Can Value Growth Potential Still be Found in UK South East Raw Land?

Real estate values in London and the South East have proven to be more resilient in the recession. But does that mean raw land investment opportunities still exist?

The recession that began in late 2007 has had a different effect on London and the South East than in the rest of England, Wales, Scotland and Ireland, as well as most other parts of the Eurozone. That is, while prices of homes fell everywhere, deeply in many areas, those drops were not as pronounced and the recovery has been more robust in the South East and London.

According to a publication, The UK’s Housing Crises/CentrePiece Winter 2012, by Henry Overman, director of the Spatial Economics Research Centre and a professor of economic geography at the London School of Economics, the two areas both experienced about a 9.3% drop in value from 2007 to 2009. London recovered quickly, with a 5.5% rise by 2012, and the South East a bit more slowly, reaching a 2.3% rise by 2012. Compare this to a 12% drop in the North East and 10% in the North West.

The declines in construction in all regions have been even more pronounced, notes Overman. “There has also been a severe slump in construction in these parts of the country,” he says. “In the North East, construction (measured as permanent dwellings completed) has fallen by 36% from its 2007/2008 peak.”

Overman points out a key difference in construction activity between London and the South East compared to points North and West. A slowing of construction activity there, he says, “is somewhat less pronounced: 12% down from the peak for London; and 19% down from the peak for the South East.” So, for the homebuilding industry and its investors, business has been quite slack, but less so in London and the South East.

This provides important points of consideration for both those who engage in land investment and those who invest in homebuilding. One might gamble a bit to invest in other parts of the country, where prices of existing homes and land are lower than elsewhere; the question remains as to where and when the upside will come. Or, they might instead invest in London and the South East, where economic activity was harmed less by the Great Recession, and where recovery seems to be underway.

Of course, as the most populous and economically advantaged area, is there still an upside to buying raw land in places such as the South East? Given that there is no raw land to speak of in London proper, the answer there is a simple “no.” However, PropertyWire.com, an industry web publisher, says, “the rest of the country is way off peak [2007 values]…[but] the South East is expected to be the next region to recover to peak values.”

The publisher goes on to note that the real estate firm Savills predicts that serviced land values will not return to their former peak before 2016. The director of development research at the firm notes that population projections suggest an expansion of London into the outer zones, including perhaps Green Belt lands as planning authorities might allow. In particular, he notes that government-sponsored “new build schemes” should encourage building to suit the middle market, which is significantly undersupplied across the country.

Perhaps the key point in Savills’ prognostication is that already-serviced land will not peak for until 2016. Where there is un-serviced areas – raw land appropriate for future development – there therefore remains opportunity for asset growth.

There certainly is raw land in the region, the development of which is dependent on increased population and economic growth factors. A good example might be Fareham, situated between Southampton and Portsmouth. A market town, Fareham has evolved from its industrial past producing bricks and chimney pots to becoming a retail mecca, as well as a base for call centres and banks. Regional planners call for the addition of 13,700 new homes in the area by 2026. This will require much land development.

Fareham is just one example, illustrating the pro-business and pro-employment zeitgeist of the region. As town centres expand to accommodate new employers, land investors and developers will play an important and essential role in providing housing for workers.

Individuals who consider making alternative investments, particularly raw land assets, should independently meet with a personal financial advisor. This counsel will help the investor weigh the pros and cons of real estate opportunities within the context of the individual’s complete financial portfolio.

Before Buying Raw Land for Development in the UK, What Due Diligence is Advisable?

With a press for new homes in the UK, investors are looking at raw land for development. The acquisition phase should include a thorough due diligence.

When investors look at raw land for its development potential, it can be an exciting process. But part of that excitement can mean moving fast when the opportunity is there – faster than a competing investor might be able to do.

A factor that necessarily slows this process – to good effect – is due diligence. This is the necessary probe into unseen and potentially problematic features of the property. We do not buy cars without a test drive and a thorough inspection of the vehicle, inside and out. The same can be said, writ large, on the acquisition of property.

The basic review of the due diligence process should include the following characteristics of the proposed land acquisition:

• Physical – What is topographically amenable to development, including subterranean barriers (rock that is difficult to excavate, for example), slope, wetland presence, archaeological features and potential toxic contamination? Also, a boundary survey needs to establish these topographical features and if any structures improperly encroach on others’ land.

• Legal – Aside from clearly established title, any existing covenants, liens and rights-of-way should be uncovered in the due diligence process. Zoning and site plan approvals also are critical and can sometimes be “deal breaking” considerations.

• Financial – Price and value of a property are not always the same thing. To the investor, it’s about buying low and selling high, so in the pre-purchase phase a realistic look at both parts of the equation is critical to the entire enterprise.

• Sustainability – Properties’ sustainability performance is about more than “doing the right thing,” however that still is a fine motivator and one that can favourably impact the future marketability of a property. But it can also affect the property’s economic performance in rental growth, duration to let, depreciation and the time required to sell the property. Of note, residential and some commercial built properties place high values on sustainability features, while some “green” scenarios can be a poor fit with industrial development.

• Social – How will this land transaction affect the surrounding community? And of equal importance but a slightly different question, how will the community perceive that it will affect them? Development always means change, and change almost always meets resistance. That said, advocates for affordable housing have come to be advocates for development, alleviating the outsized demand with an increased supply, which tends to lower prices.

From there, the investor can assess external factors that determine the land’s potential investment performance. This may have little to do with the land in its current state and much more to do with external variables: the potential for use re-zoning (amenability to change on the part of local planning authorities), the market needs for housing, and the economic equations under which homebuilders in the area conduct their business. Land that cannot be re-zoned, developed and re-sold is not land that is attractive to most investors with mid-term goals (i.e., to recoup their investment with growth in two to five years, for example).

While formerly the province of single land developers, individuals with £10,000 or more are participating in UK strategic land development within joint ventures. As such investment groups are coordinated by land development specialists, much of the risk is mitigated with a thorough knowledge of the industry – and application of the due diligence process. The new investor in land should weigh such ventures within the risk structure of his or her full portfolio, preferably under advisement of an independent financial specialist.

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.