How to Mitigate Risks in UK Land Investments

What are UK land investment risks and how are they mitigated?

Three factors improve land investments for housing: Funding for Lending, local planning authorities and splitting risk between investors and builders.

The rate of building new homes in the UK should be about 230,000 per annum, and yet the country’s homebuilders are constructing only about half that number. Naturally, that translates into very high housing demand – which to the alternative investor in any form of development (including those who acquire raw land to develop into residential property) should be indication of a pretty good financial bet.

But the housing market can be tricky. First, there are many who are quick to criticise the government for failing to provide programmes that can effectively restart the housing sector. Second, planning authorities answer to local political considerations more than investors’ needs to seek a return on their investment; they often cite greenbelt traditions and restrictions as reasons not to grant zoning changes that would allow development. Third, building structures on speculation there will be buyers may not be the land investor’s best talent.

These tend to be problems encountered by the unseasoned investor, however. Note that while inadequate, about 100,000 homes still are built every year. How do professional land investment fund managers do it? The answer largely lies in how each of those confounding factors are mitigated:

• Government programmes – The Funding for Lending scheme, instituted in 2012, is beginning to show signs of having a positive effect. Unfortunately, it hasn’t unleashed a boom in homebuilding and home buying just yet and is criticised for its downward effect on returns to savers. That said the stakes are high in political circles to find solutions that will truly stimulate the economy. To the land investor, perhaps the best advice is to acknowledge the government might be able to help things along, but it would be unwise to depend on it.

• Local planning authorities – It would be foolhardy for any investor to purchase land without some knowledge on how the local planning authorities would rule on a petition for a zoning change (note: generally speaking, a use re-designation can be a very fast way to add value to some properties). Professional land development specialists have relationships with the political structure and members of the LPA that allow fair knowledge on what might be granted.

• Building on speculation – While in past eras the land investor covered the full range of development, from dirt to doorsteps, the process has been bifurcated to allow homebuilders to assume some risks and rewards. Investor groups, working with specialists, can acquire land and build infrastructure to support building (roads and utilities, primarily). But the actual home building and capital it requires can be handled by homebuilders. This not only mitigates risk, it brings in two sets of business analysts to assess the potential for the property at an early state.

What should be apparent is that land investments are like any other asset: there will always be some risk. Would-be investors are advised to speak with independent financial advisors to determine what degree and type of risk is tolerable in their portfolios.

How to Identify Qualified Joint Venture Partners in Land Investments

Qualified land investment joint venture partners a lynchpin of smart investing.

The history of land investment and developed real estate are instructive. Having the right joint venture partners is a key component.

In the UK, Canada and American real estate circles, the 1980s story of Olympia and York (O&Y) is often cited as a lesson learned. The highly-capitalized firm ran into an unfortunate set of circumstances with its Canary Wharf (London) and Manhattan properties in the late 1980s and early 1992, ultimately declaring bankruptcy with $20 million in arrears to various banks and investors.

The family running the firm, the Reichmanns, were seasoned real estate professionals. However they were overleveraged in two markets that were going through a pronounced slump. Their story provides a sobering picture of how even experienced investors can get involved in property and land investments that sometimes fail spectacularly.

Still, real estate in general is the means by which many of the world’s greatest fortunes have been built. And it’s not a game of Monte Carlo-like chance: there are key characteristics of joint ventures in land that increase investors’ odds of achieving asset growth. They include:

• Experience in the type of land investing being undertaken – There are many ways to invest in real estate: existing commercial properties, raw land, industrial warehousing, residential development and real estate investment trusts (REITs). One or several partners in a joint venture should have expertise in the type of investment where you put your money.
  
  For example, a raw land investment would best be managed by professionals who understand how to turn otherwise dormant property (or what might be currently used for agriculture, for example) into viable residential development. This requires acumen with local planning commissions, being able to judge the likelihood of a zoning change that would benefit the local economy. It is not a task for amateurs.
  
  
• Shared ROI interests – Some investors expect a return on their investment in one year. Others are patient to wait two, three, four or five years or longer. What doesn’t work is when a joint venture partner is on a different schedule and therefore wishes to exit the investment early. Investment managers should be able to project when a real estate investment will provide an optimal payout – and then deliver on that projection.
  
  
• Appropriate allocation of funds (e.g., focus on a single property) – To avoid the mistake made by Olympia and York, it is important that the fund investment managers have a demonstrable track record of success. Just as important, their funds and managerial attention should be focused on properties where economic factors are promising. For example, in the UK market a growing population and under-investment in the housing stock during the past ten years is driving high demand for housing. Whether those properties are built for sale or to let is a matter for further discussion, but suffice it to say people need to live somewhere and that need shows no sign of abating.

Ultimately, remnants of O&Y recovered some of the company’s fortunes in the UK and Canada (but not the US). They and their investors learned their lessons – and prove once again that great fortunes can be achieved with real estate and land investment.

Be certain to work with a personal financial planner when considering any type of investment, be it in real assets or traditional market-traded securities.

How Property Fund Investors Can Fare Better than Real Estate Developers

Are real estate developers disadvantaged relative to property fund investors?

Most real assets are performing better than the volatile stock market. But for some, property funds hold greater attraction over developed real estate.

Since the financial crisis of 2008, investors have soured on traditional investments due to factors of poor performance. Instead, they’re turning toward alternatives that include land investments and property funds. The reasons for this are easily understood: The growing housing shortage in the UK portends good near- and mid-term value growth for all aspects of residential real estate, particularly in light of robust (7 per cent since 2001) population growth.

Of course, not all real estate is the same for investors. Within real estate are two distinctly different types of investments, built properties and raw land. Some investors choose built properties or to invest in the developer who is managing the construction and sale of homes and commercial structures. An option to that is raw land, ripe for plan rezoning from, say, agricultural to residential-designated land.

Both have their merits, of course. But land investment might hold the advantage for at least three reasons:

• Adaptability to market needs – Raw land can be converted (pending approval of Local Planning Authority approvals, of course) to the use that is most critical to the local economy. This flexibility allows the land investment fund to prepare parcels for what will be needed in a relatively short period of time. On already-built property, investors have only what is there unless circumstances allow for the extraordinary expense of demolition and rebuilding – which only rarely makes sense from an asset growth perspective.

• Less investment in development (and associated risks) – The boom-bust cycles of the past several decades remind us of how a billion Pounds can be squandered rather quickly when a large property comes online at the precise moment when no one wants it. See “Canary Wharf, Olympia & York” for a spectacular illustration of how badly property investments can fail.

• More liquidity (but still not volatile) – Perhaps the Achilles Heel of real land assets is the illiquidity of land, with or without property. But land investments that at most involve the light infrastructure required of residential neighbourhoods (roads, sewers and other utilities) are much more easily sold than property involving structures. While that pales in comparison to real estate investment trusts for liquidity, real property is not nearly as subject to market fluctuations as are REITs.

To be sure, both investors in property funds and land investments tend to achieve asset growth in well-managed situations. But from land to property development, the path is quicker. With a seasoned team of land investment professionals, a joint venture partnership can identify and manage properties for maximum value appreciation and resale between 18 months and five years after acquisition.

All investments carry risk and should be considered in relation to one’s full portfolio of financial instruments. Be sure to contact a personal financial consultant before embarking on any investment.

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 ~

Lucent Strategic Land Fund – Liquidity Position

In light of the difficulties recently experienced by several funds that have led to their suspension or closure I wanted to reiterate the robust controls that the Lucent Strategic Land Fund (LSLF) has in place to ensure its continued financial well-being, particularly with regard to fund liquidity.

Admittedly real asset funds do not have the same liquidity as a daily traded equity fund. This is something that investors should always bear in mind. Liquidity therefore has to be carefully managed. This is an area the Investment Advisors and the Fund have to plan for, both during the initial submission of the file to the regulator and on an on-going basis.

The LSLF fund is domiciled in Luxembourg and is regulated by that country’s financial services authority, the Commission de Surveillance du Secteur Financier (CSSF).

LSLF’s Directors take the management of the Fund’s liquidity very seriously indeed. LSLF has the capability to call on a 30% liquidity margin. This is a significantly higher margin than property funds typically have. A minimum of 10% of the Net Asset Value (NAV) of the fund is always maintained in cash.  In addition, the Fund can facilitate access of up to 20% of the NAV in order to meet, if needed, exaggerated redemptions.  It is able to do this because the LSLF does not use leveraging for asset acquisition.  For clarity, the Fund does not use bank debt to finance acquisitions.

An important competitive advantage the LSLF has over and above other types of property funds is the divisibility of land.  This, together with the fact the Fund’s land assets are not leveraged means that the LSLF can, if need be, sell off part of a site. Indeed larger projects such as the Lincolnshire Lakes project are capable of, and planned to be, multi exit deals with the phased delivery of the asset to national housebuilders and commercial participants. This provides the Fund with, in effect, a ‘rolling liquidity’.

Furthermore, the above phased sale capability, in conjunction with the lack of leverage, gives a competitive advantage over commercial property funds.  Whilst the LSLF can sell off part of a site, a property fund, that has leverage on a 30-story office block, may find it difficult to sell, say, 15 floors.

All of the above make the LSLF’s liquidity position a robust one.

Liquidity is recognised as an extremely important issue by the Directors of the LSLF and is managed in a manner that has been found to be satisfactory to the institutions with whom we deal.

~ Chris Westerman, Lucent Group UK

Lucent Group Attracting Global Investment

When it comes to investing in UK strategic land, it’s all about timing.

There is an acknowledged housing shortage in England and a population forecast to increase by 17.5% within 20 years. Existing housing stock needs to increase by 29% by 2031. This presents a huge opportunity in land development to which Lucent Group is uniquely well placed to respond.

Lucent is the only group in the UK able to undertake a rigorous land acquisition process backed by the proven "in-house" land skills that are necessary to bring land forward for development. This is done without bank finance given the Group's own international fund-raising capability via the Luxembourg-domiciled and -regulated Lucent Strategic Land Fund (LSLF).

An International Proposition

Given that land is obviously such a country-specific asset class, the UK has been a natural and very supportive market in terms of investor inflows. The positive and compelling fundamentals that are driving the market in UK strategic land have, however, also been recognised by international investors. Since its launch in September 2010, the LSLF, an open-ended SICAV–SIF domiciled in Luxembourg, has attracted investors from the Far East, Latin America and other countries in Europe as well as from the UK. This has not happened by chance. Lucent’s global distribution network has worked hard to bring the opportunity that the Fund presents to an international audience. Seminars have been held, and visits made, to all of the above regions in order to support the Fund's distribution. The response of these various markets has been positive without exception. In today’s global marketplace, wherever an investor is based, a sound investment proposition from anywhere in the world, is something that will be considered.

The Opportunity

Timing has of course been critical to the Fund's success. The launch of the Fund in 2010 was in response to the circumstances created by the financial crisis and its impact on the strategic land market and its participants. House builders have been forced to find ways of reducing their building costs because of constraints on their equity resources. Finding more capital-effective means of acquiring land ready for development has been critical to them, and Lucent has responded to that need. The Fund has been ideally placed to act as the leading platform in preparing and delivering land ready for construction to the national house builders. The LSLF undertakes the acquisition, design, master planning and promotion of strategic sites and then sells consented land onto the house builder market.

The Fund is undertaking an intensive acquisition and planning period in order to deliver "oven-ready" sites to the house building market as demand for development land peaks. There has been a lot of activity in the house-building sector over the past four years. House builders have undertaken rights issues to raise capital and replenish their land stocks so that they are able to deliver new housing at a time when demand is greatest. The impact of this is already apparent. Development land values are rising. The strategic land market is being driven by a very different set of fundamentals from those affecting the property market in the UK.

Market Background

Given the above, the launch of the Fund in 2010 was well timed at an industry sector level. The same is also true when considering the timing of the launch in macro-economic terms. At a macro level the market in UK strategic land is being driven by demographics, and when a market is driven by demographics, its progress is unstoppable. The BRIC (Brazil, Russia, India and China) economies are testament to this. Figures from the Office of National Statistics (ONS) show a significant increase in the UK population over the next 20 years. It is not the fact that England is currently the most densely populated country in Europe that is key – it is the fact that this density is set to increase markedly. There are currently 395 people per sq km.  By 2031 there will be 464 people per sq km., an increase in population from 61.3 million to 71.6 million. When this map is considered in conjunction with the chronic housing shortage that exists in the UK (reference to which you see regularly in the press), the growing demand for strategic land with residential planning consent becomes obvious.

According to the Department for Communities and Local Government (DCLG), in a report published in November 2010, the number of households in England is projected to grow to 27.5 million by 2033, an increase of 5.8 million (27%) over 2008. All regions throughout England are in need of major urban expansion. Little wonder, then, that there is such strong cross-party political support for the need to bring more land forward through the planning system.

Trends in Financial Services

As mentioned earlier, timing is critical. For the LSLF timing has been perfect. Not only have the micro- and macroeconomic fundamentals and the political and demographic backdrops been supportive, but so too have been the recent trends that have evolved within financial services. A recurring theme, reported by Independent Financial Advisors (IFAs) in all the markets from which Lucent’s global distribution receives business, has been the demand of clients to "show me something different." In the past, UK strategic land investment was an asset class dominated by large institutions and the super-rich. The LSLF has made this asset class available, for the first time, to individual investors. It is delivering a new option at a time when clients are demanding something different as a consequence of their dissatisfaction and disappointment over the past few years with the major asset classes. The Fund has helped IFAs to meet this client demand. Predictably that enthusiasm has gained momentum with IFA’s and their clients, family offices, High Net Worth individuals and Discretionary Fund Managers as the returns available from strategic land have become apparent to them.

The LSLF has provided returns in excess of 50% since launch and has significantly outperformed the FTSE All Share Index over that period. IFAs have also been able to use the Fund as a means to address clients' increasing concerns over future inflation. History has shown that investment in a "real" asset such as land is a very effective, timely hedge against inflation. Lucent Group is the foremost land site assembly specialist in the UK. The LSLF has been launched by a group with direct land experience – not by a fund management company with no such experience. That much at least is not just about timing.

~ Chris Westerman, Lucent Group UK

Land Supply in the UK

Much has been made of the various government initiatives to both kick start the UK’s economy and increase demand for housing.  Several programmes were introduced in the Budget in April 2013:  the Help To Buy Mortgage Guarantee scheme, the Help To Buy Equity Loans scheme and the Build To Let scheme.

According to Kieran McLaughlin, a Director of Jones Lang LaSalle, together with a significant uplift in mortgage approvals – up 25% since January – and the re-emergence of the 95% mortgages from providers like Halifax, these initiatives have boosted market confidence.  Indeed the share prices of the main house building PLCs have increased by 50% on average since the beginning of the year.

There are concerns however that all this demand side activity will do little more than create another housing bubble unless there is also an increase in supply.

Planning Minister Nick Boles seems to understand this predicament and is looking at ways to improve the supply of land and housing to try to meet an ever-increasing shortfall.  Whilst Government figures suggest that England needs to build 232,000 new homes a year to keep pace with demand, in 2012 only 115,000 completions were recorded.

Mr Boles has previously suggested that it might be necessary to build on green belt land.  He has however also stated the importance of good design.  In an address to the National Housing Building Council in June 2013, he said that high quality, appropriate design would make it more likely that planning approval would be granted.  And in August he suggested that empty or boarded up shops on the nation’s high streets could be converted into housing.  With an estimated 14 per cent of high street shops now unoccupied or boarded up, and with the growth of both out of town malls and Internet shopping, this is an idea worthy of serious consideration.  It seems evident that if we are unable to improve the supply of housing, then house prices will continue to rise.

At Lucent we fully support Mr Boles’ views as to the importance of design.  This is why we have worked with urban planners, Allies and Morrison to develop the plans for our Lincolnshire Lakes Development.  And this is why we are also working with several other leading companies to ensure that the development is of the highest quality in terms of ecological mitigation, leisure and recreational facilities and infrastructure improvements.

We are also looking at urban sites such as in Southampton where our cutting edge design will transform the Royal Pier Waterfront site into a must-visit mixed-use destination.  In addition we are working with other councils across England to find innovative ways to bring land forward for develop to the benefit of all parties involved.  Wherever we work, we are committed to creating sustainable communities in which people wish to live.

And we will continue to play our part as strategic land specialists in supplying consented land to those who are hungry to build homes to meet the demand for housing in the UK as well as providing an outstanding capital growth opportunity for those wanting to get involved in alternative investments.

~ Anthony Brindley, Lucent Group UK ~

Global Banking and Finance Review

In October 2012, Lucent Group announced that the Lucent Strategic Land Fund had grown in value by just over 50% since it was launched in 2010.

The market case for strategic land development is overwhelming: There are many more people wanting homes than there are homes available. This acute housing shortage in the UK means there is a high demand for "oven-ready" sites that can be developed for residential or mixed use. Official projections show the need for an additional 232,000 homes to be built in England every year just to meet current household growth. And yet in 2009 there were just 118,000 housing completions; in 2010, 102,570 completions; and in 2011, 109,020 completions. These figures have helped to create strong cross-party political support for the need to boost the house-building sector and for changes to planning laws that are designed to make the development of land easier. The constraint on the delivery of "ready-to-build" land is the single biggest hurdle to increasing housing supply.

The delivery of strategic land is what we do. Lucent focuses on the most profitable part of the land development process: acquiring sites that have been identified to come forward for residential or mixed-use development within their respective local plan but that do not yet have detailed plans or permissions. Lucent then works with its own in-house team of specialists, augmented by a select group of professional consultants, to produce sustainable "development-ready" land sites before selling them to house builders or other development companies.

The Fund was launched at a nervous time for investors, but it has now grown to a critical size with acute interest from sophisticated and institutional investors across the world. Since the Fund opened in 2010, the shares have risen in value by 50.99%. So far this year, the Fund has grown by 11.01%. In the recent investment climate, this is a remarkable achievement.

The increase in value has resulted from Lucent delivering on its strategy. We have secured 605 acres of the Lincolnshire Lakes project, which can accommodate up to 4,000 homes and commercial development in the first phase. Lucent is working with the council to create a masterplan for what will be one of the largest garden city projects in the UK, a concept of a series of villages. The masterplan will soon be going out to public consultation. We expect to be announcing further acquisitions in the south of England shortly.

The Lucent Strategic Land Fund (LSLF) operates in a structure of rigorous governance and compliance. It is a dedicated fund of KMG SICAV–SIF based in Luxembourg and regulated by the Commission de Surveillance du Secteur Financier (CSSF). With a separate board of directors owing overall responsibility for approval of all investment and divestment recommendations, the LSLF has also appointed KMG Capital Markets Luxembourg S.A. to act as its global investment manager. Governance of the LSLF and the operations of two dedicated Lucent Group companies (Lucent Advisors Ltd and Lucent Global Distribution Ltd) is aided by a range of advisory firms, including BNP Paribas Real Estate, which provides the monthly valuation of the LSLF.

The Lucent Strategic Land Fund has been designed to provide well-informed investors with the opportunity to access this fundamental asset class. There is little doubt that land investment is – in a well-governed structure – one of the safest and smartest ways of investing money. The LSLF is the only open-ended investment vehicle available that focuses purely on strategic land delivery in the UK.

But it is about more than wealth creation. We also have a social responsibility to ensure the sites that we plan are sustainable and right for the people who will live and work in them. This goes to the heart of what we do and what we believe in. We help the Government and local authorities we work with deliver their ambitions for the future. I am proud to say that those who work with me have a fantastic record of delivering sustainable and desirable plans. 

I hope and believe that our legacy will be sustainable and responsibly developed sites combined with exceptional returns for investors.

~ Marco Pasquale, Lucent Group UK ~