How UK Cities Realize Economic and Community Benefits from Housing Construction

The burst of the housing bubble in 2008 put many UK homeowners and taxpayers on guard against building. But the benefits of building are hard to ignore.

UK planning minister Nick Boles told The Guardian in early 2013 that Margaret Thatcher’s vision of a nation of property owners will fail if “home ownership will revert to what it was in the 19th century: a privilege the exclusive preserve of people with large incomes or wealthy parents.”

What he was speaking to was the current housing crisis, where only half as many new homes are being built as should be to accommodate the growing British population. With a projected growth rate of 27 per cent over the 25 years between 2008 and 2033, new homes are essential. And yet due to a variety of factors - the credit crunch is cited most often in the wake of the financial meltdown in 2008 - much-needed homes are not being built.

Certain schemes such as the “Help to Buy” programme may work - early reports are that it’s better than nothing. An expanding economy, however, is what would help the most. But of course the two are interrelated - what is good for the housing industry is almost always good for the economy overall (short of housing bubbles, of course).

A report from the Scottish Government: Communities Analytical Services (“What does the literature tell us about the social and economic impact of housing?” 2010) provides an interesting and fairly comprehensive look at the community benefits of a revitalized housing sector that can easily apply to England and Wales as well. It argues that the construction industry overall has a disproportionately large impact on the economy, relative to other industries. The benefits break down into three basic components:

1.    Direct economic benefits - In Scotland, construction comprised 10 per cent of the GDP in 2009, employing 5.4 per cent of the total workforce that year. Fiscal stimulus programs in the recession were judged to have saved a proportionate number of jobs in the private sector. The most meaningful impact of additional house building is to improve affordability - something that is critically problematic in England and Wales, where the prices of home are beyond reach of more people than just eight years ago (the portion of housing that is rented has risen by 17 per cent in just seven years). But renting is not a decisive negative: private renting, on the rise in England as well as Scotland, contributes to labour mobility. And key to homebuilders, the impact of all new home building is greater in areas of expanding markets versus those that are on the decline.

2.    Indirect economic benefits - Housing wealth as measured by house prices translates into new business collateral (supporting start-ups and self-employment) as well as other forms of credit access. New home building can advantage one city over others in attracting and retaining a skilled workforce. And housing policies that lead to greater ownership rates have an inverse effect on old-age poverty.

3.    Social impacts - While the study acknowledges there is a “lack of relevant housing data on the economic impact ... of housing on health, education and so on,” it references extensive research that shows the correlation between overcrowding - what is happening throughout the UK due to under-building - and poor “self-assessed physical health as well as stress and mental health problems.” Poor housing also correlates with run-down estates, homeless and low educational attainment.

In March 2013, John Cridland of the Confederation of British Industry (CBI) made an appeal for building 100,000 new homes, with £2.2 billion earmarked for government spending in “high growth areas,” creating 50,000 affordable (lightly subsidized) homes. His push for affordable houses are about making London and other city centres affordable to essential service providers, such as nurses and firemen, as well as the construction jobs created along the way. Worth noting is that this runs counter to the Cameron government’s determination to rein in spending.

The political debate will rage on, of course - the tenets of Thatcherism remain an unsettled dispute several decades after the fact. But with a clear need to build in several critical cities and counties, there should be good data collected over the next several years to feed the discussion - as much as new home construction might feed the economy itself.

Investors are increasingly drawn to the housing market in multiple real asset classes - REITs, via homebuilding companies and those who invest in strategic land that can be designated for zoning changes to residential and commercial use. As with any investment, interested participants should discuss opportunities with independent financial advisers who can determine acceptable risk.

Homebuilding and Land Site Investment Are Separate Entities in the UK

Historically, homebuilders bought land, achieved zoning changes, constructed houses, then sold them. But land site developers change the equation – and reduce risk.

After five full years of an economic downturn for homebuilders, sellers and buyers, the news is instead looking up in the United Kingdom. The Wall Street Journal reported in April 2013 that homebuilder stocks were up 80% over the previous 12 months, buoyed in part by the government’s Help-To-Buy schemes announced earlier in the year.

This came about six months after Reuters reported that UK home builders were sitting on land banks, much of which was purchased in 2009 and later, when the price of land had plummeted. They are now about to leverage the value of that land, pending development consent from local planning authorities, to build new homes.

But many of those homebuilders suffered quite a bit through the earlier years of the recession, with portfolios of property that included land purchased just prior to the financial crisis of 2008. That expensive land was a drag on profits – those firms that had deep pockets might have been able to afford to carry the costs, but many homebuilders (particularly smaller ones) fell out of the business entirely because of crushing debt.

Some of this recent land investing and building history helps illustrate how the business of development on raw land has been bifurcated in recent years. Instead of builders taking on the full risk of investing, building and selling, land investment specialists now undertake the first stages. In addition, real estate analysts at Savills report that the forthcoming Basel III banking regulations could constrict debt funding, which further limits how much risk homebuilders will be willing to assume. They will instead look for smaller parcels of serviced (infrastructure-built) properties.

The new approach is for land specialists, themselves or with the help of investors, to make strategic land purchases. They engage in intensive market research to identify where growth is most critical, then investigate raw land where that might be possible, taking into account seller predispositions, existing and needed infrastructure, as well as how amenable to planning changes are local planning authorities. The land specialists might (and often do) build the infrastructure – roads, water and sewer, and electrical capacity – but then sell parcels or plots to homebuilders, who have greater experience at both construction and the marketing of the built properties.

To a land site investor, the holding of property for several years before construction begins – as happened to homebuilders since 2008 – does not fit the business model. The investor’s objective is to turn the investment as quickly as possible, and to buy land in the first place that will sell at an optimal price in the near term. This is part of why land-to-build investors are coming to real estate from other alternative investment categories: If their options are hedge funds, precious metals, real estate investment trusts (REITs) or market-traded securities, the return on investment formula places heavy weight on timing. The land investor may plan to achieve a return in as little as 18 months after acquiring raw land (note: it sometimes can take five years to bring a property to market and realise the return on investment).

A key component is of course zoning changes, taking land that might be designated for agriculture or other uses and have it designated by local authorities for residential or commercial development. Homebuilders may have this capability in-house as well, or may contract it out to others. With land investment specialists, it is an essential part of the business model and a key component of achieving profitability. Relationships with local planning authorities in strategic locations certainly aid in this process.

Land investment, particularly with raw (unbuilt) properties, involves risks just as much as with other types of investment. But by controlling for factors such as land planning, and splitting the risks – and rewards – of building and selling completed homes, residential land investors mitigate those risks. Individuals who are interested in land investments should speak with a personal financial planner to determine if any particular investment fits their overall financial portfolio.

The Battle Over Land Planning Reform in the UK

UK land planning reform is a battle of tough choices.

Clearly, greenbelt and other open lands in England are among its greatest assets. But raw land development might be a smart answer to the housing crisis.

All over the developed, industrialised world there is a somewhat civilised form of conflict over land use. Everyone agrees a rational approach should be used to accommodate the increasing population – perhaps even more so in the UK, where population is growing faster than in most of the Eurozone – but that rationality takes a different form when sacred areas such as open land and greenbelts are targeted for development.

The unique characteristics of land planning and housing shortages in England and Wales, in particular, foster a particularly heated battle. In one corner are the preservationists – The Campaign to Protect Rural England, in particular – who largely consider maintaining the absolute sanctity of greenbelts and Areas of Outstanding Natural Beauty as their mission. These tracts of land were created to bring a quality of life to the country; any compromise thereof is considered a betrayal of the intent of the founders of these movements.

Resistance by these groups to development does not stop with housing. Commercial construction, mineral extraction and even wind farms face opposition. Even those who publicly laud the economic benefits of each of these things will adopt a NIMBY (not in my back yard) posture when it affects their own town or neighbourhood.

The other side of this battle might be considered the pragmatists, those who view the country’s pressing housing needs as reason enough to rethink and revise the use of such lands. Homebuilders and developers (including those working with managers of property funds), of course, are a driving force in this debate, following an obvious economic interest. But so too are affordable and social housing advocates, who argue that limitations on all building is driving the exorbitant cost of housing at the lower end of the economic spectrum. The poor and working classes are increasingly burdened with little space even while an increasing portion of their income is consumed by rent. Affordability for buying is dropping, as a full 20 per cent of housing now being built is for the to-let market, up considerably since 2000.

The adoption of the National Planning Policy Framework in 2012 was heralded as a means to simplify procedures and encourage acceleration in development, replacing a difficult, time-consuming and not always rational system. In outlining the Framework, Minister for Planning Greg Clark, MP stated several priorities for land use in the UK:

• Encourage economic competitiveness
• Ensure town centre vitality
• Promote a prosperous rural economy
• Drive sustainable transport
• Push for high quality communications infrastructure
• Offer broad choices in quality homes
• Foster good design
• Create healthy communities
• Provide greenbelt land protection
• Meet the challenges of flooding and coastal change and climate change
• Conserve and enhance natural and historical environments
• Insist on sustainable use of minerals

Specifically under green belt land protection, the plan says the Government “attaches great importance” to them, honouring the fundamental goal of preventing urban sprawl. “The essential characteristics of green belts are their openness and their permanence,” it states. It also prioritises “the recycling of derelict and other urban land.”

At the end of the analyses, the complexity of the problem suggests a complex solution – some open lands might be worth sacrificing to achieve social goods, while other areas absolutely must be protected.

Strategic land investment in development needs to be sensitive to all these needs. In parallel, they need to answer to the dictates of responsible asset management. Would-be investors should always balance their real estate investments with their social conscience as well as their financial risk tolerance, ideally with the counsel of an independent financial advisor.

Is 9% of Developed Land In the UK Enough?

What makes development on 9 percent of UK land a set point?

Advocates for greenbelts and open lands find Government proposals to build outward unsettling. But the housing shortage for a growing population may require it.

Members of a national organization that campaigns for the protection of countryside, the Campaign to Protect Rural England (CPRE), heckled UK Planning Minister Nick Boles when he spoke at their annual meeting in June 2013. He proposed that the 9 per cent of England that has been built upon should be increased to 12 percent. This proposition proved to be a lightning rod, bringing about strong opposition from the CPRE and other aligned organizations.

But is it such a terrible idea? Can open lands be forever protected as sacrosanct? The UK population grew by 7 percent in the decade measured by Census 2011, a trend that shows no sign of abating. Homebuilders cite a plethora of reasons why they build only about half as much as is needed, but land investment funds eagerly seek places to invest and build. It is the economics of scarce land that constitutes a large part of the equation.

Toward those interrupting him as he spoke, Minister Boles lashed out by saying that rural villages would “become fossilized” if land development were blocked in certain areas. Indeed he makes an important point, as the number of individuals engaged in agricultural work has diminished in recent decades, due largely to increased efficiencies in how farming is done. If new (non-agricultural) employers cannot find a population of workers, they simply will not locate their operations where the population is scarce.

To be clear, the housing shortage in the UK is so critical that the following are now points of deep concern:

• The laws of supply and demand seem to be hard at work – much to the disadvantage of the homebuyer. The Institute of Economic Affairs (IEA) reports that, in nominal terms, “house prices in the UK have increased by a factor of nearly forty over the last forty years. Rent levels have followed suit.”

• Social housing, which once numbered 5.5 million units in 1981, now is reduced to 3.8 million. On the waiting list are 1.75 million households. People without dependent children are excluded from this list altogether. This further adds to the price pressure in market-rate housing.

Such discussions almost always prove to be contentious. And data from one study to the next sometimes provide widely different opinions on such matters.

One misperception is that the National Planning Policy Framework (NPPF) tilts land use toward development over greenbelts and the official Areas of Outstanding Natural Beauty (officially designated countryside lands deemed to have significant aesthetic and environmental value, so determined by the UK Government by way of Natural England). To the contrary, the Institute of Economic Affairs (IEA) observes that the NPPF advocates for residential development on open (raw) lands outside of the greenbelt and Areas of Outstanding Natural Beauty.

The CPRE counters that more than 400,000 brownfield sites already have planning permission and should be built upon first before green lands are developed (buried in that statistic is how many of those sites have industrial waste residue that needs remediation, an additional cost added to an already expensive housing equation).

The IEA singles out the blame for the housing crisis. According to its report, “Abundance of Land, Shortage of Housing” (IEA, April 2012), “Planning restrictions are a key determinant of housing costs.” The report advocates for a liberalisation of the land use planning system as a means to address the housing affordability crisis, citing a number of studies conducted in the UK, elsewhere in Europe and in the United States.

The battle will undoubtedly wage on for some time to come. But to be clear, institutional and private investors (often, those interested in a joint investment land opportunity do so through alternative investment funds) are increasingly interested in raw land as an investment, seeking planning changes that enable them to add to the housing stock on otherwise non-productive acreage. When those planning changes are achieved, the process is effective. But before an investor elects to participate in a land-to-houses scheme, they should consult with a qualified financial advisor who can help weigh the nature of the investment against other savings strategies.

Land Planning Tied to Multiple Local Economic Factors

Local planning authorities (LPAs) deal with more than just housing zone changes. New homes are one component of environmental, economic and life-quality considerations.
It’s a classic chicken-and-egg question. What comes first, a resident population of workers for companies looking to establish workplaces in a particular locale – or is it the other way around, when employers are the draw to workers who move to be near them?

It happens in both ways, of course. But central to both perspectives is the intrinsic relationship between populations and workplaces. Not only do employers need people with certain skill sets, but they also require a large-enough population from which to draw appropriate workers. But over time, people will relocate to areas where the jobs are most plentiful.

Government policy recognises this. The Housing Grants, Construction and Regeneration Act 1996 addressed the matter of regeneration and development as a means of economic stimulus in select regions. Among the legislation’s priorities are to provide or improve upon housing as well as social and recreational facilities “for the purpose of encouraging people to live or work in the area,” as described in the act.

Many other factors affect where both workplaces and homes are built, of course. And as the UK struggles to revive its economy while simultaneously addressing a housing shortage, all such factors form a constellation. These factors run the gamut from the general state of the economy (local and global), currency strength, government interventions and interest rates.

Note that housing – the construction phase of new homes in particular – is often discussed as a short-term economic stimulus. We tend to discuss the economic value of homes purely in the activity around construction and furnishing a home. Less is said about the broader economic benefits, such as providing residences for workers who are essential to local employers as well as their role as consumers of products and services in the area.

Local planning authorities (LPAs), newly empowered with the Localism Act, are at the core of land use designation decisions. Much is said about the environmental sustainability goals of LPAs, which are, of course, of great importance. Some expect that a focus on the preservation of greenbelt and agricultural lands might then be the ultimate priority, but in fact the National Planning Policy Framework as set forth in 2005 allows that local economics are part of sustainability as well. Preceding this, the Brundtland Commission said back in 1987, “sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” Planninghelp.org.uk, which champions planning for rural areas, translates this into at least three directives:

• The economics of planning – Ensure that “sufficient land of the right type, and in the right places, is available to allow businesses to set up and grow, and to be supported by infrastructure such as roads and railways.”

• The social role of planning – Housing, leisure, recreation, retail and schools make for strong, vibrant and healthy communities.

• The environment’s role – Protection and enhancement of landscapes and wildlife, as well as historic and archaeological structures, are essential to clean water, energy and mineral access, as well as providing cultural and tourism assets.?

So while new home construction is an important short-term stimulus to local economies, it really is part of a matrix of considerations and, well planned, part of the broad sustainability of a region as well.

As the UK struggles with a shortage of housing, each of these considerations should help guide a renewed building phase that should materialise in the coming months and years. Already, investors from the UK, the United States and elsewhere are financing projects that will add to the country’s housing inventory.

With such an obvious degree of pent-up demand, strategic land investors and homebuilders are identifying good opportunities. Individual investors investigating alternative investments must, of course, examine the risk profile of development in light of all these factors, as well as take counsel from an independent financial advisor on their overall portfolio allocation.

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.

Why Full-Scale Land Development is Not Solely Done by Homebuilders

The full range of developing raw land into residential construction is becoming too much a risk for companies that build homes. The task is now split, with good results.

Home builders in the UK have traditionally functioned as developers. This means they took on everything from buying land to developing streets and utility infrastructure to building the homes. If the homes are priced right for the market – and meet market expectations for what a home should be – they made a good profit.

But the housing crisis in the UK suggests that this formula is no longer working effectively as it once did. Despite a robust increase in the population (2011 Census found that, overall, the country grew by 7% in the previous decade) and a historically underbuilt environment, homebuilders were unable to undertake the traditional risks of building. While the population grew by about 4 million people between 2001 and 2011, only 1.4 million homes were built in the same time period. The average home has slightly more (by statistical averages) than two people, suggesting that this rising population is underserved. Consequently, the price of homes has risen even while lending standards have reduced the numbers of qualified buyers. About 270,000 new homes built per year would satisfy population growth, according to the (now defunct) National Housing and Planning Advice unit.

That said, growth and demand are not uniform across all regions of the country. London and the South East have high demand, while the Midlands and elsewhere (including Wales) have lower economic growth and therefore lesser demand and wherewithal for housing. And in surprising niches here and there, there is an absolute demand for new homes.

This is where the creativity has come into play. Instead of taking on the full sequence of development – buy, plan, build infrastructure, build homes, then sell – home builders increasingly rely on strategic land specialists and their investment partners to bear some of the risk, do part of the work and share the reward. The land specialists and investors therefore do the following:

1. Identify local housing needs – Land specialists study economic, business development and other data to learn where new housing is most critically needed.
2. Identify appropriate sites – Within an identified market, land investment groups search multiple locations to determine where the best opportunities lie for optimal return on investment.
3. Understand local planning authority preferences – Land is not acquired without knowing the local predisposition to make zoning changes that would allow residences to be built where another use, such as agriculture, is the status quo.
4. Negotiate a purchase – One or several landowners need to be approached with an offer. Needless to say, this needs to be done within clear financial parameters.
5. Work with local planning authorities to achieve use designation changes – Once the land is purchased, a strategic rezoning must be pursued. This is more possible under the new National Planning Policy Framework (NPPF), which grants local authorities more discretion than in the past. Local authorities are now encouraged to free up between 5% and 20% of land for housing.
6. Construct development site infrastructure – With that land-use change, the land investors will fund construction of streets and utilities that provide homebuilders with a ready-made place for residences.
7. Sell to homebuilders – This is where the homebuilders pick up the programme. They buy single or multiple lots, build the homes then sell them. Of course, their capital investment in structures is significant, but it’s less money carried over a shorter period of time than if the six previous steps had been their responsibility.

Individuals who are interested in the land investment phase – up to and including step 6 above – should do so in partnership with experienced land investment specialists. And at that, they should consult with a personal financial advisor to determine if such an investment fits their overall investment goals and objectives.

Joint Venture Land Opportunities in the UK

The joint venture land opportunity of today is to anticipate where post-recession growth will increase demand for housing and businesses.

Land investors – especially those interested in investing in strategic land – are currently focused on the UK, where a chronic shortage of housing means demand for land is high – and growing.

Global and local economic forces, in combination, are making joint venture land opportunity investing a particularly compelling scenario for investors.

Let us analyse how that works and its consequences. To the land investor, the depressed price of real estate caused by the worldwide economic downturn is a distinct factor – and opportunity. An economic recovery could well unleash demand for housing and commercial construction, which would consequently increase the price of land with relative speed. In some jurisdictions, the desire to attract residents and businesses creates a willingness to enact a change of use on key parcels of land.

Investors who are wary of the exposure from “going it alone” instead use joint ventures to purchase, manage and resell land. This enables the purchase of larger and perhaps more strategic tracts of property, often without borrowing money. A joint venture will also corral the talents of specialists in real estate acquisition, development and management who provide an important bridge between financiers and real property. That expertise can allow the partnership to focus on the most profitable part of the land development process: acquiring sites that have been identified to come forward for residential or mixed-use development but do not yet have detailed plans or permissions.

More investors see such JV arrangements as enabling them to achieve a balanced, diversified portfolio. Real estate has historically performed well and is in fact the source of wealth creation for a large proportion of individuals of high net worth. Current market conditions are thought to provide a rare opportunity for rapid valuation increase.