Strategic Land Investment Versus Stock and Bond Markets – A Comparison

How Do Traditional Investments – Stocks and Bonds – Compare to Strategic Land Investing?

Investors are looking outside of stocks, bonds and REITs for better returns. But the alternatives, real assets such as strategic land, defy apples-to-apples comparisons.

The performance of stocks, bonds and REITs (real estate investment trusts) is based partly in the companies they represent and partly in overall market trends. This has proven to be dissatisfying to many investors in recent years because, net-net, those types of investments have shown little overall growth amidst a sea of financial volatility.

An alternative, strategic land investing, is attracting disenchanted investors because, simply, such investments are able to outperform the securities traded on the London Stock Exchange, the New York Stock Exchange, the SEHK and other trading organisations.

What makes for this difference? Why would an investment in land be advantageous over something as apparently similar as a REIT? And doesn’t the general health of the economy affect demand for land in a similar fashion to demand for stocks. These are important and natural questions, best understood by considering the following premises:

•    Strategic land versus REITs – Most real estate investment trusts hold commercial property such as office buildings, retail centres and warehouses. Strategic land, however, is primarily made up of acreage that is unbuilt but ripe for municipal repurpose designations. The strategic land fund, a conglomeration of investors working in partnership with land acquisition and development professionals, will purchase the land and improve its value by various means such as rezoning and infrastructure development (“land site assembly”), then sell the property when its value is sufficiently increased (often, within two to five years).

•    Strategic land versus stocks and bonds – Investors in market-traded securities follow trends, which often supersede the intrinsic value and worth of individual companies. REITs, also traded on the exchanges, are subject to the same generalisations. But strategic land values rise and fall on the acumen of investment property specialists – in how and when they purchase property, their success at rezoning, skill at cost-effective infrastructure construction and identifying the optimal time to sell.

•    Strategic land relative to the general economy – The general economy may be in the doldrums, yet specific tracts of land in select locations might concurrently be highly desirable due to area-specific factors.

These are each reasons why strategic UK land investment specialists hold great value with their investors. But before you embark on a strategic land investment, speak with your personal financial advisor who understands your own investment goals, timeframes and tax considerations.

Building Depreciation Versus Land Appreciation

Buildings Can Sometimes Lose Value While Land Investment Values Grow

The characteristics of property that contain buildings are different from undeveloped land. These differences affect value growth of both asset classes.

Real estate investors are growing in number under current economic conditions due to several factors. One is that traditional investments in the stock markets are providing disappointing yields. Another is that real estate overall suffered in the global recession and properties of all types are potentially undervalued.

But land that is undeveloped differs significantly from that which has buildings and infrastructure components (water, waste removal and utilities) and is proving to be one of many viable alternative investments.

So why do changes in the value of undeveloped land not mirror those of developed land.  There are several factors at play here:

•    Simple physics – The principle of atrophy applies very directly to built property. In addition to the costs related to routine maintenance, all buildings require major repairs over time. The costs can be a significant factor on landowners’ balance sheets.

•    Adaptability to market needs at time of sale – In addition to a propensity to age and break down, built property is inherently inflexible. For example, a structure built to be a hospital can only become a residential building with extensive renovations. However, undeveloped property can provide optimal economics to builders, buyers and occupants at key moments. By engineering smart site assembly, the investor can accomplish strategic land development that efficiently meets market needs.

•    No tax benefit to building depreciation – American investors are accustomed to a depreciation formula on investment property, which unfortunately is non-existent in the UK tax laws.

•    The beneficial value of new – Some buyers want to be the designers and first occupants of structures. This is even more pronounced in this era of green building, where structures today are significantly more energy efficient and sustainable than those built as recently as five years ago.

Of course, this is not an either-or scenario. Different investors work according to different strategies, asset allocation/diversity and on different timelines. Also, some investors have the technical knowledge to manage and improve a property, while others work with consultants or fund managers (when an investment is made with several sources of funding in collaboration) or through joint ventures. For more information on the type of land or property investment in the UK that might be right for you, contact a qualified personal financial consultant.