The London Housing Crisis: Boris Johnson's Proposals and Others' Suggestions

The shortage of housing in the UK is concentrated in London. There are many solutions and all may be needed - private investors are already at work.

London Mayor Boris Johnson isn’t getting a lot of love on his solutions to the housing shortage. And the numbers as of mid-2014 weren’t helping much.

Not that it’s an easy problem, or one where there is universal agreement on the solutions – or even the depth of the problem itself. But suffice it to say there are many investors who look at the high demand for housing and ask, “Why can’t we build more to take advantage of this undersupplied market?”

Indeed, for property fund managers the scenario is tantalizing. London Councils, which represents 33 local authorities, notes that with the anticipated nine million residents by 2021, the city needs to increase its housing stock by 526,000 units (based on statistics compiled by the Department for Communities and Local Government). In addition to that, another 283,000 new homes are needed in London to answer a backlog of demand – pushing the total needed to more than 800,000 flats and homes.

The net effect of the current shortage is rapidly increasing prices for both purchase and rental rates. Most economists and social scientists agree the high cost of housing makes for a difficult economy as well as a negative influence on the quality of life. Further, it could discourage companies from establishing themselves in the city, and make sourcing important workers harder for the companies that are already there.

Several proposed strategies for increasing London’s housing supply are being discussed or already in some level of implementation:

London.gov.uk, from the Greater London Authority, extols the need and details Boris Johnson’s plans. The department is investing £3 billion in housing, including £1.8 billion for affordable homes. Some of this involves the release of publicly owned lands for home construction. Overall, the Mayor’s plan seeks to deliver 42,000 homes per year, a task shared between the city, boroughs, and both private and public sector developers.

The First Steps programme is Johnson’s effort to help lower-income Londoners to buy or rent at affordable prices, purportedly lower than renting or buying privately on the open market. The programme claims 21,000 homes have been delivered through the program up to 2014. While this is more about finding built homes than increasing the supply, it is about removing inefficiencies in the marketing process.

Housing Zones, focusing on 20 areas in London where the construction of 50,000 homes will be accelerated through expedited planning and financing measures. Construction bids for the first projects were received as of September 2014.

London First, which represents the city’s largest private employers (and who need affordable housing for their employees), pushes for a plan of greater ambition than that Johnson has offered thus far. Equating affordable and available housing with general economic competitiveness, the organisation published “Home Truths,” a list of recommendations that includes establishing new suburbs served by Crossrail 2, the proposed rail route in South East England that would stretch between Surrey and Hertfordshire. With a shorter time frame for development, the publication also urges development on publicly owned land and to enable councils to have greater borrowing power to build homes themselves.

What is clear is that there is likely no single programme that can address such a large and pressing need. The public sector can provide funding and establish policy, but the private sector is often the engine behind the home building machine.

Alternative investment funds are channelling private investor pounds to homebuilding investments. Some such projects are large scale and others are smaller. But because these investor groups help with land assembly – identifying appropriate properties, getting planning approvals and establishing infrastructure as needed – they smooth the development process for builders.

Some investors prefer the fund approach to filling the pipeline of much needed housing. Others elect to be buy-to-rent investors. Some do both. But what’s key is that by working with an independent financial advisor, people with the financial wherewithal can help increase the housing supply while pursuing their own best financial outcomes. Mayor Johnson seems to understand these private market motivations, as reflected in his housing policies.

Immigration Pushing Up Housing Demand, Land Prices

UK housing and land prices are rising due to immigration and other population factors.

Immigrants to the UK, both ethnic and white, fuel a net population increase. This places price pressure on land and homes, the supply of which lags demand.

For several generations in the Post-War period, the United Kingdom has drawn immigrants from Europe and around the globe. Ethnic populations that have arrived on our shores since the late 1940s have been in concentrations from the former Commonwealth countries – people from the Caribbean, sub-Saharan Africa, India, Pakistan, Bangladesh and China, primarily – as well as individuals of white parentage from South Africa, Australia, New Zealand and Canada. This influx has been unabated in the first decade of the new century, contributing to the 7 percent increase in population recorded in Census 2011.

In simplest terms, increasing population of any kind will drive demand for housing, which these immigration patterns have done. Demand for housing also drives demand for land investment and development, which is currently lagging market needs, a potentially huge opportunity for those looking to get involved in alternative investments. Examining immigrant populations with a bit more complexity, it becomes easier to understand the interplay between immigration, economics and housing demand:

Ethnicity less a barrier to economic ascendancy - While Britain’s storied class structure has diminished a bit in recent decades, there remains a tendency for successive generations to achieve the same social class as their parents. But a series of studies cited by the Joseph Rowntree Foundation in its report, “Migration and social mobility: The life chances of Britain’s minority ethnic communities” (2005) at least finds that this tendency is colour- and ethnicity-blind. The report cites the Oxford Mobility Study (1983), which found that migrant populations, including those of colour, had “a weaker association between origins and destinations,” meaning successive generations fare better economically among immigrants than established populations (this same phenomenon is pronounced in the United States). The classic examples are the immigrants who toil at working class positions while their children achieve university degrees and enter into the managerial ranks.

Home building lags in the UK - The economic downturn since 2007 has certainly put a crimp on home buying and building, but not simply because people have less wherewithal to purchase property. While the population of England and Wales has grown by 3.7 million people in the past 10 years (many of them young and starting families, a point at which home purchases are typical), construction of new homes is remarkably slow. Only about 21,500 new home building starts were recorded in England in the second quarter of 2012, the lowest level in a century and thought to satisfy only about a third of actual demand.

High demand, yet financing is difficult - Younger people, including first- and second-generation immigrants, have difficulty getting mortgages under current financial conditions because they cannot muster a deposit (about 15 percent or more of the value at purchase). Some argue that banks could provide more financing, to builders as well as buyers. This creates a logjam that needs to break, and the sooner the better.

Rents are rising - Average private rents in the UK in mid-2012 were about £750 per month and rising. Higher rents are almost always an indicator of housing demand, and typically a trigger for new building. But the financing problem (see previous item) instead is pushing some builders – financed by insurance companies instead of banks – to build for-let housing.

Note that immigration is not the only factor at work. The Census also identified that pensioners now remain longer in their homes than in the past, a credit to their good health and vitality. We celebrate that fact, but must acknowledge it further exacerbates the housing shortage.

On the whole, this pent-up demand is driving interest in land for development in the future. While brownfield and green belt tracts are considered, undeveloped land appears to be increasingly attractive for development. Many municipalities are turning to their Local Planning Authorities, a product of the Localism Act 2011, to authorize rezoning of agricultural and other-use lands for housing. For many towns, the ability to attract employers includes having a growing population (that is housed, of course). They provide workers as well as consumers, neither of which is available if there is nowhere to live.

Are Land Investments Affected by the Libor Rate-Fixing Scandal?

How does the Libor rate-fixing scandal affect capital growth investments such as land?

Stringent lending practices by banks are blamed for the housing shortage in the UK. Might the LIBOR scandal, uncovered in 2012, play a role in this?
While residential real estate prices in London remain high and climbing, most other parts of the UK have seen a significant drop in home values since the financial crisis of 2008. Economists and pundits alike have pegged this to many factors in the economy, but since the Libor (London Interbank Offered Rate) rate fixing scandal came to light in 2012, some voices are questioning the degree to which this may have then, and since, affected home buyers. Of course by extension, the ability to purchase homes affects the fortunes of strategic land investors and developers.

A Fortune magazine senior editor wrote in late 2012 that because the housing market crash was due to many homeowners being unable to pay their mortgages, that Libor manipulations “added to the borrowers’ hardships,” making it at least a contributing factor.

Other voices argue that the damage of Libor manipulations benefited just as many people as it may have hurt. As much as rates were artificially inflated, just a bit, so too were they pushed down (driven by the bankers found to be responsible for their own reasons). It should not go without notice that about 45 percent of adjustable-rate prime mortgages and 80 percent of adjustable subprime mortgages are set according to the Libor rate. Student and auto loan rates are hitched to Libor as well.

But if there is one outcome of the scandal, it may have been the undermining of trust in the system overall. It certainly shakes investor confidence in the financial markets.

Billion-pound-plus settlements have been reached by those banks found responsible (Barclays, UBS, Royal Bank of Scotland.  American banks including Citigroup, JPMorgan Chase and Bank of America have not faced charges). And new regulations in the aftermath are predicted, with some variation between countries and their respective regulatory systems. In the UK, that may follow the Vickers proposals, which the International Center for Financial Regulation says will put ringfences around all UK-based retail and investment banking services.

While the punitive settlements reached between UK regulators and the banks sound hefty, relatively speaking they pale in comparison to the costs borne by borrowers since the fraudulent practices began in the early 1990s. According to the website ThisIsMoney.co.UK, small businesses’ and households’ annual mortgages were affected by hundreds of pounds each year due these transgressions. Consider how, says the site, Libor and therefore mortgage rates soared in the lead up to the 2008 financial crisis, particularly its climb around August 2007.

The credit crunch and housing price crash since has slowed investments of all kinds, not the least of which has been home building in England and Wales – despite a continued population increase and pronounced shortage of housing. Would-be new homeowners have difficulty meeting tighter lending standards, which has dulled the interests of most developers in building new homes.

As confidence builds again in the banks, and as lending loosens up, there is growing interest in the pent-up demand for housing that has occurred. In the meantime, to-let housing is becoming more common in the UK and elsewhere, particularly with new construction. The dynamics of banking and business, and the population increase, all suggest that home building has to increase in the future – perhaps this time, with fairer, less-manipulated lending rates. When that does, capital growth for landowners, land investors, and existing built-property owners should benefit as well. On the receiving end, more young people and families will be able to find a place to live – and pensioner parents will reclaim their homes for themselves once again.

For all considered, all market factors must be taken into account. The smart investor will always consult with a qualified personal financial planner to ensure the risk profile of an investment is tolerable and complementary to other assets in his or her portfolio.

Land Investments Relative to Traditional Investments in the Recession Era

How have land investments fared relative to traditional asset classes in recent years?

Investors are disillusioned with the performance of market-traded securities. Raw land is an alternative, but one which has its own requirements and limitations.

In the first quarter of 2013 18 firms resigned from the London Stock Exchange, up from 15 in the same time period in 2012, 10 in 2010 and 12 in 2009. Analysts told the Financial News that these departures since the collapse of Lehman Brothers are due to regulation, austerity measures and shrinking commissions.

Volatility and disappointing performances in traditional market-traded securities has been similarly widespread since 2008. Investors instead have shifted their money to alternative real assets, which range from hedge funds to commodities (agricultural, mineral), precious metals, art and antiques, real estate and raw land.

As one finance and investment advisor, Satyajit Das, told The Independent in March 2013, “Disillusioned with financial assets, the ultra-rich are focusing on scarcity - farmland, prime real estate in world cities with desirable properties, and rarities (fine art, antiques, rare cars). Even wine has emerged as an asset class, giving a new meaning to the term ‘liquidity’”. Das further explained the trick to capturing the benefits of volatility is to take advantage of large price fluctuations, particularly investment capital that is subject to “irrational exuberance”.

In other words buy low, sell high (of course). But what investors are also gravitating toward is the ability to manage the investment, either through knowledge of the asset before purchase - the skilled art dealer/buyer, for example - or in transforming the asset to something of greater value. This latter strategy is characteristic of strategic land development, changing property from one use such as agriculture or a brownfield property into residential use, for example.

This type of land investing differs dramatically from the real estate investment trusts (REITs) available in the UK since 2007. While the REITs have disappointed investors - in fairness, the lifetime of this asset class has existed almost entirely during this recessionary era - raw land provides a niche that investors find a bit more controllable. This is due to three characteristics of successful raw land investing:

• Pent-up demand - With the continued net growth of the UK population (credit immigration, a healthy birth rate and improving pensioner longevity that allows more people to stay longer in their homes), it’s a simple equation to understand that more people need more homes. But due to recessionary economics and stringent financing there are many Brits, younger people in particular, who cannot buy their own homes yet. As government programs to aid home buying and a better economy arrive, that demand will need to be satisfied.

• Working with knowledgeable land specialists - There are few land barons who build their empires on good luck. Instead, investor groups generally hire specialists who understand local economies and local planning authorities, as well as the homebuilder sector that ultimately is the buyer.

• Temporary illiquidity - For the investor, raw land is a difficult-to-exit investment strategy. The typical land investment at a minimum requires 18 months such that investors might instead focus on a three to five year period in which the investment builds in value in preparation for a sale.

While land investments yield varied returns, due largely to the apples-to-oranges nature of location, these three characteristics provide reason for investor confidence and the increasing popularity of the asset class.

Persons drawn to land investment should consult an independent financial advisor who can vet the offer relative to all instruments in the investor’s portfolio.

Should Land Investors Be Encouraged by the Rise in UK House Building?

The story on UK building, as told by statistics gathered by private and public organizations, is mixed. The best advice is to get good advice.

There is a flurry of information regarding construction starts in the UK in 2013 - some of it encouraging, some perplexing. Making sense of it for real asset investing is the challenge of the day.

Much of what the Royal Institution of Chartered Surveys (RICS) predicted at the end of 2012 has come to pass. A pick up in housing starts has indeed occurred, but not until the second quarter after a small drop in the first quarter. Overall for the year, RICS predicted 115,000 new housing starts. But while its unclear where the year will end up, a survey of data from around the UK reveals the following somewhat tantalizing details:

• Glenigan Constructing Insight reports that for all types of construction - private residential as well as social housing, healthcare, education, industrial and infrastructure - activity was up 2 per cent in the second quarter of 2013 (as compared to the same period one year prior).

• Infrastructure leads the way with an increase of 41 per cent growth. By Glenigan’s reporting, large road projects can be credited the most with this.

• Utility building is up 29 per cent.

• Housing starts are up 12 per cent versus 2012.

• Regionally, the West Midlands report an increase of 70 per cent (after only a 10 per cent rise in the first three months of 2013) of all types of construction.

• The South East, which experienced a 20 per cent decline in May was up again by one point compared to 2012, with private housing and infrastructure building responsible for those gains.

• All construction starts in Scotland were down by 37 per cent, an unfortunate trend with similar deficiencies over the previous six months.

• Government investment in health and education are restrained, leading to fewer and lesser-sized projects. The Priority Schools Building Programme might alter this to the positive through 2014.

The chief economist for RICS, Simon Rubinsohn, feels that first-time buyers of homes - rather, the lack of them - continue to be a drag on incentives to build new homes. “Even with the Funding for Lending scheme and some other government policies beginning to be felt in the mortgage market, many first-time buyers will continue to find it difficult to secure a sufficiently large loan to take an initial step on the housing market,” he says. Instead, he thinks the government should act to set up conditions that will increase building of rental or for-purchase housing, and to bring new development quickly onto the market.

This holds special implications for the land-to-housing development investor, many of whom apply alternative investment funds to property funds. While building may appear to be healthy today, there needs to be significant construction of new homes at an accelerated rate just to meet basic demand. But the strategic land investor him or herself must be sure this type of investment is appropriate for their own portfolios. First, they must work with a team of knowledgeable specialists who understand how to manage the entire process effectively. They also need to be willing to wait a minimum of 18 months before they see a return on investment. They also should simply get the advice of a personal financial counsellor who can objectively evaluate the strength of the joint venture land investment.

Property Funds vs. REITs: How Investor Timing Needs Matter

Investor timing matters: Property funds compared to REITs, timing by the investor is everything.

Returns on investment are not the only guide to where one puts their money. The relative liquidity of the funds, and what that means, should be considered as well.
The UK arrival in 2007 of real estate investment trusts - REITs - was heralded as a new era for investors. “For the wider economy, investors are expected to benefit from greatly enhanced dividend payments and growth in the investment property market,” Liz Peach, chiefexecutive of the British Property Federation, told The Telegraph in January 2007. She said it would bring benefits to the British economy as a whole with efficient property use and asset management.

Economic conditions being what they have since 2008, it is difficult to fully ascertain the long-term prospects for REITs in the UK. But the UK-REIT Survey 2012, produced by BDO LLP (an assurance, tax and corporate finance advisory firm), makes several notes about how these types of alternative investment vehicles have fared in the global recession:

• If a UK REIT has a geographic or sector focus (perhaps both), it performed better than trusts that did not.

• Performance was not a function of size (i.e., some smaller and some larger REITs did well, and others of both sizes did poorly)

• A retail property focus - not surprisingly, given the recessionary conditions and reduced consumer spending - tended to cause certain REITs to turn in lesser performances.

What is well understood in mature REIT markets such as the US, where REITs have existed across several boom and bust cycles, is performance of such funds is largely tied to the overall economy and even the ups and downs of daily market trading. Traded like a stock, price volatility is to be expected for the REIT investor.

But that same volatility speaks to another key consideration of the investor: timing.A REIT is an exceptionally liquid investment, which may well suit the needs of one investor over another. In contrast, property funds that commit the investor to a specific piece of property may need to be held for two to five years to appreciate the outcome of the investment.

What is the tradeoff if one chooses a property fund over a REIT? To use a gambling analogy straight out of Las Vegas, a REIT might be characterized as a slot machine, roulette wheel or craps table. A tiny amount of skill is required to get in and the smart player gets out when the numbers fall to his or her favor, if they do. A property fund, in contrast, is more like a good game of poker. Skill and strategy – and a longer period of time playing, typically – help the player achieve a good outcome.

(For background, property funds often deal in the acquisition, site planning and resale of strategic land. The investor is well informed of the property and its prospects for value growth during the projected time period of the investment.)

Individuals interested in REITs or property funds should discuss it with a personal financial advisor. As previously noted, investors’ risk tolerance and timing vary.

Planning Your Exit Strategy in a Land Investment

When investing in land, your exit strategy is an important consideration.

Timing is everything, particularly in how investments pay off. The investor in raw land needs to know when the asset will increase to its optimum sale price.

The goal of all investing is to make money, to sell at a price higher than that at which the investment was purchased. But that simple formula fails to factor in the extremely important matter of timing: how long it takes for the investment to achieve that optimal price, as well as how the timing affects the investor. Taking a good profit in one year might be disadvantageous over taking it in another, largely due to taxation.

The essential nature of timing – when to invest and when to disinvest – affects all classes of investments, both those in the traditional markets (stocks, bonds, REITs) and the less traditional real asset categories (strategic land/hedge, property funds, precious metals, minerals, rarities such as antiques and fine art, etc.). Much of that has to do with the intrinsic (some might call it organic) nature of the investment and how it relates to macroeconomic dynamics, while external factors such as government subsidies and regulations can affect it as well.

A good example is renewable energy in Germany. A robust government sponsored program (“100,000 roofs” and the Renewable Energy Act) fostered small and medium-sized companies (as well as university research in partnership with them) to develop photovoltaic, wind, biomass/waste and hydroelectric electricity sources. With government supports and guarantees, investors had a good sense of where things were going and when. The timing of their disinvestment and payback carried more certainty, which of course attracts more investors.

Notably, in German investors in solar PVs and wind can expect the timing of their returns to be shorter than those in hydroelectricity. It simply takes more time to achieve a favourable return-on-investment from dam construction.

In a different asset category, raw land in the UK, the macroeconomics are well understood: the UK population grew 7 per in the decade to 2011, even while the nation’s home builders have not been increasing residential inventory to keep pace. Consequently, there is a housing shortage that will need to be filled eventually (and the sooner the better). The government plays an important albeit indirect role in that local planning authorities are now given greater reign over decisions about land use designation. In other words, if a local planning authority strongly identifies an area for home building or other development, it is far more likely to happen.

To the land investor, ceding land use planning from national to local authorities is very important to timing – and was long awaited. The Kate Barker recommendations in 2004 (the Barker Review of Housing Supply) looked at rising housing costs and the inadequate supply of new homes to meet the need. The Barker recommendations were factored into the modernised core UK planning principles, which include:

• Objectively identify development needs of an area (housing, business, etc.)
• Drive and support sustainable economic development, which includes the delivery of homes, businesses and industrial properties 
• Provide the necessary infrastructure to support new developments
• Account for market signals such as land prices and housing affordability, and set strategies for allocating land in sufficient quantity to meet the needs of people and employers

The well-managed land investment can meet these criteria, and as such is more likely to qualify for expedited approvals. The ability to deliver value to investors sooner rather than later is a clear advantage of this.

Individuals involved in any type of investing should get solid counsel from a personal financial advisor. This investment professional should work independently of any financial instrument to holistically review your investments, goals and anticipated expenditures to determine where an asset would be timely.

How Much Communication Should You Expect from a Joint Venture Planning Team?

Joint venture planning teams should communicate frequently with investors.

Financial laws in the UK require a certain degree of transparency with all investments. With JVP land investing, on-going communications is essential.

The best investment understood by smart investors. In contrast, financial turbulence and numerous cases of fraud in recent years has sent many investors back to study prospectuses with their financial advisors, eager to minimize risks and to manage their expectations. This is even more so the case, as financiers are drawn increasingly to alternative investments, such as land, precious metals, minerals and hedge funds. Alternative Investment Funds (AIFs) are market-traded securities of smaller-capitalisation firms, also an option for investors who reject the poor performance of traditional stocks and bonds.

Of course, it helps if a fund management firm is both in compliance with the law and oriented toward servicing investor information needs.  A consultation paper (CP12/32, “Implementation of the Alternative Investment Fund Managers Directive”) – compiled by Financial Services Authority in 2012 – makes non-binding recommendations that apply to AIFs but could and should also be used to evaluate the likes of joint venture planning.

In other words, the general directive is to provide clear and periodic communication to investors and regulators on the status of investments.

The matter of communications is frequently described in financial circles as a matter of transparency. FSA says that investors should expect ample information in three moments of the investment:

• Investors should be informed before they invest.

• Investors should be informed on a periodic basis

• Investors should be informed when significant changes occur relative to the investment.

The types of information that should be disclosed in advance of the investment (pre-sale disclosures) are far ranging. That includes a full disclosure of the investment strategy, as well as restrictions to the strategy. The use of leverage in the investment should be well documented and conveyed. The investment should have fully-detailed liquidity risk management arrangements. All fees and charges should be disclosed. Valuation procedures, net asset value, procedures for the issue and sale of shares and third-party service provider arrangements all need to be shared.

On an on going basis, disclosure requirements include an annual reporting, as well as notifications when liquidity arrangements are permitted. Remunerations to staff – broken down by fixed and variable remunerations, as well as senior management and staff – should be provided as well.

Joint venture plan teams for land investments have every incentive to provide frequent updates, given the two to five year life cycle typical of such investments. A well-managed plan run by experts in land acquisition will frequently have milestones to report, including those relating to site planning, commercial development, risk analysis, negotiations and planning applications.

Individuals who invest in joint ventures should do so with counsel from a personal financial advisor. Expectations for asset growth, risk tolerance and timing each factor into a decision to participate in such investments.

How Land is Purchased at an Optimal Low Price

Purchasing land at an optimal price requires timing and skill from the investor.

Several factors can affect the current and future of undeveloped land, not the least of which are specific characteristics of the property itself and the overall economy.

The first aphorism of investing is simply this: “Buy low and sell high.” The second may well be, “easier said than done.” Both apply to the business of strategic land investment in the UK.

First, understand that investment in land, particularly undeveloped tracts, is growing due to key factors: a net population increase of 7 percent over the past decade, plus a housing shortage that is already facing pent-up demand that might reach dizzying heights with a post-recession economy. Add to that the Localism Act of 2011, which alters the rules by which land use designations are changed (i.e., more power to local councils). Decisions are now made by local councils that were formerly the province of regional agencies; this can help or hurt investors’ chances for achieving optimal return on an investment.

It may help to break the equation into four distinct considerations:

• Look for the dips that precede demand – Basic, and that’s exactly where we are at now. Land prices are low as a result of the economic downturn. The economy still has a long way to go to achieve full recovery, and population increases will multiply the effect that has on housing demand.

• Anticipate the needs of the seller and the eventual buyer. The seller may be a single entity (a farmer or inheritor of a land tract, for example) or several parties. What are their financial needs? Why would they choose to sell – or not? Can a good price be negotiated? As for buyers, it is about anticipating demand for the land’s ultimate use designation, be it commercial, residential or industrial.

• Even in a heated market there are opportunities. Where specific properties offer strong upswing potential.

• Have good local knowledge on the property in question. Towns that can provide housing will also be able to attract employers, but not all local citizens want or need such local development. Before buying a property, it helps to understand the local mood and propensity to see development as a good thing, then create a land site assembly package that fits the extant neighbours’ needs.

The most effective means for those looking at alternative investments is to work with land acquisition and development specialists who do extensive research on properties that meet each of these considerations. The potential investor should seek objective counsel from a professional financial advisor to understand where land might fit into their overall financial planning.

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.

CEBR Predicts 15% House Price Rise and What It Means to Investors

Investors take note: The CEBR predicts a 15 percent house price increase.

The economy is on a slow but steady upswing, reflected in part by a prediction in house value increase. Land investors might benefit from this.

Is land a high-return investment? No, says the Centre for Economics and Business Research (CEBR). But it still might be better than the alternatives.

CEBR is predicting between a 14 percent and 16 percent rise in house prices by 2015. For homeowners and builders, that is relatively good news after the price dips of 2007-2009. The bleeding is stopped, the patient is recovering. Raw land prices somewhat mirror housing prices, with differences in niches. But no one would call this a boom.

It is a curious time for real estate, particularly those who approach it on an investment level. How properties and property funds or land perform against the alternatives – traditional stocks and bonds, or alternatives such as private equity, hedge funds and precious metals, for example – is the real question. In each of those categories in recent years, there has largely been slow growth, loss or volatility.

Investments in land can be attractive when approached with an appropriate set of expectations and knowledge. To wit:

Supply and demand curves suggest asset value growth. There should be a housing boom. The population in the England and Wales is on a steady growth curve: seven percent over the past decade, probably a faster rate of growth from now through to 2020 and beyond. Meanwhile, housing construction lags woefully behind because banks are not lending to builderss. The government however has introduced schemes such as Help-To-Buy to ease financing pressure on buyers.  It seems inevitable therefore that house prices will continue to increase.

Returns in three to five years, more or less. Well-managed land investments are approached with a get-in-fix-and-leave strategy. That is, after the purchase of raw land, the specialists appeal to local planning authorities to rezone the land to serve local economic interests, which includes additions to the housing stock. The Localism Act of 2011 encourages this where prudent. The investment fund may build streets and sewers and install other utilities as needed – then sell to a developer who will build according to market demands. Good land investment fund managers will know from the outset about how long this will take.

Location is everything. Housing prices are high and getting higher in London. But at the same time homes in the North East and Scotland are losing their value. For land investors, it has to be approached on a very local basis, with a solid understanding of where development will find a ready market. This is typically where local employment needs are growing, sometimes due to a large, single employer.

Investing in land is a substantial commitment; one that the investor should expect will require £10,000 or more as an entry-level position. Investors should consult with a personal financial advisor to see how land investments affect their tax status, where it fits into near term needs and if the investment fund is well managed.

Avoid UK Land Investment Scams

Land investment scams in the UK are on the increase – but can be avoided.

There are valid opportunities to invest in land in the UK, primarily because of accumulating demand for housing. But shady operators are selling worthless property.

A great irony of the Internet era is that access to information should make us better informed and therefore smarter and able to make optimal decisions. But the success of scams such as Internet Nigerian bank swindles and corrupt land investment schemes prove this not to be the case.

The latter of these two – land banking investments – is fuelled by the known increase in demand for housing in the UK. With a swelling population and a pronounced housing shortage, it makes perfect sense that investment in UK land will pay handsome dividends. But the undeveloped land that will be most valuable is that which is most likely to be rezoned appropriately and is situated where population growth is most pronounced.

The Financial Services Authority warns against land scams, which are characterised by the following:

Aggressive selling – The adage that “anything that sounds too good to be true probably is” applies to land banking schemes. It begins with the schemers contacting potential clients. These are “cold calls,” where you have no existing relationship with the company. The pitch is straightforward and exciting: There’s a land rush about to happen, so anyone who can buy undeveloped land will make handsome returns on their investments. Some victims of land banking schemes were told they should expect a 100 to 130 percent return. If such an investment could do well, they would not be offering it to anyone but themselves.

Instead, the individual investor who truly is interested in land investment should speak with a qualified financial advisor.

Inappropriate or ineligible tracts – The fact of the matter is that most land banking schemes do involve actual land that the investors will own, providing them with legal title. The problem is the land is virtually worthless – even if located in nice places.

How does that work? The land parcels may be tiny, perhaps located in an environmentally protected green belt area, unlikely to ever be zoned for development. Some have no road access or they may be situated on steeply sloping hillsides. Some brownfield properties are sold, but are so contaminated by previous industrial use that they would require unaffordable clean up measures to bring them into compliance with environmental laws. The land schemers purchase these lands for a very low price, then subdivide and sell them to unsuspecting would-be investors.

If you are interested in a land investment, do your own investigating. Again, a trusted third party financial advisor can steer you to qualified land investment firms that has a track record of legitimate dealing and a proven rate of return on investments.

Continued requests for additional money – One trick of land banking frauds is that they lure investors with small down payments of £500, more or less. The money makes the victim feel invested, and they will continue to pay into the property fund over time. This is all that the operation wants to do, which is to create a flow of income (many such operations are based in other countries, where wire transfers are simple to execute).

Legitimate alternative investment programmes in land typically require between £10,000 and £25,000 at a minimum for participation. You would identify qualified, professional land investment firms through a qualified personal financial advisor.

When Buildings are Better than Open Land

The need for UK housing is challenging the greenbelts and rural lands.

Britain’s natural beauty is indeed one of its greatest assets. But a critical need for housing is forcing a discussion on the sacrosanct nature of open lands.

A primary point of debate around the UK’s critical housing shortage is whether or not to build on greenbelts and the open countryside beyond, typically agricultural and forested areas. The argument often boils down to a two-dimensional, either/or choice between increasing density in towns versus building outside the metropolitan areas, accepting a certain degree of American-style sprawl that loses forever some of the best characteristics of the country.

But in truth, the choices need not be quite so distinct. Neither side of this argument has to count themselves winners or losers, as more hybrid approaches can be considered – and in fact are already being implemented on a limited scale. This is not just wishful thinking. Research indicates that there are many choices that allow for different means of expanding land availability to the single goal of increasing the supply of housing.

Considering how investors in the development of strategic land have land investment funds ready to go to work, this is a topic that needs creative thinking. The housing need is great, and developers and homebuilders are also raring to go.   The question is, where can they build?

The greenbelt concept, first implemented in the 1930s, was remarkably prescient in what it sought to achieve. While other countries (in particular the United States) were expanding their metropolitan regions far from core cities – allowing automobiles to become the primary means of individual transport, enabling middle class workers to have larger homes and gardens while they commuted to downtown employment – cities such as London, Cambridge, Nottingham, Bristol, Dorset, West Midlands, and on the Continent (Germany in particular), preserved their dense and compact downtowns with designated greenbelts.

The vision of what greenbelts should be is a region of land enveloping the cities that democratically provide recreation and fresh air to the populace. For the most part, that is what was created. The more densely populated cities of the UK keep people closer to workplaces, stores and community amenities, much of it accessible by foot, public transport or bicycle. Conversely, those sprawling suburbs in the States mean that workers spend onerous stretches of time in traffic, traversing 8-lanes-wide of asphalt from one suburb to the next, leaving little time to enjoy those larger houses and gardens.

The British have a distinct love for greenbelts and in fact have added about 25,000 hectares to the 14 greenbelts in the country since 1997. Local authorities have further plans to increase various greenbelt lands by 12,000 hectares in the future.

But while greenbelts have largely succeeded in their initial goals, they face increasing scrutiny largely because of the housing shortage. The policy is attacked for being too rigid. Also, greenbelts don’t always achieve the intended goals of preserving environmental quality as they are poorly managed in some locales. Among those who criticise the current configuration of greenbelts are the Town and Country Planning Association (TCPA), which decades ago had championed their existence. Since 2002, the TCPA has suggested the greenbelts instead be broken into wedges, gaps and corridors, largely in response to the housing needs.

Baroness Hanham, communities minister in the House of Lords, is critical of absolute policies that protect greenbelts as sacrosanct. She is quoted as advocating for more rural development, so people “can live in the villages in which they were born,” as well as for social housing because some of the land is “not absolutely brilliant” and therefore would be put to better use as sorely needed housing.

For example, an abandoned powerhouse in Formby (Borough of Sefton, Merseyside) sits in greenbelt land. A draw to vandals, it is regarded as an eyesore yet a proposed 62-home development (10 per cent dedicated to affordable housing) is encountering resistance from a community group. The development would require some additional use of greenbelt land, but would also put derelict land into productive use. Should the old building continue to stand and deteriorate, or would it be better to build sensibly and add community infrastructure improvements along with it?

Of note, development of any housing on raw, open lands need not favour social housing over more expensive private homes – or vice versa. The Joseph Rowntree Foundation (JRF), which advocates for affordable housing, looked at eleven countries that are similar to England in how they approach land supply, including restrictions on sprawl and protection of agricultural land. The Foundation concludes that a more sophisticated, layered approach to growth management, “rather than urban containment,” should be considered.

JRF also argues for proactive planning, such as compulsory purchase, because the current housing approach is often incoherent. As an advocate for social and affordable housing, the organization also champions land auctions and land assembly as a means to effect sound development.

Private and institutional investors increasingly are interested in building new housing, both to buy and to-let, wherever such development fits into town growth strategies. Strategic land advisors who engage real asset funds to build are typically cognizant of those town strategies. Clearly, the questions around greenbelts and raw land have to be answered in many areas where development is needed.

With investors ready to build, such conversations and decisions are being pushed forward, making these kinds of debates more likely in the future as more capital is freed up to build much-needed homes. Individuals who invest in development that requires planning permission should consider whether strong opposition exists in that planning authority; they should also discuss such investments with an independent financial advisor who can determine if the risks and rewards of property development fit the portfolio of the investor.

What Can Be Learned from 40 Years of Housing Volatility in the UK?

Has the volatility in UK housing since the 1970s taught us anything?

There are many fingers pointed in as many directions as to why there is a housing shortage today in the UK. A look at history helps identify causes and solutions.

It is a widely understood fact that there is a housing shortage in the UK. Population increase is unmet by building, for various reasons, while the net effect is overcrowding and high ownership and rental costs. This particularly affects the lower-end of the income spectrum, but the middle class is affected as well in ways that can impact employers. They are increasingly stymied in where to locate their workplaces, given how employees have trouble moving to where the jobs are.

How did the UK end up in this situation? And why do not the market forces of supply and demand drive development of new and refurbished housing? These questions linger with regard to both market rate homes and social housing, and in residences built for ownership as well as the rental market. Certainly, land investment arising from capital growth funds seeks out opportunities to build where the opportunities are – and there is no shortage of market demand when population statistics are considered.

The Joseph Rowntree Foundation, which works to reduce poverty by promoting affordable housing, holds the position that a failure to produce a sufficient stock of housing – including lower-cost affordable residences in the private market – is what has pushed price volatility since the 1970s.

Digging a bit further into the weeds, a columnist for The Guardian opined in April 2013 that the roots of the crisis might be tied to key housing acts during and after the Thatcher era. The columnist first states that transferring social housing to private landlords (housing associations in particular), as well as increasing ownership of such properties, was Lady Thatcher’s goal. The 1980 Housing Act initiated a decade of subsidized ownership of council homes, enabling more than one million citizens to purchase council housing at a discount. Notably, the volume of social housing was reduced considerably as a result – even as the country’s population continued its increase at a steady clip as a result of both immigration and a strong birth rate (strongest in England, less so in Wales, Scotland and Northern Ireland). Real asset investing drew some private capital to the industry, which has increased as a by-product of the financial meltdown of 2008 because of a distrust in market-traded securities

The BBC’s Peter Shapely broke down the problem in the network’s “History and Policy” series into four components:

Rising population – Census 2011 showed that the total population of the UK increased by 7 per cent, an astounding number relative to other countries in the Eurozone that show no increase and in some cases losses. This is due to immigration, the strong birth rate and single-occupancy, both with younger people and pensioners who are living longer in the homes they’ve occupied for decades. Construction of new homes is currently (and has been for many years) at about half of what the population growth would require.

More single-occupant households – While only 11 per cent of households were occupied by just one person in 1997, that portion grew to 13 per cent in 2006 and is projected to continue upward to18 per cent by the year 2031. This represents a lifestyle change that is more pronounced in the middle and upper classes and one which places obvious additional demands on housing and other resources.

Finite land availability – The decades-old debate on the relaxed use of greenbelt lands for development wages on. But few question the necessity to designate some unused and underused agricultural land for residential development. With global trade and higher per-acre agricultural yields, it’s an easier argument to make.
 
Housing costs rising faster than wages – Shapely argues that this factor alone mandates that “only state intervention can resolve this crisis.” But he advises that such government involvement should be done with a sense of balance: enable those whose ambitions include ownership, but do not abandon social housing in the process.

The Shapely series ends with a “lessons from history” observation, which includes urging government not to overreach with programmes that fail to account for economic cycles and land scarcity. Nor should Government dictate what types of housing is provided. Rather, the Government should provide an adequate degree of choice for the market. The Joseph Rowntree Foundation recommends similar solutions, to encourage a mix of new construction that serves different economic strata.

From the private side, there is increasing interest by individuals as well as institutional investors in the housing market, both for ownership and to-let. They often engage in strategic land investment led by real asset portfolio managers. Individual investors – given this historical volatility and the effects of government and local planning authorities on housing programmes and land use – should speak with an independent financial advisor to determine their risk tolerance in this asset class.

The Implications of Institutional Investors in Rented UK Housing

Institutional investors now back in UK residential rental housing: What does it mean?

Investors such as Prudential are now buying to-let residential housing in England. After decades of absence, the housing crisis seems to be the driver.

The quadrupling in the size of the private rented housing market in the UK over the past decade reached a watershed moment in 2013: institutional investors are now getting back into quality rental housing ownership. Prudential PLC ended a 30-year absence from investing its assets in the sector with the purchase of 500 newly constructed homes, promising to increase its portfolio there in the future.

Since the 1970s and 1980s, individual landlords with small portfolios largely dominated the landscape in private to-let housing. Indeed, the National Landlords Association says that a growing proportion of private landlords – currently, 73 per cent – rent only at market-rate, not to recipients of local housing allowances. Some of this can be attributed to the strength of the rental market, as more working people can afford to pay rent but are unable to buy their residences.

The introduction of the 1988 Housing Act changed the scenario for private landlords, as they were enabled to charge market rates for housing. About two-thirds of residential rental properties are held in small (one or more units) portfolios owned by individuals. The remaining one-third is held by companies that, for the most part, are real estate firms.

But the long-term cash flows of rental property look increasingly attractive to institutions with money to invest. Analysts note that residential compares well to commercial properties, where deep-pocketed investors have been concentrating their assets in recent decades. Additionally, development of raw land sometimes focuses on the rental market already, where the market demands it. Residential properties beat commercial in both total returns and risk adjusted returns, in addition to outperforming equity and gilt markets. The total annual return for to-let residential investments is 9.78 per cent (vs. 5 per cent for commercial), according to analyst M&G Real Estate (formerly known as PRUPIM).

One attractive aspect of the residential rental market is that it is more inelastic to economic downturns than with commercial. In an economic trough, commercial spaces empty as businesses shrink or close, but housing is more resilient as even unemployed people find ways to stay in their homes if at all possible. Elsewhere in the Eurozone – Switzerland and Germany in particular – a robust institutional rental market has always been healthy.

But perhaps the biggest driver in the UK rental market is a simple acceptance that ownership is beyond the reach of much of the country’s burgeoning population. With 7 per cent growth over the past decade (Census 2011), the country’s homebuilders are only constructing half as many homes as needed. The tight supply, as well as stringent lending and unattainable deposit requirements, have made renting the only rational option.

Strategic land partnerships and homebuilders are responding to this shift by building for to-let owners. Indeed, land development specialists who assemble investors (often operating as capital growth partners) are now speaking to local planning authorities about the rental option. Where employers need people living nearby, rental housing may be the answer – particularly if workers need to be flexible to moving. With companies such as Prudential entering the market, competition for good properties may heat up.

Interested investors in any type of housing need to go about it with due caution. Many choose to invest via land investment funds that are managed by a strong team of strategic land investment advisors. Speak with an independent financial advisor to examine where land and property investing fits into your overall portfolio risk profile.

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.

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.

Lucent Strategic Land Fund – Liquidity Position

In light of the difficulties recently experienced by several funds that have led to their suspension or closure I wanted to reiterate the robust controls that the Lucent Strategic Land Fund (LSLF) has in place to ensure its continued financial well-being, particularly with regard to fund liquidity.

Admittedly real asset funds do not have the same liquidity as a daily traded equity fund. This is something that investors should always bear in mind. Liquidity therefore has to be carefully managed. This is an area the Investment Advisors and the Fund have to plan for, both during the initial submission of the file to the regulator and on an on-going basis.

The LSLF fund is domiciled in Luxembourg and is regulated by that country’s financial services authority, the Commission de Surveillance du Secteur Financier (CSSF).

LSLF’s Directors take the management of the Fund’s liquidity very seriously indeed. LSLF has the capability to call on a 30% liquidity margin. This is a significantly higher margin than property funds typically have. A minimum of 10% of the Net Asset Value (NAV) of the fund is always maintained in cash.  In addition, the Fund can facilitate access of up to 20% of the NAV in order to meet, if needed, exaggerated redemptions.  It is able to do this because the LSLF does not use leveraging for asset acquisition.  For clarity, the Fund does not use bank debt to finance acquisitions.

An important competitive advantage the LSLF has over and above other types of property funds is the divisibility of land.  This, together with the fact the Fund’s land assets are not leveraged means that the LSLF can, if need be, sell off part of a site. Indeed larger projects such as the Lincolnshire Lakes project are capable of, and planned to be, multi exit deals with the phased delivery of the asset to national housebuilders and commercial participants. This provides the Fund with, in effect, a ‘rolling liquidity’.

Furthermore, the above phased sale capability, in conjunction with the lack of leverage, gives a competitive advantage over commercial property funds.  Whilst the LSLF can sell off part of a site, a property fund, that has leverage on a 30-story office block, may find it difficult to sell, say, 15 floors.

All of the above make the LSLF’s liquidity position a robust one.

Liquidity is recognised as an extremely important issue by the Directors of the LSLF and is managed in a manner that has been found to be satisfactory to the institutions with whom we deal.

~ Chris Westerman, Lucent Group UK