What in the UK Economy Attracts Foreign Investors?

There are specific reasons that foreign investors are attracted to the UK economy.

Financial instability in the Eurozone has driven an influx of European and other foreign investors to the UK. Buying a second home in London is a common tactic.

A handful of cities around the world would like to lay claim to being the centre of the known universe. New York City has long positioned itself as such, while the emergence of the Chinese economy might give either Hong Kong or Beijing that title. Abu Dhabi, Kuala Lumpur or Singapore might make similar claims for legitimate reasons – and truth be told, qualifying criteria for the title varies considerably between individuals. But if interest in owning property somewhere is any indication, a 2012 survey by the real estate agency Cluttons (in partnership with VPC Asia Pacific, a consulting firm) found that worldwide, 57 percent of wealthy investors identified London as their top target market for property purchases.

It’s more than an aspiration. Low interest rates in Asian currencies, which have appreciated well against the British pound and American dollar, have helped many buyers to purchase properties in Kensington & Chelsea as well as other desirable districts. Many buyers are purchasing residences for their children who attend English universities, as they are averse to paying rent on housing for even just a few years when they might be able to achieve capital growth from such an investment. Also, when non-residents realise capital gains on a UK asset they are not subject to the country’s capital gains tax (profits derived from rental properties, however, are subject to taxation).

The Eurozone crisis is widely attributed for leading to the investment in residential property in the UK by non-Brits. The head of residential research at property agent Knight Frank told a blogger in 2012, “The more instability you get in the Eurozone, the more the London property market benefits.” Indeed, Spanish, Portuguese and Italian buyers of English properties have jumped by two and three digit percentages in the past two years. Greek buyers, too, from old wealthy families, are investing in rental properties as well as for their own family members.

This seems to be a clear indication that staying out of the Eurozone has been a plus for the real estate industry and for owners of property. It does not, however, change the dynamic for British citizens who find housing difficult to afford. The financial crises of the past several years in combination with a dearth of home building have failed to provide adequate housing stock for middle class buyers. Land investment is shifting toward building the infrastructure and achieve local planning commission approvals for the conversion of agricultural property to housing, either for sale or to-let.

Whether foreign or UK-based, land investors and home purchasers should speak with an independent financial advisor before buying any property, developed, raw or strategic land. The investment needs to fit an individual’s overall portfolio needs and expectations.

Land Value Appreciation Versus REIT Income

How do REITs perform (I.e., yield income) relative to land investments?

All real estate in the UK is poised for value growth, given demographic trends for the next two decades at least. But how to invest requires careful examination.

In all sectors of real estate investment in the U.K. there is a general level of optimism about the mid-term future. This is largely based on demographic trends in the country, as charged by the Office for National Statistics (ONS) and the 2011 Census. The numbers basically reflect a population increase based on a higher birth rate, a lower death rate and inward migration.

For example, from 2001 to 2011 the population of England and Wales has seen a net increase from 52 million to 56 million, an astounding 7 percent growth rate. The ONS offers some interesting breakouts of statistics within this growth, which includes how the population is distributed evenly among age groups. In comparison to some western European countries and Japan, the distribution of populations in the 30- to 60-years age categories is evenly split. This means that the golden 45-49 year old cohort – those who buy the most, pay the most in taxes and who purchase properties – will be a strong economic driver at least through the year 2035.

There is also a well-documented housing shortage, which became more critical in the recession during which little building was done. Combined, these factors spell good prospects for real estate valuations and real estate investors.

There are two primary means for investing in real estate. One is through real estate investment trust (REITs) funds, which own a percent of properties across a large and diverse portfolio. The other is the property owner who is engaged with a particular tract of land, developed or undeveloped. Some investors spread themselves between these two types of investments and some steer clear of one while investing entirely with the other. The type of investor who focuses exclusively on REIT funds is different from the strategic land  investor in at least three key ways:

• Time frame expectations – A REIT may deliver a good return in a matter of weeks or months, or it can go on for years with flat or even losing returns. The land funds investor generally expects to hold the investment (and achieve target returns) in a two to five year time frame. For the land investor, the property that is selected is ripe for development with a zoning change because well-researched locations will accommodate a municipality’s need to expand commercial or residential properties.

• Need (or non-need) for liquidity – As a REIT is bought and sold on an exchange, that investor has the advantage of doing just that at a time of their choosing. The land investor, operating as an individual or within a professionally managed fund, understands the upswing of value is likely to happen in a few short years and therefore is wise to stay with the investment until the property is sold.

• Relationship with the actual property – While the REIT investor technically owns shares in dozens if not hundreds of properties, he or she may never even know where those holdings exist much less the factors affecting their value. The land investor is well informed on the whereabouts of the property, the local economy and the land zoning board’s propensity to approve a use designation (zoning) change. His or her task is to devise a smart land site assembly that satisfies investors, buyers and neighbours. Arguably, this closer relationship can enable smarter investment decisions and yield stronger capital growth returns.

Of course, no investor should embark on any significant real estate investment of either type without discussing his or her investment strategies holistically with a personal financial consultant.

Key Variables in Real Assets that Create Volatility

Real assets such as land are less vulnerable to price/value volatility.

Real assets including real estate are popular alternative investments. Raw land stands out among them because it is characterized by low price volatility.

The shortage of housing in the UK is the most obvious factor in discussion of land assets and the growth potential for land investments. With a solid 7 per cent (over the past ten years) growth rate of the population, the country stands above most other European countries in its need for new home construction.

Compounding this has been the reluctance of builders in the financial crisis since 2008 to construct new homes (due to stringent financing), which strongly suggests pent up demand. Even if people cannot afford to buy, they have to live somewhere, right? In fact, the construction of rental housing is on the rise and may be where real asset investing shifts.

But looking five to ten years hence, will there be a housing bubble – a rash of building followed by an oversupplied market? Not likely – the build up in demand is that critical and unlikely to be fully satisfied for a long time to come. But even without this extraordinary set of circumstances, land investing is generally less subject to price and value swings, vis-à-vis other real assets, for a number of reasons:

• Raw land appreciates in value on a linear path – Due to the finite nature of land coupled with a growing population, demand is always on the upswing. Inflation naturally pushes prices upward, and with a positive decision by planning commissions the asset can grow dramatically.
• Raw land allows diversification – While most land investment requires a minimum of £10,000 to participate, it is possible therefore for many investors to participate in multiple sites. Built properties carry a considerably higher price, effectively forcing the investor to be concentrated in fewer property investments.
• Land investment specialists know how to optimize value – The many variables of strategic land investing are best left to the professionals – because they know what they’re doing. They are able to negotiate optimal purchase and sales prices, how to time an investment and achieve local planning commission permission to convert raw land into something more productive.
• Land investing is not like an REIT – Real estate investment trusts are market-traded securities, subject to market dynamics that may have little or nothing to do with the intrinsic value of the properties in the trust. Raw land is a real asset that is much more controllable.

Real assets overall have proven to be attractive during the years of the 21st century financial crisis, albeit with variable performance from one to the next. Investors are encouraged to seek the counsel of an independent financial advisor before committing to a specific investment.

Understanding Property Funds

A property fund allows investors to participate in real estate opportunities with the added benefit of diversification.

With greater awareness of the opportunities present in the current real estate market, many investors are looking carefully at property funds. The volatility of traditional investments, especially publicly traded stocks and bonds, drives interest and investment in various forms of real estate and property investment instruments.

A property fund allows the investor to diversify – and minimise risk – by buying multiple properties that are appropriately vetted (before acquisition) and managed (after acquisition) by skilled property fund managers. This differs from individual investors who are sole owners of single or multiple parcels of land. The lone investor may face headwinds from external factors, such as change-of-use resistance or an adverse change in local economics, whereas a property fund will strive to avoid such situations. While the nature of land will always be subject to externalities, the diversified nature of property funds leaves the investor with proportionately less exposure.

An alternative to a property fund is a REIT (real estate investment trust) fund; however, the two have key differences. A REIT is more liquid – an advantage to some investors and a disadvantage to others. But this also tends to subject the investor to market volatility, something avoided by a trust fund. REIT funds incur management fees that are generally greater than those found with property funds.

The Role of Property Fund Managers

Good property fund management bolsters the strength of real estate investments.

The attraction of historically low land valuation is compelling investors to consider real property as an important complement or even lynchpin of their financial strategies. Because most people lack deep familiarity with real estate and land investing and how to discern a smart acquisition from a poor one, investors depend on property fund managers to guide them in their investment choices.

Managers of property funds will follow a strategy, such as a focus on warehouses, retail centres, hotels and resort properties or undeveloped land. Typically, fund managers expect most of the land it acquires to be sold to developers involved in house building.

These strategies adapt to evolving market conditions, of course. A good example of a fund management strategy is one that considers how residential homebuilders are decoupling their role of cost-effective housing delivery from that of land acquisition. That presents opportunities for property fund managers to prepare and deliver land that is ready for construction. The specialists who manage those funds are experts in the acquisition, design, master planning and promotion of sites.

In that same example, it is beholden on the property fund management firm to first identify – on behalf of investors – where the best opportunities lie in land acquisition. They are attentive to where population and economic conditions will drive housing or other needs for land development and to where local authorities are likely to allow rezoning or change-of-use plans to accommodate the kind of development that will ultimately be profitable to all stakeholders.

Can Investors in Property Funds Participate at Varying Levels?

Discover the different levels of participation in property fund investments.

The range across which investors can grow assets includes REITs, joint land investments and sole ownership of vast tracts. Each offers advantages and disadvantages.

Building wealth through buying, selling and holding land is a time-honoured tradition across the world and throughout history, in the U.K. as anywhere else. It is not fool proof, of course – everyone and anyone could get rich if it were – but at least the means by which one can invest in land are now more varied than ever before. It is possible to own shares in a real estate investment trust (REIT) for a few hundred pounds, just as the land barons of today own thousands of hectares in Britain and elsewhere.

REITs’ rules in the U.K. have been in effect since 2007, and are lauded for providing investors a means to access property value increases without having to buy the property itself.

However, REITs are traded publicly and tend to rise and fall with general market trends. The owner of REIT shares has no involvement in the actual properties, therefore value growth is entirely a function of the markets and the broader economy. Performance by REITs shares in the economic downturn since 2008 has been unkind to shareholders.

At the opposite end of the UK land investment spectrum, confident and experienced land developers look for raw, undeveloped land for asset growth. The savviest investor learns where market pressures for developed properties (e.g. housing) drive a need for zoning changes that will convert unused (sometimes agricultural) property to residential tracts. That investor will know how to buy at a price that will ultimately return a profit. The Duke of Westminster, one of the richest land investors in the UK, exemplifies this model.

In between REIT shareholders and His Grace are land development investors who work with property funds that hire professional land investment advisors. The price of entry into either type of fund ranges between £10,000 and £25,000 (US$15,000-$40,000) in most scenarios. Such an investment provides the investor greater opportunities than they might find in an REIT – for example, the prospectus will detail the specific features and risks associated with a particular land purchase. The investor will enter with some knowledge as to how long the investment will be held – typically between 18 months and five years – and what the benchmarks are for light development (infrastructure, less so buildings) before selling to housing or commercial structure developers.

Alternatives to land investing and property funds include stocks, bonds, commodities, hedge funds, precious metals (gold, silver), forestry products, energy (fossil fuels and renewables), and rarities such as art and antiques. For more information on choosing the right investments to match your individual asset growth needs, seek counsel from a qualified financial advisor.

Joint Ventures in Strategic Land

The current state of market-based investing makes strategic land joint ventures the preference among investors who want to avoid volatility.

The contemporary opportunities in strategic land investing are based on several factors. One is that economic conditions have depressed the value of land in recent years. Another is that pent-up demand could well drive an increase in that land valuation over the next several years. A third is that both homebuilders and commercial construction companies are less interested in buying raw properties than in building and marketing those properties after they are made ready for development.

Investors have several choices in how they can participate in real estate on a large scale. One is through real estate investment trusts (REITs), which tend to be subject to market volatility owing, in part, to the liquid nature of the shares. Many investors choose instead to work with managed strategic land investments, through either funds or joint ventures.

In strategic land joint ventures, the defining relationship is between managers with skills and expertise (for identifying properties that will create the best return) and the investors who participate in the enterprise. The managers in the joint venture perform best when they acquire and manage properties that are ripe for a change-of-use rezoning. This creates value by transforming property into ready-to-build status. The significant returns that Lucent has already seen in this area suggest it is both highly profitable and low risk.

Whether the investor chooses a joint venture, a fund or a REIT generally hinges on his or her overall investment and tax strategies. But the strength and track record of the management team in any real property investment should be a key consideration.