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.

Be a Land Investor, Not a Real Estate Speculator

With demand for housing at an all-time high in the UK, it is easy to become enthusiastic about land investing. Just be careful about over-exuberance.

The data analytics company Hometrack showed an interesting and perhaps alarming trend (depending on how you look at it) in home sales in May 2013. While the sales agreements for the month were up 8.2 per cent, new homes being built were only up 2.8 per cent. Does this outsized demand level not only push prices upward, but up into a real estate bubble once again?

Certainly, to Londoners that may seem to be the case. Central London home values recovered very quickly from the financial crisis and its aftermath in 2007-2010. But much of the demand driven there in that pricey market is a function of it being London: home to the international well-to-do, many of them from other countries who are here seeking a more stable society and economy. The same phenomena are observed in international cities that include New York, Tokyo, Hong Kong, Sydney and Melbourne.

But contrast that to home values in the rest of England and Wales. In the prosperous South East, prices are up but far from the levels seen in London. The Midlands and Wales have continued to see slow growth. The Funding for Lending scheme from the UK government, and historically low interest rates from the banks, are helping create some of that demand.

This is not surprising considering how there is wide concern about a third recession in 2013. In the economic seesaw seen over the decades, worries about the economy reduce purchasing of all kinds. When prices are low enough on such things as real estate, property fund management teams often swoop in to buy at the lowest prices in anticipation of a solid growth in asset value in the near term.

Land speculation is rarely a beneficial phenomenon in the long term. It generally means land prices rise above the productive value of the land itself – for example, when £10,000 per hectare is the going rate when under any zoning circumstance (agricultural, commercial or residential) the land cannot produce that much value. When the bubble – more a psychological matter than good sense investing – bursts, lenders to speculators cannot recover the loans, which then creates serious problems in the financial markets.

It should be noted that land speculation typically and quite obviously occurs when demand outstrips supply. And in the UK, where 130,000 fewer homes are built each year than are needed, that indeed is the case. What holds back speculation from happening now is the recent experience of a burst bubble – this factors heavily into private investor and financial institution thinking. No one wants a repeat of 2008.

No one – not governments, not homebuyers and most investors – likes a rapid rise and rapid fall. This kind of volatility leads to big winners, big losers and a generalised instability. The more solid land investment operates on a different model, where reasonable and logical strategies lead to a slower degree of growth.

So where do land investors wanting capital growth find those solid returns? Real estate investment trusts (REITs) have had at best middling success since being introduced just prior to the recession. They seem more subject to the dynamics of market trading than land and building supply and demand.

Strategic land investors working with land development experts often do so in micro-markets. In areas where employment is growing, for example, there may be strong incentives for local planning authorities to grant land use changes from agriculture or industrial to residential (to accommodate economic development). A strategic land investment will necessarily require work on the part of the investors (or their joint investment advisors and agents) to achieve the zoning change, design and develop infrastructure, then sell the land to homebuilders. This process is perhaps too slow for speculators, taking 18 months to five years to complete and to achieve a return on the investment.

Even with the more strategic approach to land development, an investor is strongly advised to work with an independent financial advisor. This helps the investor weigh the relative risks and rewards of land development against his or her capital growth planning and make decisions based on objective criteria.