What Are the Cost Considerations For Developing Land into Housing in the UK?

Investors in raw land, looking to develop it into much-needed housing, are also responsible for infrastructure development. But to what extent?

For those looking to make alternative investments into UK strategic land, it is worth noting that Conservative MP Nick Herbert raised a few difficult issues - along with unpleasant scenarios - when he published an opinion piece in the Daily Telegraph in late 2012. In it he suggested that some communities are failing to build adequate infrastructure (read: sewers, schools and roads) as they accommodate residential development.

Herbert is quick to acknowledge the pressing need for housing in the UK, as most expressly indicated by Census 2011. But he cites scenarios where inadequate wastewater systems, overcrowded schools and clogged highways show a lack of planning and appropriate resource allocation in the development process. Implicated are, of course, the investor-developer-builder teams who bring about these developments. Herbert introduced an amendment to the Growth and Infrastructure Bill debated in the House of Commons that requires planning authorities to ensure sufficient infrastructure be included in new development.

The costs associated with providing adequate infrastructure in a rapidly-growing population are always a point of debate. Apart from Herbert’s arguments, there are several factors at work in the UK and around the world to consider where it comes to defining what infrastructure entails and how to achieve it:

The UK’s Community Infrastructure Levy (CIL) - Newly created to be faster, fairer and more transparent, the CIL is an option for local councils to charge developers and land owners for the added community costs of new developments. Monies can be used for new roads or road improvements, new health centres and park improvements - per the discretion of local authorities. It also ensures a predictable fund stream that enables effective planning, as well as accountability to local (extant) residents as to how the levy monies are spent. (Note: Herbert is sceptical that this new levy will be sufficient because it carries no mandates for local planning authorities.)

Larger, exurban lots present lowest upfront costs (U.S.) - A paper published in 2009 (Rayman Mohamed, “Why do residential developers prefer large exurban lots? Infrastructure costs and exurban development”) in Environment and Planning B: Planning and Design looks at data from public records of construction costs in South Kingstown, Rhode Island in the U.S. Of course the American approach to development differs and they do not have some of the constraints and levies that exist in the UK. But when the lots are large so too are the prices, while infrastructure costs are only incrementally more. This difference takes on greater contrast when compared to the urban, vertical-built opposite.

But dense cities offer most sustainable complex costs - The “new urbanism” movement popularized in the UK, Europe and the Americas seeks to reverse the suburbanization and ex-urbanization sprawl patterns with a densification of population, transportation, commercialization and city services such as sewers and all other public utilities. The differences from the South Kingstown study (above) is that this looks at the longer-term resource consumption of development (which nets out in favour of densification). Some argue that it creates a lower quality of life, however that is subjective and open to much debate.

Infrastructure in “community assets” - The Joseph Rowntree Foundation (JRF), which endeavours to support resilient communities, argues that community infrastructure ideally incorporates intangibles such as “social capital” (those things that foster connections between individuals), “social networks” (inter-dependencies between individuals and organizations) and civil society (faith-based organizations, political parties, voluntary and community organizations, etc.). JRF makes policy recommendations relative to the affordable housing, with a focus on house price volatility - a matter that is easily connected to sustainable development.

As Herbert, a Conservative, argues in his Telegraph piece, there ultimately is an ongoing juggling act where it comes to infrastructures and its costs, short-term and long-term. “We should not deny young people the chance we’ve had to own our properties,” he says. “But it also means taking care not to damage the countryside. And at the very least, it means ensuring that where such housing is needed, there is adequate infrastructure to support it.”

Be it for market rate, affordable or social housing, significant questions ultimately find answers in those willing to invest in critically needed development. Any and all building will alleviate the pressure from its current state, but of course quality of life issues must be considered along the way. Investors in market housing need to consider all costs - including those cited above - when determining the risks inherent in those investments.

The Controversy of UK Agricultural Land Conversions to Housing

What are seen as the controversies around converting land from agriculture to housing?

The value of UK Green Belt and agricultural lands is undisputed. But the environmental costs of modern farming and housing needs are part of the conversation as well.

Anybody considering making an alternative investment in strategic land will know that Britain unquestionably needs more homes to accommodate a growing population. According to the Office for National Statistics, more than 4.4 million homes should be built by 2016, largely in response to two factors: A decennial growth rate of 7 percent, as measured in Census 2011, and lagging new home construction that fails to keep up with this population increase, largely attributed to the stringent lending standards of banks following the 2008 economic crisis.

At least one group claims the solution is to build on Green Belt land. The Policy Exchange, a centre-right think tank, said in late 2012 that the supply of land near cities that is kept unbuilt is a drag on the housing market. They argue that swaths of English countryside that typically surround towns should be opened up for development. The fourteen Green Belts in England cover about 13 percent of the country, enveloping about 60 percent of Britain’s population (about 30 million people).

The Policy Exchange faces plenty of headwind in its positions. Since the “garden city movement” of the early 20th century, the effort to combat urban sprawl led by such groups as the Campaign to Protect Rural England (CPRE) and the London County Council sought to maintain open spaces dedicated to recreation, forests and agriculture as a social good. But the Town and Country Planning Association has proposed since 2002 the adoption of more flexible policies toward Green Belt lands, suggesting that instead of a growth-stifling “belt,” that “wedges” and “strategic gaps” might allow a natural expansion of urban areas.

Famously, the head of Natural England, whose charge is entirely to ensure protection and improvement of flora and fauna, said in 2007 “we need a 21st century solution to England’s housing needs which puts in place a network of green wedges, gaps and corridors, linking the natural environment and people.”

Agricultural land outside of Green Belts

Of course, land away from the major cities is green as well, much of it in use for agricultural, forestry and recreational purposes. More than 80 percent of the landmass in England and Wales, 12 million hectares, are used for farming and forestry. Local planning authorities can more easily rezone the lands outside Green Belts when market factors, such as the demand for housing development, call for it. Since 2000, about 1500 hectares of agricultural land has been converted to housing development every year.

Of course, similar sentiments understandably still exist relative to the bucolic perceptions of farming in the U.K. But environmentalists take exception to how modern agricultural methods, which include excessive application of fertilisers, can actually burden nature with its by-products:

• Toxic build-up. 100 million tonnes of sewage sludge, compost and livestock manures applied annually to agricultural lands is leading to a build-up of potentially toxic elements such as zinc and copper, and more than half of sensitive wildlife habitat experiences harmful acid and nitrogen pollution, according to a paper published by Environment Agency UK.

• Loss of soil. About 2.2 million tonnes of topsoil is lost each year due to intensive cultivation, some of which is instigated by compaction from heavy machinery and livestock, which precludes plant growth and leads to runoff in rain. (source: Environment Agency UK). To be fair, some runoff is noted as well from building sites before landscaping is completed.

• Water quality compromised. About 70 percent of sediments found in water come from agriculture, and those sediments can carry metals, pathogens, pesticides and phosphates.

Such problems due to modern agriculture plague the planet, as similar pollution levels are reported throughout Europe, Asia, North America and Australia. Africa, Brazil and Argentina, the newer frontiers for agriculture, are expanding arable croplands to meet global food demands but also exhibit a host of environmental sins.

The food-housing tug
There is no denying that the housing needs in the UK must be met - and soon. A whole generation of families are postponing children or living in cramped quarters, awaiting homes they can afford or at least rent to accommodate their members.

But Brits need to eat as much as sleep. So how to balance the use of land for each?

A number of approaches are being tested. One is to encourage development of so-called brownfield lands, which include properties that may require remediation from previous industrial uses. These lands are often within towns or immediately adjacent to them, some with excellent access to existing urban infrastructure while others are cost-prohibitive for a variety of reasons (no existing infrastructure, undesirable locations for housing or extensive environmental remediation required).

Sustainable Build.co.uk is a web publisher that considers the balance between development and environmental sustainability from a very pragmatic standpoint. The site offers several points on how land conversions to development can have a negative effect, which include: converted green fields are quite unlikely to be converted back to nature; there is inevitable loss of habitat for animals and plants; a loss of employment for agricultural workers; and a loss of Green Belt land that provides geographical definitions and separations of cities, towns, villages and hamlets (i.e., American-style urban sprawl).

Answering the problem of diminishing agricultural lands is a nascent movement to small-scale, organic agriculture on greenfield lands. Sustainable Build notes, “There are greenfield sites that are not being used for any purpose, for whatever reason. Development must consider all human and environmental factors, not just consume land and space for short-term solutions. A sustainable vision would look at all the options for land use, human population expansion, urban sprawl, economic considerations as well as environmental needs.”

Which, in a country with a growing population and a concurrent appreciation for the environment, is perhaps the most realistic and pragmatic approach.

Immigration Pushing Up Housing Demand, Land Prices

UK housing and land prices are rising due to immigration and other population factors.

Immigrants to the UK, both ethnic and white, fuel a net population increase. This places price pressure on land and homes, the supply of which lags demand.

For several generations in the Post-War period, the United Kingdom has drawn immigrants from Europe and around the globe. Ethnic populations that have arrived on our shores since the late 1940s have been in concentrations from the former Commonwealth countries – people from the Caribbean, sub-Saharan Africa, India, Pakistan, Bangladesh and China, primarily – as well as individuals of white parentage from South Africa, Australia, New Zealand and Canada. This influx has been unabated in the first decade of the new century, contributing to the 7 percent increase in population recorded in Census 2011.

In simplest terms, increasing population of any kind will drive demand for housing, which these immigration patterns have done. Demand for housing also drives demand for land investment and development, which is currently lagging market needs, a potentially huge opportunity for those looking to get involved in alternative investments. Examining immigrant populations with a bit more complexity, it becomes easier to understand the interplay between immigration, economics and housing demand:

Ethnicity less a barrier to economic ascendancy - While Britain’s storied class structure has diminished a bit in recent decades, there remains a tendency for successive generations to achieve the same social class as their parents. But a series of studies cited by the Joseph Rowntree Foundation in its report, “Migration and social mobility: The life chances of Britain’s minority ethnic communities” (2005) at least finds that this tendency is colour- and ethnicity-blind. The report cites the Oxford Mobility Study (1983), which found that migrant populations, including those of colour, had “a weaker association between origins and destinations,” meaning successive generations fare better economically among immigrants than established populations (this same phenomenon is pronounced in the United States). The classic examples are the immigrants who toil at working class positions while their children achieve university degrees and enter into the managerial ranks.

Home building lags in the UK - The economic downturn since 2007 has certainly put a crimp on home buying and building, but not simply because people have less wherewithal to purchase property. While the population of England and Wales has grown by 3.7 million people in the past 10 years (many of them young and starting families, a point at which home purchases are typical), construction of new homes is remarkably slow. Only about 21,500 new home building starts were recorded in England in the second quarter of 2012, the lowest level in a century and thought to satisfy only about a third of actual demand.

High demand, yet financing is difficult - Younger people, including first- and second-generation immigrants, have difficulty getting mortgages under current financial conditions because they cannot muster a deposit (about 15 percent or more of the value at purchase). Some argue that banks could provide more financing, to builders as well as buyers. This creates a logjam that needs to break, and the sooner the better.

Rents are rising - Average private rents in the UK in mid-2012 were about £750 per month and rising. Higher rents are almost always an indicator of housing demand, and typically a trigger for new building. But the financing problem (see previous item) instead is pushing some builders – financed by insurance companies instead of banks – to build for-let housing.

Note that immigration is not the only factor at work. The Census also identified that pensioners now remain longer in their homes than in the past, a credit to their good health and vitality. We celebrate that fact, but must acknowledge it further exacerbates the housing shortage.

On the whole, this pent-up demand is driving interest in land for development in the future. While brownfield and green belt tracts are considered, undeveloped land appears to be increasingly attractive for development. Many municipalities are turning to their Local Planning Authorities, a product of the Localism Act 2011, to authorize rezoning of agricultural and other-use lands for housing. For many towns, the ability to attract employers includes having a growing population (that is housed, of course). They provide workers as well as consumers, neither of which is available if there is nowhere to live.

Identifying Qualified Land Investment Agents: What To Look For

What qualifies as competency for land investment agents?

Land investments are a promising, alternative means to achieve growth under current market conditions. Working with qualified agents is key to managing risk.

Due to rising interest in alternative investments - a response to the middling performance of market-traded securities - there has also been increased concern about the legitimacy and transparency of many of these assets. For example, the broker-dealer Ponzi scheme of Bernie Madoff may go down in history for both its size of losses as well as its instructive value.

Preceding Madoff’s spectacular debacle in 2008 was the 2005 Langbar International fraud. Here, the Nominated Adviser failed to carry out due diligence while the London Stock Exchange concurrently neglected to check compliance with Alternative Investment Market (AIM) rules.

In the wake of events such as these, many investors - and certainly many investment advisors - have had to increase their skills at identifying where and in whom to seek real asset growth with minimized risk.

Land investments should be approached with the same kind of scrutiny, as should land investment agents. There is increasing interest in raw land, due to how the population increase in the UK has not been adequately met with sufficient home building. The consequential pent up demand for housing is spurring Local Planning Authorities to consider rezoning some tracts of land. To the investor, this is an opportunity to create significant asset growth in a relatively short period of time.

The wary investor is wise to go about this with caution. Several fraudulent schemes have been unleashed on less-sophisticated investors, garnering much attention in the press. But individuals (typically investing a minimum of £10,000) working through a third-party financial advisor should inquire about a property fund’s management team.  That conversation might cover the following:

•    Track record - What successes does the land investment agent have on its record? What about failures, or poor performers?

•    Education/Experience - While many professionals endeavour in the land investment field without a university degree in that specific area, they should have accumulated knowledge in their work. The excitement of rapidly appreciating land values sometimes draws in unqualified people only recently landed in the industry.

•    Expertise - Land investment is not a simple buy-sell proposition. In fact, a team of experts typically needs to work together to turn a property into something of greater value. That includes individuals who can provide the best analysis for selecting land that is ripe for acquisition, for negotiating a workable purchase price, for development planning, site assembly and to strategically time the forward sale, all in the interest of maximum returns.

•    Transparency - All accounting of activities, expenditures, milestones, transactions and returns need to be reported on a quarterly if not more frequent basis, audited by a third party.

Not all variables can be predicted in land investments just as uncertainty exists in all types of investments. With the use of a qualified financial advisor - whose job includes clearing qualified land investment agents - an investor can at least reduce the risk of working with the wrong parties in this alternative investment.

Are Land Investments Affected by the Libor Rate-Fixing Scandal?

How does the Libor rate-fixing scandal affect capital growth investments such as land?

Stringent lending practices by banks are blamed for the housing shortage in the UK. Might the LIBOR scandal, uncovered in 2012, play a role in this?
While residential real estate prices in London remain high and climbing, most other parts of the UK have seen a significant drop in home values since the financial crisis of 2008. Economists and pundits alike have pegged this to many factors in the economy, but since the Libor (London Interbank Offered Rate) rate fixing scandal came to light in 2012, some voices are questioning the degree to which this may have then, and since, affected home buyers. Of course by extension, the ability to purchase homes affects the fortunes of strategic land investors and developers.

A Fortune magazine senior editor wrote in late 2012 that because the housing market crash was due to many homeowners being unable to pay their mortgages, that Libor manipulations “added to the borrowers’ hardships,” making it at least a contributing factor.

Other voices argue that the damage of Libor manipulations benefited just as many people as it may have hurt. As much as rates were artificially inflated, just a bit, so too were they pushed down (driven by the bankers found to be responsible for their own reasons). It should not go without notice that about 45 percent of adjustable-rate prime mortgages and 80 percent of adjustable subprime mortgages are set according to the Libor rate. Student and auto loan rates are hitched to Libor as well.

But if there is one outcome of the scandal, it may have been the undermining of trust in the system overall. It certainly shakes investor confidence in the financial markets.

Billion-pound-plus settlements have been reached by those banks found responsible (Barclays, UBS, Royal Bank of Scotland.  American banks including Citigroup, JPMorgan Chase and Bank of America have not faced charges). And new regulations in the aftermath are predicted, with some variation between countries and their respective regulatory systems. In the UK, that may follow the Vickers proposals, which the International Center for Financial Regulation says will put ringfences around all UK-based retail and investment banking services.

While the punitive settlements reached between UK regulators and the banks sound hefty, relatively speaking they pale in comparison to the costs borne by borrowers since the fraudulent practices began in the early 1990s. According to the website ThisIsMoney.co.UK, small businesses’ and households’ annual mortgages were affected by hundreds of pounds each year due these transgressions. Consider how, says the site, Libor and therefore mortgage rates soared in the lead up to the 2008 financial crisis, particularly its climb around August 2007.

The credit crunch and housing price crash since has slowed investments of all kinds, not the least of which has been home building in England and Wales – despite a continued population increase and pronounced shortage of housing. Would-be new homeowners have difficulty meeting tighter lending standards, which has dulled the interests of most developers in building new homes.

As confidence builds again in the banks, and as lending loosens up, there is growing interest in the pent-up demand for housing that has occurred. In the meantime, to-let housing is becoming more common in the UK and elsewhere, particularly with new construction. The dynamics of banking and business, and the population increase, all suggest that home building has to increase in the future – perhaps this time, with fairer, less-manipulated lending rates. When that does, capital growth for landowners, land investors, and existing built-property owners should benefit as well. On the receiving end, more young people and families will be able to find a place to live – and pensioner parents will reclaim their homes for themselves once again.

For all considered, all market factors must be taken into account. The smart investor will always consult with a qualified personal financial planner to ensure the risk profile of an investment is tolerable and complementary to other assets in his or her portfolio.

Land Investments Relative to Traditional Investments in the Recession Era

How have land investments fared relative to traditional asset classes in recent years?

Investors are disillusioned with the performance of market-traded securities. Raw land is an alternative, but one which has its own requirements and limitations.

In the first quarter of 2013 18 firms resigned from the London Stock Exchange, up from 15 in the same time period in 2012, 10 in 2010 and 12 in 2009. Analysts told the Financial News that these departures since the collapse of Lehman Brothers are due to regulation, austerity measures and shrinking commissions.

Volatility and disappointing performances in traditional market-traded securities has been similarly widespread since 2008. Investors instead have shifted their money to alternative real assets, which range from hedge funds to commodities (agricultural, mineral), precious metals, art and antiques, real estate and raw land.

As one finance and investment advisor, Satyajit Das, told The Independent in March 2013, “Disillusioned with financial assets, the ultra-rich are focusing on scarcity - farmland, prime real estate in world cities with desirable properties, and rarities (fine art, antiques, rare cars). Even wine has emerged as an asset class, giving a new meaning to the term ‘liquidity’”. Das further explained the trick to capturing the benefits of volatility is to take advantage of large price fluctuations, particularly investment capital that is subject to “irrational exuberance”.

In other words buy low, sell high (of course). But what investors are also gravitating toward is the ability to manage the investment, either through knowledge of the asset before purchase - the skilled art dealer/buyer, for example - or in transforming the asset to something of greater value. This latter strategy is characteristic of strategic land development, changing property from one use such as agriculture or a brownfield property into residential use, for example.

This type of land investing differs dramatically from the real estate investment trusts (REITs) available in the UK since 2007. While the REITs have disappointed investors - in fairness, the lifetime of this asset class has existed almost entirely during this recessionary era - raw land provides a niche that investors find a bit more controllable. This is due to three characteristics of successful raw land investing:

• Pent-up demand - With the continued net growth of the UK population (credit immigration, a healthy birth rate and improving pensioner longevity that allows more people to stay longer in their homes), it’s a simple equation to understand that more people need more homes. But due to recessionary economics and stringent financing there are many Brits, younger people in particular, who cannot buy their own homes yet. As government programs to aid home buying and a better economy arrive, that demand will need to be satisfied.

• Working with knowledgeable land specialists - There are few land barons who build their empires on good luck. Instead, investor groups generally hire specialists who understand local economies and local planning authorities, as well as the homebuilder sector that ultimately is the buyer.

• Temporary illiquidity - For the investor, raw land is a difficult-to-exit investment strategy. The typical land investment at a minimum requires 18 months such that investors might instead focus on a three to five year period in which the investment builds in value in preparation for a sale.

While land investments yield varied returns, due largely to the apples-to-oranges nature of location, these three characteristics provide reason for investor confidence and the increasing popularity of the asset class.

Persons drawn to land investment should consult an independent financial advisor who can vet the offer relative to all instruments in the investor’s portfolio.

Should Land Investors Be Encouraged by the Rise in UK House Building?

The story on UK building, as told by statistics gathered by private and public organizations, is mixed. The best advice is to get good advice.

There is a flurry of information regarding construction starts in the UK in 2013 - some of it encouraging, some perplexing. Making sense of it for real asset investing is the challenge of the day.

Much of what the Royal Institution of Chartered Surveys (RICS) predicted at the end of 2012 has come to pass. A pick up in housing starts has indeed occurred, but not until the second quarter after a small drop in the first quarter. Overall for the year, RICS predicted 115,000 new housing starts. But while its unclear where the year will end up, a survey of data from around the UK reveals the following somewhat tantalizing details:

• Glenigan Constructing Insight reports that for all types of construction - private residential as well as social housing, healthcare, education, industrial and infrastructure - activity was up 2 per cent in the second quarter of 2013 (as compared to the same period one year prior).

• Infrastructure leads the way with an increase of 41 per cent growth. By Glenigan’s reporting, large road projects can be credited the most with this.

• Utility building is up 29 per cent.

• Housing starts are up 12 per cent versus 2012.

• Regionally, the West Midlands report an increase of 70 per cent (after only a 10 per cent rise in the first three months of 2013) of all types of construction.

• The South East, which experienced a 20 per cent decline in May was up again by one point compared to 2012, with private housing and infrastructure building responsible for those gains.

• All construction starts in Scotland were down by 37 per cent, an unfortunate trend with similar deficiencies over the previous six months.

• Government investment in health and education are restrained, leading to fewer and lesser-sized projects. The Priority Schools Building Programme might alter this to the positive through 2014.

The chief economist for RICS, Simon Rubinsohn, feels that first-time buyers of homes - rather, the lack of them - continue to be a drag on incentives to build new homes. “Even with the Funding for Lending scheme and some other government policies beginning to be felt in the mortgage market, many first-time buyers will continue to find it difficult to secure a sufficiently large loan to take an initial step on the housing market,” he says. Instead, he thinks the government should act to set up conditions that will increase building of rental or for-purchase housing, and to bring new development quickly onto the market.

This holds special implications for the land-to-housing development investor, many of whom apply alternative investment funds to property funds. While building may appear to be healthy today, there needs to be significant construction of new homes at an accelerated rate just to meet basic demand. But the strategic land investor him or herself must be sure this type of investment is appropriate for their own portfolios. First, they must work with a team of knowledgeable specialists who understand how to manage the entire process effectively. They also need to be willing to wait a minimum of 18 months before they see a return on investment. They also should simply get the advice of a personal financial counsellor who can objectively evaluate the strength of the joint venture land investment.

Property Funds vs. REITs: How Investor Timing Needs Matter

Investor timing matters: Property funds compared to REITs, timing by the investor is everything.

Returns on investment are not the only guide to where one puts their money. The relative liquidity of the funds, and what that means, should be considered as well.
The UK arrival in 2007 of real estate investment trusts - REITs - was heralded as a new era for investors. “For the wider economy, investors are expected to benefit from greatly enhanced dividend payments and growth in the investment property market,” Liz Peach, chiefexecutive of the British Property Federation, told The Telegraph in January 2007. She said it would bring benefits to the British economy as a whole with efficient property use and asset management.

Economic conditions being what they have since 2008, it is difficult to fully ascertain the long-term prospects for REITs in the UK. But the UK-REIT Survey 2012, produced by BDO LLP (an assurance, tax and corporate finance advisory firm), makes several notes about how these types of alternative investment vehicles have fared in the global recession:

• If a UK REIT has a geographic or sector focus (perhaps both), it performed better than trusts that did not.

• Performance was not a function of size (i.e., some smaller and some larger REITs did well, and others of both sizes did poorly)

• A retail property focus - not surprisingly, given the recessionary conditions and reduced consumer spending - tended to cause certain REITs to turn in lesser performances.

What is well understood in mature REIT markets such as the US, where REITs have existed across several boom and bust cycles, is performance of such funds is largely tied to the overall economy and even the ups and downs of daily market trading. Traded like a stock, price volatility is to be expected for the REIT investor.

But that same volatility speaks to another key consideration of the investor: timing.A REIT is an exceptionally liquid investment, which may well suit the needs of one investor over another. In contrast, property funds that commit the investor to a specific piece of property may need to be held for two to five years to appreciate the outcome of the investment.

What is the tradeoff if one chooses a property fund over a REIT? To use a gambling analogy straight out of Las Vegas, a REIT might be characterized as a slot machine, roulette wheel or craps table. A tiny amount of skill is required to get in and the smart player gets out when the numbers fall to his or her favor, if they do. A property fund, in contrast, is more like a good game of poker. Skill and strategy – and a longer period of time playing, typically – help the player achieve a good outcome.

(For background, property funds often deal in the acquisition, site planning and resale of strategic land. The investor is well informed of the property and its prospects for value growth during the projected time period of the investment.)

Individuals interested in REITs or property funds should discuss it with a personal financial advisor. As previously noted, investors’ risk tolerance and timing vary.

Planning Your Exit Strategy in a Land Investment

When investing in land, your exit strategy is an important consideration.

Timing is everything, particularly in how investments pay off. The investor in raw land needs to know when the asset will increase to its optimum sale price.

The goal of all investing is to make money, to sell at a price higher than that at which the investment was purchased. But that simple formula fails to factor in the extremely important matter of timing: how long it takes for the investment to achieve that optimal price, as well as how the timing affects the investor. Taking a good profit in one year might be disadvantageous over taking it in another, largely due to taxation.

The essential nature of timing – when to invest and when to disinvest – affects all classes of investments, both those in the traditional markets (stocks, bonds, REITs) and the less traditional real asset categories (strategic land/hedge, property funds, precious metals, minerals, rarities such as antiques and fine art, etc.). Much of that has to do with the intrinsic (some might call it organic) nature of the investment and how it relates to macroeconomic dynamics, while external factors such as government subsidies and regulations can affect it as well.

A good example is renewable energy in Germany. A robust government sponsored program (“100,000 roofs” and the Renewable Energy Act) fostered small and medium-sized companies (as well as university research in partnership with them) to develop photovoltaic, wind, biomass/waste and hydroelectric electricity sources. With government supports and guarantees, investors had a good sense of where things were going and when. The timing of their disinvestment and payback carried more certainty, which of course attracts more investors.

Notably, in German investors in solar PVs and wind can expect the timing of their returns to be shorter than those in hydroelectricity. It simply takes more time to achieve a favourable return-on-investment from dam construction.

In a different asset category, raw land in the UK, the macroeconomics are well understood: the UK population grew 7 per in the decade to 2011, even while the nation’s home builders have not been increasing residential inventory to keep pace. Consequently, there is a housing shortage that will need to be filled eventually (and the sooner the better). The government plays an important albeit indirect role in that local planning authorities are now given greater reign over decisions about land use designation. In other words, if a local planning authority strongly identifies an area for home building or other development, it is far more likely to happen.

To the land investor, ceding land use planning from national to local authorities is very important to timing – and was long awaited. The Kate Barker recommendations in 2004 (the Barker Review of Housing Supply) looked at rising housing costs and the inadequate supply of new homes to meet the need. The Barker recommendations were factored into the modernised core UK planning principles, which include:

• Objectively identify development needs of an area (housing, business, etc.)
• Drive and support sustainable economic development, which includes the delivery of homes, businesses and industrial properties 
• Provide the necessary infrastructure to support new developments
• Account for market signals such as land prices and housing affordability, and set strategies for allocating land in sufficient quantity to meet the needs of people and employers

The well-managed land investment can meet these criteria, and as such is more likely to qualify for expedited approvals. The ability to deliver value to investors sooner rather than later is a clear advantage of this.

Individuals involved in any type of investing should get solid counsel from a personal financial advisor. This investment professional should work independently of any financial instrument to holistically review your investments, goals and anticipated expenditures to determine where an asset would be timely.

Investing in Rarities Such as Antiques, Art and Wine Follow Different Dynamics Over Land Development

Real assets including raw land, art, antiques, fine wine and antique cars are attractive to emerging wealth. But the factors affecting value growth of each are vastly different.
In late 2011, even while dealing with the after-effects of the 2008 financial crisis, the interior minister of Iceland rejected an application by a Chinese billionaire to purchase 300 square kilometres of land. The property was landlocked, and the investor claimed he wanted to build a golf course, but its close proximity to deep-water ports worried the Icelandic government. The minister said their weak currency crisis made them vulnerable to a “fire sale” acquisition, which they did not want to do.

What was going on here is actually related to a lot more than a rocky outcrop in the North Atlantic. Chinese investors are using their new money to buy up property and strategic land everywhere – in London, in Africa, Singapore, New York and around the world. But they are also buying art, antiques, rare coins and fine musical instruments, among other real assets. Each category is increasingly seen as an advantageous complement or alternative to market-traded securities, given the recent volatility and poor performance of stocks, bonds and new-to-the-UK real estate investment trusts (REITs).

How those assets have performed for investors is a mixed lot, although all did well. FT.com (Financial Times online) reported in February 2013 that individuals of high net worth have driven the market for all kinds of rarities and collectibles, including gold. Citing the Knight Frank Passion Index, a performance measure of fine art, classic cars, watches, stamps, coins and fine wine in the 2002-2012 time period, price growth for these assets is reflected as follows:

Asset                                                  10-year price appreciation (%)

Gold                                                                  434

Classic cars                                                       395

Rare coins                                                        248

Residential property* Hong Kong                     221

Stamps                                                            216

Residential property* Sao Paulo                      211

Fine art                                                          199

Fine wine                                                       166

Jewellery                                                       140

Residential property* Paris                             117

Residential property* London                         103

Watches                                                          76

Residential property* New York                     72

*All residential properties are upper-end

The FT.com article reports that 64 per cent of Chinese millionaires are collectors, which tends to boost prices of real assets. In classic supply-demand dynamics, the addition of thousands of investors from the BRIC sector (Brazil, Russia, India and China, where high-net worth households are growing fastest) drives demand and therefore higher prices for these finite-quantity goods.

FT.com also notes that with property investments, the largest cities have the natural upper hand. They are great places to live and regardless of where you grow up, you know where London is – as well as New York, Hong Kong, Paris and Sao Paulo, etc. But the children and grandchildren of investors in these well-known cities might be more adventurous, taking their money to invest outside of London, for example, “expanding as far as Richmond, Putney and even to the Docklands,” says the writer.

What should be noted, however, about comparing these different types of real assets is that the value of most is determined by factors outside the control of the investor. When a wave of interest in gold watches somehow washes over BRIC millionaires, for example, the price appreciation might double and triple in a year or two. Reportedly, Chinese wine collectors had a love for Chateau Lafite – until they didn’t. This led to a 19 per cent drop in price between 2011 and 2012.

Raw land investments, as with most real estate, defy strict apples-to-apples comparisons. Where land was developed before, during and after the economic crisis, are large variables. But agricultural land in England trebled in the decade preceding 2012, with the average currently more than £6,000 per acre.

Built real estate offers some opportunity to increase its value when an owner improves it or perhaps conjoins adjacent condominiums or buildings – although, that can decrease the value/square foot in many instances. Un-built property, raw land, can increase in value when local planning authorities can be convinced that development (typically, providing badly needed housing) will be a net benefit to the existing community. Fine wine, classic cars and rare stamps in comparison cannot be rezoned.

Potential investors in real assets need to be sure their investments are complementary and balanced within their portfolios. All investments should be made with input from an independent personal financial advisor who can access expertise on traditional and non-traditional assets for their investment potential.

How UK Land is Rezoned

More than ever, rezoning is a key consideration in UK land investing.

New zoning laws in the UK have ushered in a different set of land use planning rules. Now land investors work with local authorities to address community concerns.
The Localism Act 2011 brought a significant change to how land is rezoned in the U.K. Essentially, town and country planning throughout the U.K. is now under the control of 421 separate Local Planning Authorities (LPAs), a stark change from the regional authorities that formerly held this responsibility under the Town and Country Planning Act 1990.

Localizing authority has an impact on UK land investment dynamics. LPAs are organized at the borough, district council or unitary authority, where decisions about land use and building are considered along with other community interests and with input from local citizens. Given the general growth of the population in England and Wales (about seven percent over the decade preceding 2011), a need for housing makes this a pressing issue. Rezoning is sometimes necessary to enable developers and investors to build where housing needs are most critical.

The criteria that LPAs follow include:

•    Follow a general scheme – Before any requests for zoning changes are made, the local authorities must develop a general plan for land use, growth and use designation changes.

•    Submit information about plan revisions (rezoning) to public scrutiny – Regardless of whether an appeal to change a particular tract’s zoning comes from private parties or agencies in the public sector, those changes must be published for general public review and criticism.

•    Assess environmental impacts – In particular, the requirements of the Environmental Impact Assessment and Habitats Directives must be met, particularly with regard to the suitability of the land for infrastructure projects, such as how new roads, sewers and utilities would affect watershed, protected species and so forth.

•    Consider the social and economic impact of zoning changes – In the bill, the Community Right to Challenge (Chapter 3) provides that the LPA is required to consider social and economic impacts of any zoning alterations.

These considerations are important to investors interested in how the value of land can change with rezoning. Professional land investment companies understand the zoning process and will study the local economic conditions and LPA receptivity to land use designation changes. To the individual investor, it is important to consult a personal financial advisor, who can assist study where investments in real assets such as land factor into overall wealth management.