How Climate Change is Affecting Strategic Land Investing

Savvy strategic land investing now must consider climate change.

Two factors face land investors and developers: How to minimise their impacts on the environment, and how to mitigate potential damage from a changing climate.

The year 2012 was the wettest on record for the UK, according to the National Flood Forum, a coalition of community groups throughout the country. The organization warns that flooding is possible anywhere – flooding in never-flooded-before West Sussex in June of that year provides an instructive example – and should be considered a top emergency priority.

Part of what is so surprising about this is the drought that preceded these floods by mere weeks; widespread hosepipe bans were in place as recently as March 2012. But by the end of the year, nine people had died from excess rains and runoff. Such is the experience of weather volatility under conditions of climate change.

Meanwhile, the UK is undergoing a housing crunch that calls for no fewer than 4.4 million new homes to be built by 2016. Housing traditionally taxes both the demand for water, a problem during droughts, while concurrently establishing hardscape land (surfaces that do not naturally absorb rain) that exacerbates storm water runoff.

The Committee on Climate Change (CCC), an independent group that advises the UK government on means to prepare for and manage climate volatility, stresses that land use planning should be factored into national policy. “Climate risks appear not to be fully incorporated into some major strategic decisions,” the organization said in a report titled Adapting to Climate Change in the UK/Progress Report 2011. “Embedding climate change more fully into decision making could reduce future adaptation costs, such as building new flood defences and maintaining existing defences, and also ensure that climate risks are appropriately balanced against other risks and benefits.”

Of course, England is cited worldwide for the construction in the 1970s and 1980s of the Thames Barrier, which prevents flooding in London during exceptionally high tides and storm surges. Used only once each year up until 1989, it was closed six times in 1990, 9 times in 1993, 6 times in 1999, 10 times in 2000, on 15 occasions in 2001, 19 times in 2003 and 11 times in 2007. The Barrier responds to ocean conditions, a different dynamic but also a function of a warming planet. This is a country that can mount heroic efforts to deal with natural forces, and perhaps similar tasks can be accomplished throughout the country.

CCC notes that water supplies are near their lower limits in some regions, and are more vulnerable to patterns of development and demographic trends. To mitigate this, they recommend several measures be taken:

• Improve water use efficiency, which can include lower-flow bath and kitchen fixtures, and the use of rainwater catchments for landscape watering and other uses. Up to 45 percent of water resource zones will be at risk of shortages by 2035 if remedial actions are not taken.

• Reduce building vulnerability to flooding by situating new development appropriately and by designing homes that can withstand flooding when it occurs.

• Design water absorption systems (bioswales and rain gardens) that naturally absorb storm water in situ that precludes flooding.

The UK Green Building Council certifies construction of residences and commercial structures according to the LEED (Leadership in Energy and Environmental Design) standards used around the world. The organization also celebrates the UK government’s Code for Sustainable homes, introduced in 2006, which calls for “zero carbon” homes by 2016. Hundreds of buildings in the country have been certified in the LEED system while many others apply these standards without applying for certification. The net result includes development of materials and techniques that often becomes standard for all construction.

To those involved in land investment, a conversion of unbuilt to built property is typically the goal and end result. Building according to LEED standards may be exactly what the market calls for, although the bulk of homes and businesses that achieve certification tend to exist at the higher end of the cost/value spectrum. These structures operate at lower energy costs, so a longer-term perspective by buyers might drive more sustainable building methods; ROIs are achieved anywhere between three and 20 years into the future, depending on technologies used.

Investors who are considering land as an alternative investment should consider also the questions of sustainability. Be sure to discuss it with experts, just as any financial decisions should be weighed with the advice of a personal financial advisor

Fraud is Driving Investors from Precious Metals to Land and Other Real Assets

Real assets – including land – are providing safer haven to investors wary of gold scams.

Gold, silver and other precious metals historically hold unique attraction. But recent experiences with fraud lead investors to other real asset investments.

The soaring price of precious metals, gold and silver in particular, has lured millions of investors from around the globe who are fatigued with poor performance of traditional investments and who regard them as a hedge against economic uncertainty. But just as a hot commodity is attractive for its ability to deliver rapid asset growth, so is it able to attract frauds and scammers.

In mid-2011, the American newspaper South Florida Sun-Sentinel reported that more than 45 companies were selling precious metals in just two counties (Broward and Palm Beach counties) in that state. Because there are no licensing or reporting requirements for that industry, it has been easy for individuals to open up telemarketing and web-based businesses there, doing business around the globe including in the UK. Many of the individuals who run these telemarketing firms have criminal records, and have subsequently been arrested for running Ponzi-scheme operations that collected investor money but never owned the gold they claimed to customers.

This is nothing new. Gold and silver have a long history of investment scams, in part because it has been universally valued for centuries, and because it is highly portable and liquid. On some levels to certain individuals, it can be a wise “safe haven” investment; its meteoric rise in price has exaggerated these notions in the past few years. Individuals who might not invest in traditional stocks or bonds might be lured by aggressive marketing into precious metals investments. Fraudsters use a variety of schemes to get money from investors without actually delivering bricks of the metal, arguing that shipping and security costs would be prohibitive, and claiming that this is the way wealthy investors own gold.

Alternative investments to gold: Real assets, such as land

Economic conditions always drive the long-run returns on all investments. While broad market factors uniformly affect the day-to-day prices of company stocks, for example, those companies’ valuations ultimately are determined by the firms’ abilities to turn a profit. But each of these has their pitfalls as well.

Investors in alternative investments – which range from hedge funds to fine art to raw land, and yes, precious metals – need to be savvy. Consider the ways to win or lose at any of them:

Hedge funds – When they were novel, hedge funds were the province of the rich to (as the name implies) hedge against losses with private, actively managed funds that are designed to deliver a positive return, regardless of market rises and falls. But because these funds are private, they are not as transparent and are thus subject to abuse and fraud. The Bernie Madoff Ponzi scheme was essentially a hedge fund.

Rarities (art, antiques, jewellery, antique cars) – The rise of wealth in China and other countries have driven up prices for many segments of the rarities markets. After all, it’s about increasing demand with a finite number of available goods. But to buy art, antiques, jewellery or cars takes expertise in each category. The new collector is easily fooled.

Land – It’s possible since 2007 to buy real estate on the exchanges through real estate investment trusts (REITs) in the UK, although the nature of the investment almost qualifies it as a traditional versus alternative investment. Compare REITs to buying strategic land, where investors select sites where they are confident a zoning change will enable development to occur. When that happens, the asset value can increase dramatically.

Individuals who are considering land or any other type of investment need to pursue it with care. All investors should work with a personal financial advisor who can independently advise clients on their full investment portfolio – which includes allocating risk among different investment types.

Would Alternative Investments Be a Good Long-Term (10+ Years) Strategy?

Should a 10-year investment strategy incorporate alternative investments?

Alternative investments that might include art, classic cars, rare diamonds or raw land have performed well in the past decade. Can the asset growth continue?

The performance losses of hedge funds in 2012 set off warning bells for many investors as they look for smart investments in 2013 and beyond. As Reuters reported in July 2012, “performance losses at many funds resulted in total industry assets shrinking.” The financial news agency quotes Hedge Fund Research, which noted the average fund dropped by 2.7 per cent in the second quarter of that year alone, a time marked by net outflows in the billions from all types of funds. Some analysts attribute this to the sheer proliferation of hedge funds, reducing their vaunted performances earlier in the nineties.

All investing involves risks and rewards, ideally in commensurate quantities. As traditional market traded securities have proved volatile and ultimately disappointing since the financial crisis of the past several years, many people have turned to alternative investments. These include hedge funds, but can include art, fine wine, classic cars and precious metals, as well as real estate and land investments, among others. Most of these have performed well against the stock market – but will they in the decade to come?

Of course, the owner of the crystal ball that holds the answer would ultimately be the richest person on earth. Lacking that, the best we can do is to look at the history of alternative investments and factors that may favour or diminish their prospects in the years to come:

• Wine – Bordeaux reds tracked by the Liv-ex Fine Wine Investables Index between 1999 and 2009 found a 138 per cent return on such vintages as Lafite Rothschild 1982. Of that variety, 12 bottles purchased for £2,613 in 2000 sold nine years later for £25,500. In other words, pick your wines wisely and you can do extremely well.

• Art and jewellery “passion” – Fine art requires an expert, as with virtually all investing, to predict which artists may perform well over time. They can prove to be spectacularly wrong: Mega-selling artist Damien Hirst, whose provocative use of dead animals and even a human skull (encrusted with diamonds) has earned him US$350 million in his relatively short career thus far,  saw some of his earlier work plummet in price by 30 per cent in 2012. Yet, London-based Emotional Assets, which promotes itself as the “convergence between collecting and investing,” is part of a category known as “passion funds,” which claim returns that best investments in stocks and bonds. KPR Capital, a Cayman Islands investment firm launched a rare diamonds fund that returns between 15 and 17 per cent per annum in 2007 and 2008.

• Classic cars – The largest classic car auctioneer in the UK, Coys, says the value of cars  – including the brands Ferrari, Mercedes Benz, Porsche and Aston Martin – has gone up since 2000 by as much as 200 per cent. That said, a firm spokesman told The Guardian that a Jaguar XJ220 that sold for £120,000 has not increased in value at all, and a Ferrari Daytona sold in 2008 for £190,000 was worth £30,000 less in 2009. Again, expertise on the part of a buyer or a buyer’s consultant is advised when looking at this type of investment.

• Raw land – Land that is poised to be rezoned – typically, from agricultural or commercial purposes to residential – offers the most likely upswing in value. Because the characteristics of land are so variable, it is difficult to cite broad investment returns from one location to another. But advice and management of the investment by seasoned property fund managers are more likely to yield a favourable return. The 7 per cent growth rate of the UK population over the past ten years while housing stock did not increase commensurately all suggest that land investments should perform well for the foreseeable future.

The characteristics of best performers in almost all alternative investments include a finite supply, attractiveness to foreign investors from developing countries (China, in particular) or increasing natural demand (e.g., the increasing UK population needing housing).

No investment should be undertaken without the counsel of a personal financial advisor.

What Incentives Do UK Housing Investors Get From the Government?

Lending schemes from the government might be helping buyers, but the real way to increase housing stock might lie in programmes that grow rental inventory. 

The Guardian columnist Matt Cavanagh wrote an article in 2012 criticising the Chicken Littles of Britain who worry population growth is out of control and leading the country to ruin. “Should we see a rise in our population as a problem, or an opportunity?” he asks. “Are we simply ‘too crowded’ to cope with more immigration?” he continues, before proceeding to provide his own data and opinions that refute the worriers.

Cavanagh concludes that UK population growth has been decried for the past 100 years, and that with smart planning, lots of building and technological innovation – already underway – those problems can be mitigated.

Part of the writer’s argument is that England is not static, that the country has historically done well as it adapts to change. Also, that the land mass can support a larger population quite handily. One such change already underway is the shift from an ownership to a renter society, as illustrated by how things have changed in the past ten years. A decade ago new housing included about 10 per cent of inventory for rental; today, that number is closer to 17 per cent, and it’s projected to rise to 20 per cent within the next decade.

HM Treasury, the government’s economic and finance ministry, issued a report in 2010 (“Investment in the UK Private Rented Sector”) that acknowledged a plethora of factors favour increasing the country’s stock of rental housing to ease the burden of a housing undersupply. These factors include macroeconomic stability, meeting peoples’ housing aspirations, creating sustainable communities and establishing labour market flexibility. By increasing to-let housing, the country will get more affordable homes overall.

Since then the government has created two programs to encourage investors (such as those who seek UK joint venture land opportunities) to put money into both social and private housing development. One, a scheme for affordable housing with debt guarantees, enables the raising of debt with government backing. This effectively makes it possible to build more new rental homes because borrowing costs are lower. For building in the private rented sector, investors are also given similar debt raising support with the same expected outcome of additional building.

The Royal Institution of Chartered Surveyors (RICS) is proposing some new ideas as well to goose the rental housing market. In a report released in June 2013, RICS recommends new tax bands for higher-value properties, and it suggests providing incentives for pensioners to downsize to smaller homes. RICS was critical of much ballyhooed government schemes that help homebuyers, arguing that those are most beneficial to people who could afford to buy anyway; until there is an increase in he housing supply, millions will continue to be shut out of buying altogether.

Instead, RICS proposes releasing public lands for more residential development, which could accommodate building up to 250,000 new homes in the next few years. Another proposal is that developers be required to build within three years of receiving planning consent. Also, RICS proposes a scheme to enable lower-income renters to accumulate a “portable home ownership discount” over time that would ultimately enable them to buy their homes.

RICS also suggests that self-invested pensions (“Sipps”) could be directed to investments in new-build residential property.

Cavanagh, the Guardian columnist, acknowledges that population growth will require not just housing but investments in infrastructure and public services. But he doesn’t read these as insurmountable problems. Rather, it would take the creativity of ideas such as those provided by RICS to figure out solutions to these concerns.

Investors in the housing market – be it for-let or for sale – are advised to keep current on such lending schemes and the direction of policymakers on the local and national level. When determining to invest in strategic land or real estate, such as with capital growth investments (in a Sipps programme, for example), the advice of a personal financial consultant should be enlisted to ensure a good balance of risk within an overall wealth development plan.

What Requirements Does the Code for Sustainable Homes Place on Green Buildings?

Developers are taking on larger costs in order to build green. Fortunately, there is a market for residential property that has a lesser impact on the environment.

In 2010, the UK government set out to reduce carbon dioxide emissions by 20%, a disproportionate amount of which (30%) comes from housing. Part of the impetus for reducing the carbon footprint of residential dwellings is that the aging UK housing stock compares poorly to that of other European countries – with energy-hog buildings that disproportionately add CO2 to the atmosphere.

In response to this, new homes being built and older homes being retrofitted are certainly trending to green, energy-efficient standards. That is, energy and other resource efficiency is becoming the norm in residential structures (not to mention commercial and other large-scale education and healthcare buildings). This says a lot about the degree of interest in building greener and achieving a generally more sustainable world.

How applying various green standards might affect the dearth of housing in the U.K. – where the country is building about 100,000 fewer homes each year than are required – is a different question.

For those who can afford it, a green home is what they want. By the statistics released in March 2013, approximately 280,000 homes that are either built or are in the design stages have achieved Code for Sustainable Homes’ “Standard Assessment Procedure” certification. This measures the environmental performance of a home and has become the national standard for design and construction of sustainable new homes, in particular.

Measurements under the code result in a ratings of zero to six stars, the larger number being the most optimal. Homebuyers are now looking at this star system as a means of evaluating the home’s value. The criteria by which the system is based are the following:

• Energy use and CO2 emissions – For each star ratings level a minimum number must be reached.

• Water use/savings – Considering both interior (household) and exterior (garden and car washing) use.

• Material sourcing (minimizing impact of resource use and waste) – That which is required to construct the home should be made of recycled materials and locally sourced where possible.

• Surface water run-off and mitigation of flood risk – Measuring how a building might contribute to floods, use water-capture methods and materials where possible.

• Waste reduction – Building or property features that enable recycling and composting; also, reduction in construction material waste.

• Use of insulation and efficient heating systems to mitigate environmental impact – Minimisation of pollution that would otherwise result from inefficient heating systems.

• Contributions to occupant health and wellbeing – The comfortable home should have good daylight access, provide for private spaces, offer good sound insulation, and be accessible and adaptable.

• Impact on and protection of the local ecology – Specifically, how well the home integrates with the local environment, minimizing its impact on land features, flora and fauna.

This Code is one of many measurement systems and benchmarks that the country and its building industry have used over the past several decades (building regulations calling for tighter building envelopes have been in place and increasingly stringent since the 1960s). But it can impact the resale value, as buyers can look at the star ratings as a means of comparing one home to others.

One of the larger drawbacks of the Code for Sustainable Homes is how all costs are borne by developers. This then becomes a question of whether environmental standards will fly in the marketplace, where a sustainable home will clearly cost more to build and which then must by valued sufficiently by the home buyer.

In the midst of a housing shortage, affordability remains an important matter. But the crush of demand calls for homes at varying price points. Those involved in alternative investments such as real estate are increasingly choosing to work with specialists who convert raw land to housing that is built on strategically purchasing property that is well-suited for use designation changes. With permission from local planning authorities, the land can then receive infrastructure additions that homebuilders need. But any land investment – whether done independent or with UK property fund partners – remains a calculated risk, one that an individual investor should discuss with an independent financial planner.