RICS: “UK Housing a National Emergency”

The UK housing crisis has significant economic and social implications. The Government is responding, but private investments can really make a difference.

The Royal Institute of Chartered Surveyors (RICS) has been particularly vocal in 2015 regarding the rising cost of housing in the UK. The Institute lays blame for increasingly unaffordable homes to a supply shortage and, more specifically, a shortage of land released for use as residential property.

This is a scenario that is familiar to housing investors who, while typically working through joint venture partnerships, find their most critical task in the process involves petitioning local planning authorities for a use change. When achieved, the value of the land increases significantly – to the landowners, and to the surrounding community. UK land investments that result in housing have a ripple effect on the regional economy, particularly in how they make affordable housing a tool for employers who want to woo workers from other cities.

But when planning approval is a long time coming or fails to materialise, the whole goal of applying funds to achieve capital growth through residential development is derailed. The Localism Act of 2011 sought to reduce that, allowing for local councils to determine when a use conversion should be granted – and it has had that effect. And yet RICS and others feel the Act didn’t go far enough.

In a statement issued in mid-May 2015, shortly after the national election, RICS said, “The affordability and availability of homes in the UK is now a national emergency and addressing this crisis must be the priority for the new government.” The organisation’s head of policy urged the Conservatives to develop a “coherent and co-ordinated house building” strategy – meaning, that public authorities and private investors (e.g., partners in capital growth funds) alike need to step up and add new homes at a greater rate than has been the case for more than a decade.

Home building in 2014 was up from previous years, with 141,000 homes completed by the end of December. But even that number falls short of what is needed, which is closer to 250,000 per year to make up for a million-home deficit that currently curtails household formation. The building rate has fallen since the 1990s for a variety of reasons that include more-stringent lending practices (particularly since the 2008 financial crisis), a growing population and a failure by Government to replace social housing sold to tenants in the Right to Buy programme begun in the 1980s.

Conservatives argue the programs developed under the first administration of David Cameron effectively helped first time buyers get on the property ladder. Indeed, Help to Buy and other programmes have been instrumental in helping younger adults save for and purchase their first properties. But Labour spokespeople counter that this is working from the “demand” side, pushing up prices even further because supply is not yet ramped up appropriately to meet this increasing degree of demand.

Given the political wrangling involved, it’s no wonder that many see greater solutions when private investors (i.e., financiers looking to achieve capital growth from the funds they invest) get involved.

UK land investment money is smart when it is spent first in the areas of greatest need (demand). PropertyWire.com reported in mid-2015 that where employment rates are highest, there too are the biggest gains in value to homeowners and real estate investors:

• “The 20 local authority districts with the lowest unemployment have experienced average house price rises of 25% since 2009 compared with an increase of 17% for Great Britain as a whole.”

• “The 20 areas with the highest levels of unemployment have recorded an average house price gain of 3%.”

So while publicly supported housing is an essential part of a stable and just society, private investments and skills (i.e., joint ventures with partners in finance, infrastructure design, house builders and estate agents) are more likely to foster healthy economic development.

Investments in housing and real estate can yield great results and they are interesting in a growing economy cycle, as is the case currently in the UK. But an independent financial advisor should be involved in every significant position for an investor, as the variables are many while the stakes can be high.

The Difference Between Open-Ended and Closed-Ended Investments in Real Estate

There is a broad array of means to invest in land and property in the UK. That variety spells different kinds of opportunities for different kinds of investors.

Investments in UK land and property have always held a strong portion of individuals’ wealth portfolios and the assets held by institutional investors in the UK. But in an era far removed from a time when a select aristocracy controlled vast estates, real estate has matured and broadened in the 20th and 21st centuries.

For example, millions in the middle class – 14.3 million households, about 66.7 per cent of families and individuals – own their own home, although that portion has slipped from about 70.9 per cent in 2003, the historic peak. About three per cent of the country’s housing stock is owned by small-holdings landlords; the 1988 Housing Act made buy-to-let investments attractive to individuals who enjoy rental income, rising capital value and a lower perceived degree of risk relative to other investment classes.

Other forms of investing in real estate are through a joint venture land opportunity. This is where a group of investors work with strategic land specialists who identify land that could and should be developed. The expertise lies in identifying where development will serve local interests, such as to provide a workforce to nearby employers, as well as how to work with local planning authorities to achieve appropriate use designations. Contrast this with investing through a real estate investment trust (REIT), where the investor has a more distant relationship with a broad portfolio of properties (almost always commercial in nature).

An important distinction within real estate investing is whether the asset is a closed-end or open-end investment. In brief, these differ as follows:

Close-ended investments – This is a method for raising capital by way of an initial public offering, which typically is listed on a stock exchange and also referred to as an investment trust. The investment fund is actively managed and very often contains multiple securities, a fixed amount of share capital, and there are no further issues or unit redemptions according to shifts in demand. Share prices are not determined by net-asset value (NAV) but rather supply and demand. Closed-ended investments tend to be used for illiquid securities.

In the UK, a REIT needs to satisfy certain conditions, including being listed on a recognised stock exchange, having one class of ordinary shares and to be a closed-ended investment company.

Open-ended investments – By definition, an open-ended fund involves taking an ownership stake in one or several properties under management of the fund. When several investors are aggregated in an investment and they are able to redeem their shares by selling it back to the fund, it is known as an open-ended investment. Unlike with a closed-ended investment, the investor can simply redeem his or her shares from the fund without finding a third-party buyer.

In the case of a real-estate open-ended fund, such as a joint venture that exists to develop land into residential or commercial property, redemptions might vary depending on the size of the shareholdings. Larger investors might have longer tie-in periods (e.g., a 12-month tie-in versus a five year tie-in) to smooth out liquidity concerns.

Individuals who wish to participate in UK land investment – be it through open-ended or closed-ended programmes – should seek advice from independent financial advisors.

What Strategic Land Investors Need to Know About Water and House Building in the UK

Stormwater and wastewater services are increasingly important for quality development in the British Isles. Climate change affects infrastructure decisions.

Rain is nothing new to England. But the rate at which it falls may be. To both homebuyers and homebuilders – which include urban planners and investors such as those working through real asset funds – this is becoming an increasingly critical consideration.

Why? Climate change may well be a factor in the floods that inundated parts of the UK in the winter of 2013-2014. A study out of Oxford University reported in The Guardian (April 2014) indicates that “far more frequent severe floods for residents of the crowded region, with what were once extremely rare events [are] now happening much more often than the infrastructure of the region is equipped for.”

This comes at a time when building new homes is critical to the country. More homes mean more roads, more parking lots and more roofs, factors that prevent natural absorption of rainwater. But urban planners, landscape architects, municipalities and builders are responding appropriately. They are demonstrating that communities and homes can be designed to mitigate stormwater and the damage it can cause.

For example, on both a per-home and broader community basis, techniques to channel stormwater toward natural infiltration of water to the aquifer include rain gardens and bioswales. The UK engineering firm HR Wallingford, an environmental hydraulics organisation, has done extensive work with soakaways, trenches and basins that comprise infiltration design. The firm also performs runoff and stormwater storage analyses and builds rainwater-harvesting systems that clients can use to save water for landscaping and other non-potable uses in drier time periods.

These kinds of tools break the 20th century development paradigm that most typically channelled storm water through grey infrastructure, concrete and metal pipes that ushered water away from homes and businesses to natural streams and rivers or to municipal treatment facilities. Experience shows those systems are inadequate in heavy precipitation and with growing populations.

For the development investor, such as those working through real asset fund managers, this can sometimes translate into higher development costs. And sometimes not – every site is unique and occasionally a sustainable water-management system can be cheaper than “grey infrastructure” that is based on traditional pipes. But even when the costs are greater, it can translate into more valuable property and lower property insurance costs over the longer term. Calls to the National Flood Forum (NFF) charity tripled by early 2014, a result of the flooding events of the preceding winter. It was not unusual for a homeowner to see a doubling of his or her premiums (e.g., to £2,000/year) while one small business proprietor reported an annual premium rise from £4,000 to £25,000. A smarter design for new-build communities could help avoid that.

Investors who specifically look at UK land investment opportunities for home building need to ask questions about how sustainable the development might be. They should also engage an independent financial advisor to get a better sense of where land development might fit their investment risk profile.