Site Development No Longer the Job of UK Homebuilders

Homebuilders used to do all the work: Buy land, achieve a use change and build roads, then build and sell the homes. But now land investors do that -- here’s why.

The good news is that homebuilding in the UK in the first quarter of 2013 was at its highest in five years. The Chancellor of the Exchequer, George Osborne, is given partial credit for providing equity loans up to 20 per cent of the value of newly built homes. This “Help to Buy” program is available to purchase homes valued at or below £600,000, and can be accessed by both first-time buyers and people who have previously owned property.

It only makes sense, after all. With a growing population (up 7 per cent from 2001 through 2011, according to Census 2011 data) concurrent with the economic downturn, there has been a dearth of new home construction that has affected a generation of would-be homebuyers. Credit access for buyers has blocked many from buying, creating pent-up demand.

Another problem that has confronted homebuilders has been diminishing margins. The business has traditionally been capital intensive: they would need to acquire land sites that were appropriately zoned for housing (or slated to change, per the local planning authority), develop the streets and utilities infrastructure, then find buyers for homes they would build. The amount of upfront cash and the time frame over which all development took place forced significant carrying costs and risks on the homebuilder.

Now, however, the business model has shifted somewhat. Land investors are taking on the risks and rewards of site acquisition, zoning changes and site preparation, adding streets and public utility services, as needed. Once that is done, homebuilders buy the land, build houses and then sell them.

Why does this arrangement work? It’s about doing what one does best. Land investors and site development specialists bring a certain expertise and resources – knowledge on how to strategically acquire and prepare sites, which a homebuilder may lack. Subsequently homebuilders, who are expert in constructing the type of housing that the market needs and wants, then focus their skills there. Capital is invested in each phase, but the risks are better understood and the time frames shortened (which also mitigates risk).

Implicit in all of this of course is the complexity of each task. The business of site preparation isn’t for the dilettante. This is why land investors are increasingly turning to specialists who know the process and the pitfalls. Land investment groups are generally attuned to the government’s housing delivery initiatives and localism agendas. They are able to mitigate planning risk such that they can target per annum returns in the double digits.

In the end, all players in the equation should be able to thrive in the months and years ahead. The inexorable increase in population is creating ever-growing demand for housing, which is unlikely to be satiated anytime soon.

Individuals who consider alternative investments and who plan to invest in land for development into housing are encouraged to work with an independent financial advisor. Land investment comes with its own set of risks that specialists understand; how the risk fits individual portfolios needs to be evaluated one individual at a time.

Advisory: None of the information contained on these pages constitutes personal recommendations or advice. If you are unsure about the meaning of any information provided on this website, then please consult your financial or other professional advisor.

New UK Housing Sector Investor Advice

As institutional investors venture into the rental market after a half-decade’s absence, private investors are considering how to-let housing might work for them, too.

The news in March 2013 that Prudential Property Investment Management Division UK was growing an investment residential property portfolio signalled an important and interesting shift in both the housing and investment sectors. “The Pru” spent £140 million to purchase 500 homes from Berkeley Group, a national homebuilder; this was the single largest transaction by an institutional investor in to-let housing since the financial crisis of 2008.

Other institutional investors are being encouraged to similarly invest in the rental market. Chancellor George Osborne announced earlier in 2013 that they will increase the budget to fund build-to-let property from £200 million to £1 billion. Reportedly, Legal & General and Aviva are investigating these opportunities.

The market demand for housing of all kind is certainly still there. The paucity of building – only 110,000 homes were built in 2012, while the UK population growth and replacement of deteriorated housing demands that 240,000 homes be built every year – is well understood. Younger buyers in particular are finding it difficult to summon the deposits required to make a purchase, and banks were stringent in their lending standards during the recession.

Consequently, private investors are now looking at rental housing for capital growth investments, and many financial advisors believe doing so can complement a diversified investment portfolio.

For the individual, there are two ways to go about this: either on a property-by-property basis, or in joining with property fund partners, such as with raw land purchases for development. A third method is a real estate investment trust (REIT), however most of those focus on the commercial market (one REIT was launched in 2013 that focuses on student accommodations in London and two others are reportedly in formation).

The “Money” section of the Daily Mail online provided a list of tips for individual to-let housing investors, emphasizing how this is far from a passive investment. Among the advice provided were the following:

Know the market: Rents will range widely depending on neighbourhoods, features and amenities. Investigate this relative to your ownership expenses. Surprisingly, the best returns do not necessarily come from the most expensive properties – a survey of 50,000 rental properties found better profits in Wales (fetching a 6.7% yield, calculating rent as a percentage of property price), the North and the Midlands, as compared to Central London and the South East.

Know the trends: Figure out where people, particularly younger working adults, are moving. Access to good transport and well-rated schools each increase the value.

Mortgages and rent equations: Be a savvy mortgage shopper, opting to use a broker if you prefer. But aim to get a monthly mortgage payment that is about 80% of what the likely rent will be.

Don’t be overzealous: Most built properties have been properly valuated and will not see the same run-up in value as it happened during the bubble period of ten years ago. Expect a slow value increase in properties, with perhaps your best asset growth coming from improvements you make to the property. This is where you can negotiate the best price and achieve an increase in value by doing the work your self or hiring professionals within a set budget.

Do more/make more: While you can contract out almost all services required of a landlord, the landlords who do some or all of the work required will save more and perhaps have better control of the investment overall. A rental agent and maintenance people can be hired, but if you are willing to spend evenings and weekends showing, painting and repairing a property feature, you’ll keep more of the rent money for yourself.

The alternative, something such as a land investment fund, is a different engagement altogether. With an investment of £10,000 or more, you would be joining with other investors, who in turn hire land development specialists (among the biggest upside in real estate today is in getting land use designation changes for raw properties in strategic locations). It’s a much more passive engagement, even though the actual transformation of land to housing is tracked through the course of the investment.

Whether an investor chooses to get involved in a property, to invest through market-driving REITs or join in a capital growth investment fund that specialises in land, it should be done with a holistic look at the overall portfolio. The counsel of an independent financial advisor is strongly recommended.