves.

What is clear is that there is likely no single programme that can address such a large and pressing need. The public sector can provide funding and establish policy, but the private sector is often the engine behind the home building machine.

Alternative investment funds are channelling private investor pounds to homebuilding investments. Some such projects are large scale and others are smaller. But because these investor groups help with land assembly – identifying appropriate properties, getting planning approvals and establishing infrastructure as needed – they smooth the development process for builders.

Some investors prefer the fund approach to filling the pipeline of much needed housing. Others elect to be buy-to-rent investors. Some do both. But what’s key is that by working with an independent financial advisor, people with the financial wherewithal can help increase the housing supply while pursuing their own best financial outcomes. Mayor Johnson seems to understand these private market motivations, as reflected in his housing policies.