Is Another UK Land and Housing Value Bubble Building to 2008 Levels?

It seems too early say UK real estate values are approaching unsustainable levels, given the past half-decade of value deflation. But some see signs it is.

The story of land and real estate prices in the UK is Dickensian: the best of times in some places (central London, for example) with lingering reminders of the worst of times in the aftermath of the burst housing bubble of 2008 (Leeds, Bradford and Liverpool). In the latter, struggling local economies mean vacant properties and stalled housing sites.

The housing shortage may exist throughout the UK, but the economics of those different locations vary, according to a report from the Centre for Cities, Cities Outlook 2013 (the report is supported by the Local Government Association). The report largely argues for different and local approaches to the housing crisis, which is very real given the natural and immigration-driven population increase that has outpaced new house construction by a factor of two for the better part of 30 years.

The housing crash that was part of the larger worldwide financial crisis in 2008 certainly brought down real estate values everywhere. But true to the nature of housing values (as heavily documented in Cities Outlook 2013), the rebound has been spotty. London and the South East have recovered most robustly in 2013, says real estate advisor Savills. After disappointing reports in 2012 and the four years prior, house properties averaged across England and Wales rose 0.4% in May 2013, the fastest rise in six years – hearkening back to when the housing bubble was going full steam in 2007.

So does that mean a new housing bubble is forming? While that idea might strike some as ridiculous, here are a few perspectives on that possibility:

“Help to Buy” risks another bubble – According to Sir Mervyn King, the Bank of England governor, this three-year initiative which will have £12 billion of public backing, is too similar to the American government guaranteed mortgage market. By providing taxpayer underwriting of as much as 15% of mortgages on homes valued £600,000 or less, the programme might inadvertently send prices skyward.

London and the South East most at risk of a bubble – CNBC-TV, the financial news network, is also using the “B word” to describe what is happening in these specific areas, where prices rose faster than the national average of 0.4% in May (0.9% in London and 0.5% throughout the prosperous South East). “The gap between supply and demand in London is the largest it has been since spring 2009, said the Hometrack property analytics firm’s director of research, Richard Donnell. “In the last six months, demand has grown by 15% [in London] while supply has declined by 0.6%.” He says there is a reluctance to put homes on the market in these particular areas, given the uncertainties over jobs and housing availability elsewhere.

Basel III banking regulations and debt funding may restrict development – Real estate analysts at Savills forecast that serviced land (property with infrastructure, transport access and built structures) will achieve the 2007 peak values by about 2016. But because debt funding is limited, house builders will likely focus on smaller sites and build in lower volumes. This will tend to put a crimp on overall development such that the supply will remain tight, inadequate for the still-growing UK population.

The Savills analysis that homebuilders will lack necessary financing does not take into account the newer two-step model for developing raw land into built housing. Homebuilders now have an option: take on the full risk and extended time frame of development by buying raw land from farmers and other owners, or wait for an investor team to do about half of that work for them. In the latter scenario, investors in UK land, led by land development specialists, identify land with optimal development potential. Those specialists will have a well-informed approach to buying, being familiar with local zoning authorities who can make a designation change from, say, agriculture to residential and commercial uses. Once a purchase is made and that use designation secured, the investors often build key infrastructure features, such as streets and public utilities. Only then will a homebuilder step in to purchase lots ready to build. Profits may be split between both entities, investors and homebuilders, but so too is the risk cut by half.

Individuals who wish to participate in the investment phase are urged to do so with the help of a personal financial advisor.  The personal financial advisor can assess the value of alternative investment in land within a holistic view of one’s total wealth portfolio. They also should identify a strong land investment organisation that can illustrate success with earlier projects.

How Do Housing and Infrastructure Development Compare to Population Growth in the UK?

With the population of the UK expected to hit 66.8 million by 2030, there are many ideas on how that should be managed. The good news is solutions are being discussed.

The growth of the population in the United Kingdom runs counter to trends in many developed Western countries, where population is either flat or even in decline. For the most part, it is viewed as a positive, a revitalizing factor that energizes the economy and the culture. But it would be disingenuous to say that it does not come without challenges – and there are differing opinions on how it can be managed.

Aside from the housing shortage in the UK – attributable to a great degree to population growth, but matters of economics and lending standards from skittish financial institutions factor in as well – there is also a great deal of concern about the strain that ever-increasing numbers of people place upon the country’s infrastructure. From transport to resource demands to schools, more people require more of everything. How can the country manage if things continue on the same course?

The Building and Social Housing Foundation (BSHF), an independent research organisation that promotes sustainable development, has long held that increasing the private to-let and social housing sectors is essential, along with the supporting infrastructure necessary to support that. Without this, deep social inequity develops that negatively impacts just about everything else.

Another organisation, the UK-Green Building Council (UKGBC), devised the Sustainable Community Infrastructure, which seeks to deploy “integrated, cost effective, sustainable infrastructure such as community-scale power, cooling and health, water harvesting, waste disposal and telecommunications.” It places emphasis on urban planning and smart building, architecture that strives for net-zero energy use (power generation by the building itself through renewable sources, along with buildings that simply require less energy in the first place).

The UKGBC sponsors the country’s LEED certification program, but green building hardly stops there. The “Passivhaus” concept, pioneered in Germany, has taken root in the UK with 24 structures built thus far that achieve a very high degree of energy use efficiency. While perhaps too expensive to be built on a mass basis, these homes introduce ideas on sustainability that educate traditional homebuilders and which help develop a building materials supply chain with innovative products that can benefit all.

Forum for the Future, a London-based sustainable development non-government organisation, tackles the question on many fronts. It challenges the notion held by many that containing population growth is sensible or desirable. In its report “Growing Pains: Population and Sustainability in the UK,” the organisation argues that growth is inevitable and that all major public infrastructure bodies need to plan accordingly, preferably in cohesion and in consideration of many possibilities (i.e., with flexibility). A central point made is to “use what he have more efficiently,” meaning seek out improved technologies, renewable energy, improved water efficiency, a coherent and efficient transport system and innovative approaches to reducing flood risk. Where populations are located will matter, including how regional planning processes might shift where people live today to less populated areas (the report cites a skilled worker shortage in Scotland, for example).

The existing planning mechanisms in the UK have in recent years shifted authority to local councils, which can be an asset. There still are national directives, national schemes for increased homebuilding and national trend lines. But when an investment group, for example, asks to have a parcel of land rezoned to accommodate new housing, the local council has the opportunity to examine the proposal relative to very local needs. This is designed to speed up the process of land use changes and development overall. What is particularly important about this process is that market-led forces generally are more likely and more able to deliver what is most needed.

Investors in sustainable construction more typically see returns on investment over longer periods of time – say, seven years instead of three, because renewable energy features such as photovoltaic cells or tighter building envelopes carry front-loaded costs. That may not be workable in many development scenarios, however the imposition of carbon taxes, beyond the very low petroleum tax and climate change levy (CCL), would change the homebuilder ROI to something more immediate.

Individuals who consider joint venture land investment schemes should ask land investment advisors about matters of sustainability, as it might affect the viability of a project. But before getting to that point, an independent financial advisor should be consulted to determine if and how development risks and rewards factor into their personal financial portfolio.

Advisory: None of the information contained on these pages constitutes personal recommendations or advice. If you are unsure about the meaning of any information provided on this website, then please consult your financial or other professional advisor.

Cash vs. Debt Financing: Which Has the Upper Hand in Buying Raw Land?

Land investors are flocking to the UK because of high demand for housing. But investors with cash have significant advantages over those who work with debt financing.

The incontrovertibly rising demand for housing in the U.K. offers many opportunities to real estate investors. Homebuilders in particular, including all the subcontractors and ancillary services involved in building and real estate transactions, have a tremendous opportunity before them. It’s true that lending schemes, local planning and the extensions rule (largely disfavoured for causing strife between neighbours) may not be the magic bullets they were promised to be. But on the whole as populations increase so too must the dwellings to accommodate them.

This business opportunity arises from a confluence of demographics and economics. Already population growth was a solid 7 per cent in the past dozen years, as measured by Census 2011. Projections of population growth from 2008 to 2033 suggest that there will be 5.8 million more people in the UK as an end result, a 27 per cent increase in just a quarter century. But housing starts are at about half of what they should be to accommodate this growth, as they have been since the financial crisis began in 2008. Stringent lending in combination with working families unable to accumulate sufficient deposits have led to what is now called Generation Rent. But even as they rent, their growing families itch for more space – preferably what they themselves could own, but if not, larger rental homes.

Investors from North America, the Middle East, China and elsewhere are drawn to the opportunity British investors see in this. Many are buying single homes and flats, operating as landlords as they look for capital growth if not income from their investments.

On another level, investors are joining in syndications or joint ventures to develop raw land into new neighbourhoods. This amortizes risk among investors, but more importantly draws in professional site development specialists who understand how to do acquisitions, site planning, use designation changes, infrastructure development and ultimately sell the property to builders. From there, homebuilders who know the market will construct homes that are priced for the most likely buyers.

Some investment groups work with borrowed capital while others self-finance. A strong advantage in working free of debt is in the acquisition phase. If there is competitive bidding for land, the buyer who can offer cash has better leverage and is more likely to win the bid. There are other problems with debt financing, which include the following:

• Negative leverage, such as when the project experiences a lower rate of earning profits than the mortgage interest rate (as well as out-and-out losses).
• Greater risk in recourse lending, when the loan puts the borrower at personal risk, as might be the case when an individual is involved in a land investment.
• Missed payments have consequences, particularly if the lender determines to foreclose on its collateral.

Of course, there are many other factors that can determine whether land investing is successful or not. Professional land investment specialists who understand how to work with local planning authorities are essential, as is having the capital to see through site preparation (development of infrastructure included).

Individuals who are considering land investments should do so under the guidance of professional financial advisors. Independent analysis of any investment relative to one’s full portfolio is always a good practice.

Advisory: None of the information contained on these pages constitutes personal recommendations or advice. If you are unsure about the meaning of any information provided on this website, then please consult your financial or other professional advisor.

Are Housing Prices Inflated by “Middle Men” Land Investors?

Residential developers formerly bought land, built homes and then sold them. But now many hand only zoning and infrastructure, handing off building to builders.

With so much attention on Britain’s critical shortage of housing, much thought and discussion is given to the processes and regulations around home building and real estate development. Among the players who are so affected by the debate and who ultimately build homes are developers.

That said, “developers” are quite often two distinct players, one the one hand there are those involved in land investment and, on the other, there are those who build the homes. The former identify sites, obtain zoning designations necessary to align them with market needs, and then sell the property to builders. One question that arises is this: by having two stages and players in development, does it add to the overall cost of housing?

How this two-step process affects pricing is difficult to ascertain on a broad basis. One argument is that it theoretically could, while another posits that land investors and homebuilders share a natural division of risk and responsibility.

Land investors buy raw, undeveloped properties or brownfields with uncertainties around land use designation changes (zoning). They also need to project forward two or more years before the market value of the property reveals itself. The investor or investment group spends money on infrastructure: they build roads, sewers, water utility lines and sometimes electrical and broadband cable installations. The homebuilder, in contrast, will often construct houses on the speculation that a buyer will be willing to pay the price that fits their business model. These are very different equations that require very different sets of skills.

Some of the factors called for in the National Planning Policy Framework (NPPF), released in 2012 by the Department for Communities and Local Government, place certain responsibilities on those investors whose business is modeled around the creation of new housing. Those responsibilities largely fall on the investor side of development:

• Be sensitive and innovative around greenbelt land, where development may nonetheless be necessary. The developer should fashion land use to ultimately reduce resource use, enhance natural habitat and increase production of energy from renewable sources.
• Provide plans in advance that a development will be financially viable. No town wants a project to be approved and then derailed by cost overruns that are unmanageable or where construction standards are then compromised as a cost-savings method.
• Engage voluntarily with local planning authorities in the pre-application stage and sometimes with the local community. This would include developers availing themselves to any pre-application services that might be available.

So without question, the homebuilder needs to construct good homes for the markets to which they want to sell. But the land investor deals with an important part of the whole process that most homebuilders do not want to manage.

Individuals who are looking for alternative investments and who consider becoming part of the investor portion of the process generally work with groups of financiers who hire specialists with a good understanding of land and land economics. Those investors are urged to contract with an independent financial advisor to set their level of involvement in relation to their portfolio risk standards.

Advisory: None of the information contained on these pages constitutes personal recommendations or advice. If you are unsure about the meaning of any information provided on this website, then please consult your financial or other professional advisor.

So, It’s a Free-for-All in Land Planning?

Is it a free-for-all in land planning?

Well, not quite!

The Government is proposing some significant reforms to "provide a comprehensive plan to unleash one of the biggest home-programmes this country has seen in a generation," in the words of Prime Minister David Cameron.

The proposed reforms include the following:

• Large commercial and residential applications will be directed to a major infrastructure fast-track system;

• The government will invest in housing sites to create 5,000 homes for rent at market rates;

• The Planning Inspectorate has been instructed with immediate effect to divert resources to prioritise all major economic and housing-related appeals;

• Affordable homes will not be required where it can be shown that to build them what make a scheme unviable;

• There will be a measure to allow developers the chance to seek additional time to get their sites up and running before planning permission expires;

• Developers will be able to opt to have their planning application determined by the Planning Inspectorate instead of poor-performing councils.

Other measures include:

• New legislation for Government guarantees of up to £40 billion worth of major infrastructure projects and up to £10 billion of new homes. The Infrastructure (Financial Assistance) Bill will include guaranteeing the debt of housing associations and private sector developers.

• 16,500 first-time buyers helped with a £280 million extension of the successful "First Buy" scheme, which offers aspiring homeowners a much-needed deposit and a crucial first step on the housing ladder.

The Governments see an infrastructure and house-building programme as a key factor in delivering a prosperous economy; as in the 1930s, we are going to build our way out of the recession. Eric Pickles, Secretary of State for Communities and Local Government, said, “This Government wants to get the economy growing. To remove unnecessary red tape. To support locally led sustainable development.”

The above measures are to be applauded. The planning system will remain fundamentally intact; however, measures to reduce bureaucracy and promote an efficient, timely planning system, allowing good-quality development to proceed quickly, will provide the infrastructure, jobs and economic boost necessary for the UK economy to thrive.

~ Anthony Brindley, Lucent Group UK ~

What is the Root of Home Shortages in the UK?

Speaking of ‘the UK housing shortage’ misses the point. Cities Outlook 2013 says thatlocalizing the problem might be the national solution.

It is conventional wisdom in the United Kingdom that there is a housing shortage. And while that in fact is quite true and is evident in the high cost of housing overall, it is wrong to think the shortage is emblematic of only the economic downturn since 2007. In fact, this shortage goes back at least 30 years and arguably is due to failures in government policy in combination with robust population growth.

Various economics and population studies suggest that approximately 232,000 houses or housing units need to be constructed per year, simply to keep up with population growth (about 7% over the past decade, according to Census 2011).  But since the mid-1980s, housing completions by the three main sectors – private enterprise, housing associations and local authorities – have exceeded that number only once. The shortfall has been cumulative and has rapidly gotten worse since the burst of the housing bubble that peaked in Q3 2007.

But the actual picture of housing shortages is mixed when examined city by city, according to a report titled Cities Outlook 2013, sponsored by The Centre for Cities and supported by the Local Government Association. According to their study, the problems in the housing sector vary considerably from city to city. London currently has the least affordable housing and highest demand found today, in 2013, greater than it was in 2007. This same situation of elevated prices and high demand is found in Cambridge and Bristol. In weaker economies (Hull, Hastings and Middlesbrough, for example) prices are lower, the existing housing stock is poor and jobs are lacking, illustrating how housing inventory is a vastly different picture and subject to, but not a driver of, local economic conditions (the quality of local jobs and connectivity to other markets are more influential to those economies).

This matters more than just how crowded and unaffordable housing has become. The Cities report also details how housing markets impact local economies in three key areas:

• Business and enterprise – A robust housing market, where buying and selling transactions occur, stimulates several industries: construction, estate agents and the mortgage industry, to name a few. When housing is expensive, it effectively puts a cost burden on business if companies need to pay more to attract essential workers to an under-built area.

• Labour markets – Workers are drawn to not just jobs but an area’s quality of life, therefore outsized housing prices tend to discourage labour mobility. And for those workers who move to expensive housing markets, consumption of other goods subsequently declines, negatively affecting the local economy.

• Infrastructure – Housing development is intrinsically related to transport infrastructure and consequently needs to be considered holistically: Build the roads and rails from public coffers as private investors and perhaps housing associations add to housing inventory.

According to Cities Outlook 2013, the crux of the problem is that housing policy and programmes are set on a national level. This then fails to address local challenges and opportunities (e.g., the Infrastructure point above). For example, some of the locales where housing is more plentiful (indeed, many properties are abandoned but could be rehabilitated) benefit little from new-construction incentives (which is how the “Help to Buy” scheme is largely focused).

Initiatives such as Get Britain Building, changes to the National Planning Policy Framework and the New Homes Bonus accomplish this inadequately, says the report. It acknowledges the Localism Act does this in part, but argues instead to jumpstart home building in 2013 by two means: focus government policy on development in the specific cities where housing demand is greatest, and incentivise retrofits and reconfigurations as well as new-build development. To this latter point, the government should look at cities where vacancy rates are highest then target funding and zoning powers to retrofit and build new, whichever makes the most sense (i.e., allow for local decision making).

Without question the role of the private developer is essential – centralised development that is too heavily focused on social housing does not lead to a balanced and thriving community. Increasingly, private development of housing involves groups of investors who work with professional strategic land buyers, who themselves develop raw land or brownfield properties where demand is greatest (and where public policy is amenable to such development).

Individuals who are unschooled in land development should consult with a qualified personal financial advisor to determine how and where their money can be wisely invested in housing development. As should be clear, it is a complex arena where special skills are extremely important.

Building Depreciation Versus Land Appreciation

Buildings Can Sometimes Lose Value While Land Investment Values Grow

The characteristics of property that contain buildings are different from undeveloped land. These differences affect value growth of both asset classes.

Real estate investors are growing in number under current economic conditions due to several factors. One is that traditional investments in the stock markets are providing disappointing yields. Another is that real estate overall suffered in the global recession and properties of all types are potentially undervalued.

But land that is undeveloped differs significantly from that which has buildings and infrastructure components (water, waste removal and utilities) and is proving to be one of many viable alternative investments.

So why do changes in the value of undeveloped land not mirror those of developed land.  There are several factors at play here:

•    Simple physics – The principle of atrophy applies very directly to built property. In addition to the costs related to routine maintenance, all buildings require major repairs over time. The costs can be a significant factor on landowners’ balance sheets.

•    Adaptability to market needs at time of sale – In addition to a propensity to age and break down, built property is inherently inflexible. For example, a structure built to be a hospital can only become a residential building with extensive renovations. However, undeveloped property can provide optimal economics to builders, buyers and occupants at key moments. By engineering smart site assembly, the investor can accomplish strategic land development that efficiently meets market needs.

•    No tax benefit to building depreciation – American investors are accustomed to a depreciation formula on investment property, which unfortunately is non-existent in the UK tax laws.

•    The beneficial value of new – Some buyers want to be the designers and first occupants of structures. This is even more pronounced in this era of green building, where structures today are significantly more energy efficient and sustainable than those built as recently as five years ago.

Of course, this is not an either-or scenario. Different investors work according to different strategies, asset allocation/diversity and on different timelines. Also, some investors have the technical knowledge to manage and improve a property, while others work with consultants or fund managers (when an investment is made with several sources of funding in collaboration) or through joint ventures. For more information on the type of land or property investment in the UK that might be right for you, contact a qualified personal financial consultant.