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.

Green Belt Versus Brownfield Land Development

Does land development in the UK boil down to green belt versus brownfields?

The national housing crisis in the UK is blamed by many on restrictions to green belt development. The solutions, however, may be worked out through localism.

There is much debate in the United Kingdom over different solutions for the housing shortage. One part of the argument has to do with the dearth of financing available to both builder-developers and potential homebuyers (although the government is dealing with this latter point through schemes such as Help-To-Buy). Another part has to do with government directives on where to build: in green belt areas or on brownfield land.

The UK green belt policies reach back to the 1930s, when political leaders adopted a policy to prevent suburban sprawl. These policies effectively kept a ring of forests, agriculture and undeveloped land around many of the towns of England, Wales, Scotland and Northern Ireland.

But the total population of the country has changed dramatically in the eight decades since, as have a host of economic factors. Not only has industry and population expansion created evermore-dense towns, but a housing crisis has developed due to an unfortunate confluence of factors in the past decade: immigration, a higher birth rate, seniors living longer, and the recession.

Total population growth in England and Wales has been at about 7 percent the past decade, adding more than 3.7 million people since the turn of the century. But the financial crisis of 2008 and the resultant recession have been consequential as well. Banks are reluctant to loan money to developers, just as they have not been lending to homebuyers. New home building is at the lowest rate, as a portion of population, in 100 years. Meanwhile, multiple generations of families are sharing housing while they wait for conditions to change – specifically, for more homes to be built.

So the question in broad brush drills down to this: when the economy recovers, where will home building happen?

Directives to build brown – and the problems that presents

PDLs, (Previously Developed Land) in the towns, offer an alternative to green belt building. Also called “brownfield” sites, this is where land is vacant or occupied by vacant and decrepit buildings, or perhaps zoned for commercial and industrial purposes but sitting empty – seemingly providing opportunities to build. This is land that is contained within the green belt rings, closer to town centres and on the grid of existing utilities. These conditions make it easy to develop property, and would provide a vital, urban lifestyle to residents – and consistency with the green belt ideals of the 20th century, right?

Around the year 2000 a government commission led by acclaimed architect, Lord Richard Rogers strongly encouraged building new housing on brownfield lands, in part as a strategy to avoid green belt development. The commission acknowledged that 3.8 million new homes would be needed by 2012.

Builder & Engineer magazine weighed in on the topic more recently and they aren’t in complete agreement with that approach. The publication cites how building over the past decade has been at 160,000 to 200,000 new homes per year (and less in 2012, with a reported 21,540 new starts in the second quarter, which would annualise at about 86,000 units). Why so slow? They cite the observations of Richard Simmons, who is managing director of the Construction Centre and also a property developer.

“I think it is because brownfield is pretty slow to come to market by the time you’ve done all the testing,” says Simmons. “You have to spend a lot of money first assessing the site. Firstly you have the desktop study where they look for what contaminants are in the ground and their assessment reveals whether remediation is needed or not, which can be expensive. As a developer you are always thinking that there might be the cost of evaluating a site that might go wrong, so it’s not as easy as building on a farmer’s field.”

Not all brownfield land is contaminated, counters the British Property Foundation. A spokesman for the organisation explained that the broader definition of brownfield is PDL, which simply means it was built upon in the past. “Green building isn’t necessarily plush green land,” the spokesperson told Builder & Engineer. “It can often be nasty and derelict.”

The green belt solution?

The Daily Telegraph published an opinion piece in August 2012 largely in support of green belt preservation. It cites Housing Minister Grant Shapps’ stated support for development outside of green belt lands. Still, the newspaper acknowledges the importance of housing and the mixed picture created by the Localism Act of 2011:

“Protecting the green belt is not easy: it is in the nature of economically vibrant towns to sprawl into the countryside, and only the green belt stands in the way. Moreover, the Government’s support for the green belt can clash with its commitment to localism, as many local authorities want to build on it or causally redraw its boundaries.”

The media watchdog group FullFact.org took its own look at the scenario in September 2012 and finds a more mixed view. The group critically examined claims by the Campaign to Protect Rural England, CPRE, which are that brownfield land in England was sufficient for the construction of 1.5 million new residences.

But a closer look at the available land found something much less, says FullFact.org. Overall, there are 61,920 hectares of brownfield land in the UK, as compared to 1.6 million hectares of green belt property. A little more than half – 54 percent – of the brownfield sites are vacant or hold derelict buildings. Only the remaining 46 percent, approximately 30,000 hectares, of brownfields are truly available for repurposing and building without displacing a current occupant. This does not distinguish the portion of those brownfields that are truly appropriate and feasible for housing: many are contaminated with industrial waste, while others are situated in industrial corridors, where it would be difficult to attract residents to live.

For all of us, including those involved in UK land investment as well as those looking at investing in real assets, it may ultimately prove to be an argument that offers no national solution, as housing needs and philosophies about green belt vs. brownfield land may differ from town to town. Which in the end may be the ultimate benefit of the Localism Act.

Historical Examples of Wealth Accumulation through Investment in Land

History holds many examples of significant wealth accumulation through land.

Most of the largest landowners today are royalty, and yet some of history’s wealthiest commoners came to their money through real property.

Throughout history, ownership of land has been the single most prominent indication and source of wealth. Until a few hundred years ago land was the sole source of food, of course, which either the landholder farmed himself or, as was the case in feudal society, he essentially rented it out to others – serfs – for them to maintain.

The industrial revolution shifted the balance of wealth accumulation, somewhat, to owners of capital (factories and machinery as well as property), yet land remains one of the most important means of wealth accumulation and preservation. Some of the richest people alive today derive or preserve their wealth from ownership and transactions of land.

The list of the top 20 richest people in the U.K. includes four whose primary wealth is in land. From a list published in 2012 in the Sunday Times of London, land-rich people include the Duke of Westminster (Grosvenor property group), brothers Simon and David Reuben (who own the Millbank Tower in London), Joseph Lau (whose £33 million home is in Eaton Square in London) and Earl Cadogan and family (whose £3.4 billion estate includes 93 acres in Chelsea).

Across the globe, other names that fall onto “biggest landowner” lists are largely, but not exclusively, inherited royalty. These are Queen Elizabeth who technically “owns” 6.6 billion acres in Great Britain, Northern Ireland, Canada, Australia and the Falkland Islands (an incomplete list); King Abdullah of Saudi Arabia, also the technical owner of the 830,000 square miles of the kingdom; Pope Benedict, whose Vatican City is 110 acres within Rome plus another 177 million acres of Catholic Church properties around the globe; King Mohammed VI of Morocco, with a 175.6 million acre kingdom; King Bhumibhol of Thailand (128 million acres, including prime coastal properties); the Sultan Qaboos of Oman, whose country of 82,000 square miles lie largely in the desert; King Gyanendra of Nepal (57,000 square miles, including Mount Everest); King Abdullah II of Jordan (35,637 square miles); King Jigme Khesar Namgyel Wangchuck of Bhutan (15,000 square miles); King Letsie 111 of Lesotho (11,718 square miles, which includes diamond mines); the Emir of Kuwait (4.4 million acres, of 7 million in the nation); King Mswati of Swaziland (6,704 square miles); the non-royal James, Arthur and John Irving of Canada (owners of 3.6 million acres of land in Maine, New Brunswick and Nova Scotia); Sheik Hamad Bin Khalifa of Qatar (all 4,415 square miles of the small but strategically-located country); and CNN founder Ted Turner, whose accumulation of properties in Georgia and Montana (states in America) and in Argentina total 2 million acres. (Source: BusinessInsider.com)

As the American writer Mark Twain said, “Buy land, they’re not making it anymore.” Indeed, as the population of the U.K. continues its brisk ascent – about a 7 percent net growth in the past decade – the finite nature of the country’s land presses the matter further. There is a housing shortage and soon there will be a need to develop residential property to satisfy this growing need. The investor who can effectively accomplish land site assembly that meets market needs wins the day.

Individual investors – those who aren’t born to royalty – sometimes have the skills and knowledge to make strategic land investments in their own pursuit of personal wealth. But other investors enter into joint ventures with professional UK land investment strategists as a means of making strategic investments and development. For more information, consult with a qualified personal financial advisor.

How Does Green Infrastructure Benefit UK Housing Values?

How are housing values affected by green infrastructure?

While widely known as a social good, green infrastructure is also studied for its impact on property values. The green news is good.

It may seem that with the pressing shortage of housing in the UK, there should be flat upon flat being constructed all over the country, in urban centres as well as on and beyond the greenbelts.

But while that may have been the approach in the Post-War period, we live in a more evolved and enlightened era. Urban planning has developed as a science that takes into account many factors before launching into building schemes, those factors including transportation management, how infrastructure can and cannot support population increases and density, as well as how new development can impact the local and global environment.

These are matters of significance to communities, to be certain. But the greater sensitivity to environmental considerations ultimately guide the work of those involved in UK land investment and development. Sustainable architecture and design require a different initial perspective, sometimes incurring larger costs up front that achieve a return on investment a few years later.

In particular, the devastating floods of 2000 and the spectre of climate change now drive greater attention to the effects of built environments on the natural landscape and weather phenomena, and vice versa. And, these events informed a report from Forest Research made to the Departments for Environment, Food and Rural Affairs (DEFRA) and Communities and Local Government (DCLG). It was titled “Benefits of Green Infrastructure” and released in October 2010. The extensive study undertaken in this report (196 pages) covers the benefits of green infrastructure in several respects: the economy, social impacts, the environment, ecological dynamics, land regeneration and hydrological effects.

As one might expect, it delivers a positive position on what a conscious approach to development can mean. This includes the use of plants and topography (i.e., how rain water is managed) to mitigate pollution and flooding and to encourage physical activity and social connections. But what’s striking is that home values are also impacted.

For example, it may be intuitive that homes bordering on green spaces (including official greenbelt lands) tend to be priced higher. After all, homes and cottages that border golf courses naturally have greater value on a per-square-foot basis than those a few miles away. But the DEFRA/DCLG report identified how developing and improving properties that are adjacent to green space yields higher returns on the real estate market. “Green areas have a better image and attract more visitors, bring with them retail and leisure spending and provide job and rental opportunities. This in turn increases land and property values,” cites the report, which borrows directly from a study titled, “The Economic Value of Green Infrastructure” (Natural Economy Northwest, 2008).

To come upon this conclusion, researchers use the hedonic price method, which computes economic values for ecosystem or environmental services as they directly impact market prices. The hedonic pricing model is used by urban planners, strategic land partnerships and others when proximity to open space is clear, as well as when data on real estate transactions are available. In other words, it is based on real experiences in establishing home values.

How much can this value be increased with the presence of private and public parks? Here are two key findings of multiple studies in the DEFRA/CLG report:

1.    A view of a natural landscape adds up to 18 per cent value to a home’s property value in North West England.

2.    A view of broadleaf woods in peri-urban settings increases a home’s value on average across the UK by £7,680.

Business activity can also be generated with green infrastructure. A project in the Mersey Forest, a network of woodlands and green spaces across North Cheshire and Merseyside, involved new tree planting (8.9 million trees planted thus far), woodland management, human access to green spaces and recreational facilities, habitat improvement and land reclamation encompassing more than 500 square miles of land. Of note, this was done by engaging local communities and businesses heavily in the process. The programme was hedonically studied and found to have directly increased economic output by £2.8 million in gross value added in tourism spend, jobs related to products from the land and in health improvements.

The relationship between green infrastructure and health, as studied at the Mersey Forest, come from increased physical activity and a removal from built, urban environments that are characterised by concrete and a lack of growing plants and wildlife.

Green infrastructure often also includes a conscious and decidedly natural approach to water drainage. Hydrological effects of the use of plants and strategically placed bioswales and wetlands help convey and absorb storm water in place, instead of sending it far away in human-built drainage systems. The floods experienced in the UK and elsewhere are often due to a concentration of water where built-systems cannot accept a large volume all at once, as it happens in storms. Environment Agency UK reported as early as 2007 that a failure to absorb water in situ, particularly with new housing and commercial development, could inflict £54.6 million in damages from river and coastal flooding per year.

Investors in land development and homebuilders are increasingly conscious of these factors and are now incorporating such green infrastructure into their planning processes. Of course, dedicating land to green space might reduce the total acreage on which homes and businesses are built, but the increased value of those built acres might offset that cost in the short run and certainly add value over time.

Individuals who are looking at real assets/land investments should consider working with two types of advisors. One would be a land investment funds advisor, expert at taking raw land to productive development. The second would be an independent personal financial advisor, able to assess an investment opportunity relative to one’s overall wealth management portfolio.

What Are the Risks of Real Assets as an Investment?

All investments, including property funds and other real assets, carry risk.

Following years of poor performance by market-traded securities, investors are choosing real assets as an alternative. But all investments are subject to risk.

Battered by an economic downturn over several years, investors in the United Kingdom are, like their counterparts in the European Union and the United States, looking for investments that maximise asset growth. Traditional market-traded securities (stocks and bonds) in particular have underperformed, leading investors to look at alternative investments.

Alternative investments range from the opaque (short only funds, ultra short funds, absolute return funds, market neutral funds, hedge funds) to the transparent, such as real estate investment trusts (REITs), private equity and venture capital. A subset of alternative funds includes real assets, including land, developed real estate, rarities (art, antiques, stamps, fine wine, coins, antique cars), precious metals (gold, silver, platinum, palladium) commodities (energy sector fossil fuels, plus agricultural goods such as wheat and corn) and even renewable energy products (biofuel crops, solar panels and wind turbines).

This last category, real assets, holds great interest after the disappointments of exotic and complicated investments such as derivative assets. Art can be appreciated with the eyes, much like antiques. Fine wine can be held, traded or even consumed (a reckless investment act, but sometimes a celebratory gesture of something of even greater significance). Land can be traversed, formed, beautified and turned into human habitat. Precious metals are sometimes adornment, or held in bulk in safety vaults. We feel good when we invest in energy to power industry, perhaps even more so when it is from renewable and non-polluting sources. An antique car might be driven for very special occasions – carefully and responsibly.

But real assets such as these carry their own risks. While insurable, rarities such as art and antiques can be utterly eliminated by fire, natural disaster or theft. Commodities are subject to market forces that can, under some circumstances, cut value to a net loss.

Land investment and land development are also subject to external forces. But professional advisors control variables in strategic land investments with methods that include the following:

1.    Choose land that will likely appreciate – Experienced land investors (many investors join small-group funds with professional advisors) search for property that is ripe for development (usually for housing) to accommodate the U.K.’s growing population. Such properties are typically slated to become part of a town plan. The investors – who at a minimum invest £10,000 – do not blithely wait for the planning process to play out but actively ensure their land investment progresses on a timely basis.

2.    Infrastructure investment (where appropriate) – Some land investments benefit from the building of roads, the installation of utilities and water and sewage removal. This makes the property ready to build for construction firms.

3.    Expertly time the land sale – All strategic land development follows a pre-set timeline. This is important to the investor, as he or she can know when to expect a distribution on the eventual sale profit.

Still, even well managed property funds investments come with unknown variables. Would-be investors who want to learn more about strategic land should consult with an independent and qualified personal financial advisor.