How Land is Purchased at an Optimal Low Price

Purchasing land at an optimal price requires timing and skill from the investor.

Several factors can affect the current and future of undeveloped land, not the least of which are specific characteristics of the property itself and the overall economy.

The first aphorism of investing is simply this: “Buy low and sell high.” The second may well be, “easier said than done.” Both apply to the business of strategic land investment in the UK.

First, understand that investment in land, particularly undeveloped tracts, is growing due to key factors: a net population increase of 7 percent over the past decade, plus a housing shortage that is already facing pent-up demand that might reach dizzying heights with a post-recession economy. Add to that the Localism Act of 2011, which alters the rules by which land use designations are changed (i.e., more power to local councils). Decisions are now made by local councils that were formerly the province of regional agencies; this can help or hurt investors’ chances for achieving optimal return on an investment.

It may help to break the equation into four distinct considerations:

• Look for the dips that precede demand – Basic, and that’s exactly where we are at now. Land prices are low as a result of the economic downturn. The economy still has a long way to go to achieve full recovery, and population increases will multiply the effect that has on housing demand.

• Anticipate the needs of the seller and the eventual buyer. The seller may be a single entity (a farmer or inheritor of a land tract, for example) or several parties. What are their financial needs? Why would they choose to sell – or not? Can a good price be negotiated? As for buyers, it is about anticipating demand for the land’s ultimate use designation, be it commercial, residential or industrial.

• Even in a heated market there are opportunities. Where specific properties offer strong upswing potential.

• Have good local knowledge on the property in question. Towns that can provide housing will also be able to attract employers, but not all local citizens want or need such local development. Before buying a property, it helps to understand the local mood and propensity to see development as a good thing, then create a land site assembly package that fits the extant neighbours’ needs.

The most effective means for those looking at alternative investments is to work with land acquisition and development specialists who do extensive research on properties that meet each of these considerations. The potential investor should seek objective counsel from a professional financial advisor to understand where land might fit into their overall financial planning.

How Have Property Funds Performed Since 2010

To understand property fund performance since 2010, one must look back to 2007.

Investors in property development are presented with a very mixed picture in 2013. Several variables suggest it’s a tricky market – with a few bright spots.

It almost goes without saying that the past five years, since the financial crises of 2008, have yielded poor returns on investments in virtually all asset classes save for the countercyclicals (which include gold and its highly aberrant returns). The economic recovery – in the UK, the broader Eurozone, the US and elsewhere – has been spotty and irregular. In response, investors have migrated away from market-traded securities to real assets, including raw land and built property.

So what has happened with real estate in its various forms in the last two or three years, as the shocks of 2008 settled in and recovery began in fits and starts? The performance of real estate must necessarily be subdivided into its distinct sectors for a reasonable analysis, which is in many respects an apples-to-oranges comparison. Following is a hodge-podge overview of oft-cited indicators:

Housing prices are an indicator of not just land values but the economy as a whole, and yet several external factors confound drawing broad conclusions from “people are paying to purchase a home. By the fourth quarter of 2012, reports Savills, average UK house prices were still below their September 2007 peak. In real, inflation-adjusted terms that actually is a 24 percent drop.

So why is that not a clear indicator? Mortgage finance and an inability for would-be homebuyers to come up with an adequate deposit mean that there are buyers who simply cannot afford to get mortgages. In the past decade, the average first time buyer deposit requirement has risen from £12,000 to £58,000 – tough work when so many young people are struggling with employment and lower salaries. Fix the lending standards and perhaps there will be more movement in this regard.

Institutional investment in real estate is meaningful, given how the Pension Real Estate Association, which covers £1.5 trillion in assets under management, found that its members hold about 10 percent (£155 million) in real estate in one form or another. But a May 2012 study out of Maastricht University found that across the Eurozone the only indication of performance by assets in real estate is the allocation of funds placed into such investments (that is, returns on those investments are unknown). Growth in allocating funds to real estate investments leading up to 2008 was strong, but dropped by more than 30 percent by mid-2010.

House building is yet another indicator, which Savills reported near the end of 2012 as sluggish, but with several reasons for optimism. Starts are less than 55 percent of what they had been in 2007 throughout England, Scotland and Wales (however, Central London is a different story altogether, with prices and new construction climbing).

Land values as measured by Savills shows reason for optimism, with late-2012 growth of 0.4 percent of urban land in the third quarter of the year, and a 0.7 percent price growth for greenfield properties (in London, the quarterly growth was an outsized 4.6 percent).

Several media organizations offer up both criticism and optimism for investors in land, citing first the government’s Funding for Lending scheme, which was unveiled in the summer of 2012. Reporting in The Telegraph in January 2013 suggests the six-months-old program was not effectively delivering looser financing for homeowners from the government’s infusion of £80 billion in state-backed loans, however the full effects cannot be measured until at least a year into the program (by mid-2013). For homebuilders and land investors, the cost and slowness of the planning system is also thwarting activity.

The forecasts for strategic land development into residential property can be driven by a very different and powerful dynamic, which Savills calls “Generation Rent.” Priced out of ownership, the concentration of 20-34 year olds living in major metropolitan areas are settling into a rent-it mentality. While the largest landlord group are private individuals, who themselves cannot get adequate debt funding, larger organizations with cash are the more likely builders of to-let properties (i.e., building for renters). The demand is certainly there: a 7 percent increase in population in the UK between 2001 and 2011 has pushed a critical need for housing that is currently unanswered by woefully slow building during the recession.