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 Private Investors Work with the Homes & Communities Agency?

Government involvement in housing is typically centred on social housing. But private funders also work with the HCA on investment properties.

The purpose of the Homes & Community Agency (HCA) is to encourage development of private housing that is affordable and which enriches local communities. Historically, funding has come from the National Affordable Housing Programme, however part of the Agency’s work is to marry private investment with its projects. Current objectives include working with strategic land investment companies to bring projects to live, bringing empty homes back to use, continuation of the Mortgage Rescue scheme, restoring social housing in disrepair and supporting the FirstBuy affordable home ownership scheme.

The agency has been very instrumental in aggregating private investors with housing organisations. Included in this are the Get Britain Building programme, involving the Agency with the Notting Hill Housing Group and the Greater London Authority in a £90 million plan to rent 140 new rental units in London. The arrangement provides investors with income as well as capital growth, a combination not always found in to-let housing investments.

Another private-public investment programme is the Build to Rent Fund, which involves the Department for Communities and Local Government, the Homes & Communities Agency and the Greater London Authority.

These programmes are key parts of how the government is working to address the critical need for housing in the UK. London Mayor Boris Johnson is in full support of such efforts: “With London’s population expanding at record pace, we need to build around a million new homes in the next 25 years to meet demand and avert a possible housing crisis,” he says. “Increasing supply in the private rented sector has a massive part to play in this. Building new, well-designed homes to rent will also lead to a more balanced rental market for Londoners, as well as providing construction jobs and stimulating growth for London’s economy by making it an even better place to live and work in.”

Of note, rental housing has significantly grown since the financial meltdown of 2008. The Office of National Statistics reports that 3.8 million more people are renting today than in 2009. Investors see opportunity in both rental and to-buy development.

The HCA also works on land regeneration (remediation and reclaiming contaminated land), development of local infrastructure and public sector landowners. The goals of all investments made by the Agency are to contribute to overall economic growth, as housing is integral to prosperity and quality of life. Part of how the agency accomplishes that within the government’s “Plan for Growth” is to providing expertise on housing and physical regeneration.

All of this underscores the need to be creative on multiple fronts at addressing the critical housing shortage facing the UK. Housing is integral to economic strength as much as quality of life, both of which have suffered in the past several years. Private investment plays a similar role, as investors and homebuilders endeavour to develop new market-rate housing, for sale or to-let, in areas where the growing local economy requires it.

Private investors in housing need to do necessary due diligence on any investment, ideally through an independent personal financial advisor.

Historical Examples of Wealth Accumulation through Investment in Land

History holds many examples of significant wealth accumulation through land.

Most of the largest landowners today are royalty, and yet some of history’s wealthiest commoners came to their money through real property.

Throughout history, ownership of land has been the single most prominent indication and source of wealth. Until a few hundred years ago land was the sole source of food, of course, which either the landholder farmed himself or, as was the case in feudal society, he essentially rented it out to others – serfs – for them to maintain.

The industrial revolution shifted the balance of wealth accumulation, somewhat, to owners of capital (factories and machinery as well as property), yet land remains one of the most important means of wealth accumulation and preservation. Some of the richest people alive today derive or preserve their wealth from ownership and transactions of land.

The list of the top 20 richest people in the U.K. includes four whose primary wealth is in land. From a list published in 2012 in the Sunday Times of London, land-rich people include the Duke of Westminster (Grosvenor property group), brothers Simon and David Reuben (who own the Millbank Tower in London), Joseph Lau (whose £33 million home is in Eaton Square in London) and Earl Cadogan and family (whose £3.4 billion estate includes 93 acres in Chelsea).

Across the globe, other names that fall onto “biggest landowner” lists are largely, but not exclusively, inherited royalty. These are Queen Elizabeth who technically “owns” 6.6 billion acres in Great Britain, Northern Ireland, Canada, Australia and the Falkland Islands (an incomplete list); King Abdullah of Saudi Arabia, also the technical owner of the 830,000 square miles of the kingdom; Pope Benedict, whose Vatican City is 110 acres within Rome plus another 177 million acres of Catholic Church properties around the globe; King Mohammed VI of Morocco, with a 175.6 million acre kingdom; King Bhumibhol of Thailand (128 million acres, including prime coastal properties); the Sultan Qaboos of Oman, whose country of 82,000 square miles lie largely in the desert; King Gyanendra of Nepal (57,000 square miles, including Mount Everest); King Abdullah II of Jordan (35,637 square miles); King Jigme Khesar Namgyel Wangchuck of Bhutan (15,000 square miles); King Letsie 111 of Lesotho (11,718 square miles, which includes diamond mines); the Emir of Kuwait (4.4 million acres, of 7 million in the nation); King Mswati of Swaziland (6,704 square miles); the non-royal James, Arthur and John Irving of Canada (owners of 3.6 million acres of land in Maine, New Brunswick and Nova Scotia); Sheik Hamad Bin Khalifa of Qatar (all 4,415 square miles of the small but strategically-located country); and CNN founder Ted Turner, whose accumulation of properties in Georgia and Montana (states in America) and in Argentina total 2 million acres. (Source: BusinessInsider.com)

As the American writer Mark Twain said, “Buy land, they’re not making it anymore.” Indeed, as the population of the U.K. continues its brisk ascent – about a 7 percent net growth in the past decade – the finite nature of the country’s land presses the matter further. There is a housing shortage and soon there will be a need to develop residential property to satisfy this growing need. The investor who can effectively accomplish land site assembly that meets market needs wins the day.

Individual investors – those who aren’t born to royalty – sometimes have the skills and knowledge to make strategic land investments in their own pursuit of personal wealth. But other investors enter into joint ventures with professional UK land investment strategists as a means of making strategic investments and development. For more information, consult with a qualified personal financial advisor.