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.

Investing in Rarities Such as Antiques, Art and Wine Follow Different Dynamics Over Land Development

Real assets including raw land, art, antiques, fine wine and antique cars are attractive to emerging wealth. But the factors affecting value growth of each are vastly different.
In late 2011, even while dealing with the after-effects of the 2008 financial crisis, the interior minister of Iceland rejected an application by a Chinese billionaire to purchase 300 square kilometres of land. The property was landlocked, and the investor claimed he wanted to build a golf course, but its close proximity to deep-water ports worried the Icelandic government. The minister said their weak currency crisis made them vulnerable to a “fire sale” acquisition, which they did not want to do.

What was going on here is actually related to a lot more than a rocky outcrop in the North Atlantic. Chinese investors are using their new money to buy up property and strategic land everywhere – in London, in Africa, Singapore, New York and around the world. But they are also buying art, antiques, rare coins and fine musical instruments, among other real assets. Each category is increasingly seen as an advantageous complement or alternative to market-traded securities, given the recent volatility and poor performance of stocks, bonds and new-to-the-UK real estate investment trusts (REITs).

How those assets have performed for investors is a mixed lot, although all did well. FT.com (Financial Times online) reported in February 2013 that individuals of high net worth have driven the market for all kinds of rarities and collectibles, including gold. Citing the Knight Frank Passion Index, a performance measure of fine art, classic cars, watches, stamps, coins and fine wine in the 2002-2012 time period, price growth for these assets is reflected as follows:

Asset                                                  10-year price appreciation (%)

Gold                                                                  434

Classic cars                                                       395

Rare coins                                                        248

Residential property* Hong Kong                     221

Stamps                                                            216

Residential property* Sao Paulo                      211

Fine art                                                          199

Fine wine                                                       166

Jewellery                                                       140

Residential property* Paris                             117

Residential property* London                         103

Watches                                                          76

Residential property* New York                     72

*All residential properties are upper-end

The FT.com article reports that 64 per cent of Chinese millionaires are collectors, which tends to boost prices of real assets. In classic supply-demand dynamics, the addition of thousands of investors from the BRIC sector (Brazil, Russia, India and China, where high-net worth households are growing fastest) drives demand and therefore higher prices for these finite-quantity goods.

FT.com also notes that with property investments, the largest cities have the natural upper hand. They are great places to live and regardless of where you grow up, you know where London is – as well as New York, Hong Kong, Paris and Sao Paulo, etc. But the children and grandchildren of investors in these well-known cities might be more adventurous, taking their money to invest outside of London, for example, “expanding as far as Richmond, Putney and even to the Docklands,” says the writer.

What should be noted, however, about comparing these different types of real assets is that the value of most is determined by factors outside the control of the investor. When a wave of interest in gold watches somehow washes over BRIC millionaires, for example, the price appreciation might double and triple in a year or two. Reportedly, Chinese wine collectors had a love for Chateau Lafite – until they didn’t. This led to a 19 per cent drop in price between 2011 and 2012.

Raw land investments, as with most real estate, defy strict apples-to-apples comparisons. Where land was developed before, during and after the economic crisis, are large variables. But agricultural land in England trebled in the decade preceding 2012, with the average currently more than £6,000 per acre.

Built real estate offers some opportunity to increase its value when an owner improves it or perhaps conjoins adjacent condominiums or buildings – although, that can decrease the value/square foot in many instances. Un-built property, raw land, can increase in value when local planning authorities can be convinced that development (typically, providing badly needed housing) will be a net benefit to the existing community. Fine wine, classic cars and rare stamps in comparison cannot be rezoned.

Potential investors in real assets need to be sure their investments are complementary and balanced within their portfolios. All investments should be made with input from an independent personal financial advisor who can access expertise on traditional and non-traditional assets for their investment potential.

How UK Land is Rezoned

More than ever, rezoning is a key consideration in UK land investing.

New zoning laws in the UK have ushered in a different set of land use planning rules. Now land investors work with local authorities to address community concerns.
The Localism Act 2011 brought a significant change to how land is rezoned in the U.K. Essentially, town and country planning throughout the U.K. is now under the control of 421 separate Local Planning Authorities (LPAs), a stark change from the regional authorities that formerly held this responsibility under the Town and Country Planning Act 1990.

Localizing authority has an impact on UK land investment dynamics. LPAs are organized at the borough, district council or unitary authority, where decisions about land use and building are considered along with other community interests and with input from local citizens. Given the general growth of the population in England and Wales (about seven percent over the decade preceding 2011), a need for housing makes this a pressing issue. Rezoning is sometimes necessary to enable developers and investors to build where housing needs are most critical.

The criteria that LPAs follow include:

•    Follow a general scheme – Before any requests for zoning changes are made, the local authorities must develop a general plan for land use, growth and use designation changes.

•    Submit information about plan revisions (rezoning) to public scrutiny – Regardless of whether an appeal to change a particular tract’s zoning comes from private parties or agencies in the public sector, those changes must be published for general public review and criticism.

•    Assess environmental impacts – In particular, the requirements of the Environmental Impact Assessment and Habitats Directives must be met, particularly with regard to the suitability of the land for infrastructure projects, such as how new roads, sewers and utilities would affect watershed, protected species and so forth.

•    Consider the social and economic impact of zoning changes – In the bill, the Community Right to Challenge (Chapter 3) provides that the LPA is required to consider social and economic impacts of any zoning alterations.

These considerations are important to investors interested in how the value of land can change with rezoning. Professional land investment companies understand the zoning process and will study the local economic conditions and LPA receptivity to land use designation changes. To the individual investor, it is important to consult a personal financial advisor, who can assist study where investments in real assets such as land factor into overall wealth management.

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.

Eurozone Crisis and UK Land Values - What Might Happen?

There are increasing questions and developments around UK land and the Eurozone crisis.

While the UK population swells, very little is being added to the country’s housing inventory due to economic uncertainty. It is a mixed picture with emergent ideas.

As the Eurozone crisis continues to hover over the Continent as well as the United Kingdom, a mix of factors is affecting the value of built property and land. In some ways, one could say the increasing demand for places to live is akin to water rising behind a dam. The question is where will that water - people who hope to own houses sometime soon - be let loose?

The Royal Institution of Chartered Surveyors said early in 2012 that “something bold is desperately needed,” as new home building is at about one-third of what would be necessary to meet demand. So where are the supply-demand dynamics of our economic system? Blame Greece, perhaps, as lenders are spooked by what might happen if the EU collapses. No one knows at the time of writing what exactly is in store, so at best we can examine certain key dynamics relative to housing. From there, the value of strategic land can be somewhat projected.

Population increase, and pensioners are staying put - The UK Census 2011 showed an overall population increase of 7 percent over the previous decade. This leads to a natural increase in demand for new housing, but another factor adds to that: older members of the population are healthier and therefore remaining longer in their homes. This reduces the supply of granny flats opening up to young couples – which, reportedly, are living with their grannies.

Wealthy foreign buyers attracted to London - Savills reports that well-off Europeans are fleeing France, Spain, Portugal, Italy and - irony alert - Greece over worries related to the Eurozone crisis. They are buying higher-end properties in London, which explains why prices remain strong there and in the South East of England.

Low interest rates driving some buyers - It is a great time for homebuyers because mortgage rates are low. The caveat on that is, of course, that the buyers must have a good credit history and a healthy established deposit, at least 10-15 percent and more if possible. Without that, buyers are unlikely to get a loan from banks that have scaled back lending due to - you guessed it - the Eurozone crisis.

Some investors building-to-let - In August 2012, The Guardian economics writer Patrick Collinson noted, “demand is there, but the supply is not forthcoming. The obvious reason is finance.” He argues for relaxation of the green belt rules, but notes this is not the core of the crisis. Instead, he offers, “one solution, barely tried yet in the UK, is build-to-let…[it] is about increasing supply, which should cap rents and soften house price increases.” He adds that Hearthstone Investments (fund managers in residential property) and Aviva (insurance) are cumulatively raising £1.5 billion to invest in new builds for letting. This mirrors some markets in the U.S., where developers are finding a stronger rental market fuelling new construction.

It’s too early to predict what, when and how the Eurozone crisis will subside and what exactly will happen with land values. But the UK continues to be an attractive draw to immigrants, and the making-babies business shows no sign of subsiding. The finite amount of land available for residential construction suggests the supply-demand curve will continue intersecting ever higher.  Those looking to make alternative investments should take note.

Demographic Trends Pushing Land, Housing Values Up

Land and housing values are affected by certain demographic trends.

Housing values are affected by many factors: the economy, the availability of financing, building, population growth and variables of age and ethnicity.

For those considering making an alternative investment in strategic land, it is worth understanding the housing shortage in the UK.  It’s a classic case of short supply, high demand - and increasing prices. Perhaps less well known are the underlying factors, particularly population trends:

Net increase in population for England and Wales

Unlike other parts of Europe and Russia, there are clear population increases now and likely into the future:

• The population grew by 3.7 million people in 2001-2011, a rate of about 7.1 percent.Growth was largely due to inward migration, higher birth rates and a lower death rate in the elder population.

• There is projected population growth of 4.9 million in the current decade, and by 6 million additional residents between 2020 and 2035.

• England and Wales are now populated by 56 million people, the highest ever recorded. Concentration and growth rates are highest in London and the East Midlands, lowest in the North East.

Influx of professional class immigrants

Part of the growth of population can be attributed to troubles in the Eurozone:

• Anecdotally, we know of working professionals moving to the UK because of the Eurozone crisis. The Financial Times reported in June that the posh neighbourhoods including Mayfair, Belgravia and Knightsbridge were destinations for well-heeled foreigners looking to establish a London address (this is being curtailed by a stamp tax imposed by the chancellor, George Osborne).

• Savills, the real estate firm, has data that reflects these increases: Buyers from Spain grew by 14 percent in 2011; from Italy, by 46 percent and from Portugal, by a whopping 153 percent.

• London real estate prices, atypical of the housing elsewhere in the UK, maintain their value perennially. Save for a dip in 2008 and 2009, prime Central London home prices have continued on an upward swing that is divergent from the rest of the country since 2005. As it is said, there will always be London.

• The children of working class immigrants, many of whom arrived during the Thatcher era or before, are experiencing better-than-average social mobility, adding to the class of people who are likely to purchase homes.

Population is aging - but not moving

Hooray for the pensioners in that they are living longer and more vital lives. However, that means they are staying in their homes longer, which keeps their flats and cottages from coming available on the market:

• As a share of population, people aged 65 and older constitute the largest ever portion at 16.4 percent

• In the 60-64 age group - baby boomers - the number of individuals increased by 800,000 between 2001 and 2011. The total in that category is about three million.

• The largest proportion of older people live in the South West; proportionally, London has the fewest pensioners.

Rental rates are up (£750 per month in private housing, on average), which usually precedes greater demand for home purchases.  But developers are not finding loans nor are younger buyers able to find mortgages due to tight credit markets. Consequently, there is building demand for housing – but the demand is not being satisfied.

Does this portend explosive growth once credit is eased? The factors are all there, but the question can only be answered by the banks... and time (something those hardy, long-lived pensioners, many of whom lived through the War and shortages in the aftermath, might be able to tell us about).

Can the UK Housing Crisis be Eased with "Hard Money" Loans?

The housing crisis in England and Wales is one where too few homes are being built because would-be buyers can’t get loans. "Hard money" loans as a solution considered.

“Hard money” loans - more commonly issued in the U.S. but which exist in UK lending between private parties, for the most part - allow lending to individuals and companies that may not be able to get traditional loans from a bank. They are collateralised, where an acceptable amount of equity in an asset will assure the lender that their loan is protected (a loan-to-value ratio of 60-70 per cent, usually) in case of a default.

With lending at the crux of the UK housing crisis, can these hard money loans help ease the problem should they become more prominent? Will homebuilders or homebuyers be able to achieve financing with these subprime loans where they could not through traditional channels?

Most analysts do not think so. First, as private deals, hard money loans are unlikely to happen on a mass scale absent a larger, established lending institution. And the value of land, being what it is, as the basis for the collateral is unlikely as well - who can own land and yet not afford to build (other than, perhaps, inheritors of land)? Also, so-called hard money loans are typically made with short-duration terms, three years or less – good enough for a builder, perhaps, but hardly enough time for a home owner-occupant.

There are reasons to think that Brits would be able to start building and buying more homes. A poll of market watchers taken by the Reuters financial news agency in February 2013 found some hopeful signs:

• British home prices have not crashed as deeply as those in America. People who owned houses before, say, 2007 are in a good position to trade up if their income allows.

• While the threat of a triple-dip recession looms, more people are working in the UK than ever before.

• Interest rates from the Bank of England have remained steady at 0.5 per cent for those who qualify (which usually requires a good down payment on the property they wish to purchase).

• At the end of 2012 mortgage approvals rose to 55,785 and are expected to climb steadily higher in 2013.

• The government’s Funding for Lending scheme (FLS) may find greater use among lenders as time goes on, according to Nicholas Wrigley, chairman of Persimmon PLC, a leading residential housing developer (there are those who disagree with this, but time will tell).

The Guardian reported also in February 2013 that house sales are on the rise, according to the Royal Institution of Chartered Surveyors (RICS). But the organisation warms that the recovery is fragile and remains uninviting to first-time buyers.

Other means by which housing construction can commence to meet the growing UK population is for builders to elect to construct to-let housing where it is needed most. With so many young families looking for space, renting is increasing while home ownership is on the decline. “Triple dip-induced paranoia appears to be stalking the market, with many would-be buyers in the family sector choosing to rent for the time being,” said the principal of a Wakefield-based estate agency.

Another agent in Maidenhead, Berkshire, observed, “Buy-to-let investors are coming back to the market noticeably.” The Guardian reports that in the fourth quarter of 2012 that buy-to-let mortgage loans reached a 16 per cent growth over 2011, constituting 13 per cent of all mortgages granted last year. Building societies (BSAs), mutually owned by members who historically encourage individual home ownership, are increasingly extending loans instead to landlords; this is due to both demand factors and because higher fees from buy-to-let customers net better revenues for those societies.

It appears that investors in strategic land and housing development are exploring various means by which to increase housing stock and achieve asset growth in the process. Before embarking on such an investment, individuals should work with a personal financial advisor who can weigh risks against alternative investments in a holistic manner.

Be a Land Investor, Not a Real Estate Speculator

With demand for housing at an all-time high in the UK, it is easy to become enthusiastic about land investing. Just be careful about over-exuberance.

The data analytics company Hometrack showed an interesting and perhaps alarming trend (depending on how you look at it) in home sales in May 2013. While the sales agreements for the month were up 8.2 per cent, new homes being built were only up 2.8 per cent. Does this outsized demand level not only push prices upward, but up into a real estate bubble once again?

Certainly, to Londoners that may seem to be the case. Central London home values recovered very quickly from the financial crisis and its aftermath in 2007-2010. But much of the demand driven there in that pricey market is a function of it being London: home to the international well-to-do, many of them from other countries who are here seeking a more stable society and economy. The same phenomena are observed in international cities that include New York, Tokyo, Hong Kong, Sydney and Melbourne.

But contrast that to home values in the rest of England and Wales. In the prosperous South East, prices are up but far from the levels seen in London. The Midlands and Wales have continued to see slow growth. The Funding for Lending scheme from the UK government, and historically low interest rates from the banks, are helping create some of that demand.

This is not surprising considering how there is wide concern about a third recession in 2013. In the economic seesaw seen over the decades, worries about the economy reduce purchasing of all kinds. When prices are low enough on such things as real estate, property fund management teams often swoop in to buy at the lowest prices in anticipation of a solid growth in asset value in the near term.

Land speculation is rarely a beneficial phenomenon in the long term. It generally means land prices rise above the productive value of the land itself – for example, when £10,000 per hectare is the going rate when under any zoning circumstance (agricultural, commercial or residential) the land cannot produce that much value. When the bubble – more a psychological matter than good sense investing – bursts, lenders to speculators cannot recover the loans, which then creates serious problems in the financial markets.

It should be noted that land speculation typically and quite obviously occurs when demand outstrips supply. And in the UK, where 130,000 fewer homes are built each year than are needed, that indeed is the case. What holds back speculation from happening now is the recent experience of a burst bubble – this factors heavily into private investor and financial institution thinking. No one wants a repeat of 2008.

No one – not governments, not homebuyers and most investors – likes a rapid rise and rapid fall. This kind of volatility leads to big winners, big losers and a generalised instability. The more solid land investment operates on a different model, where reasonable and logical strategies lead to a slower degree of growth.

So where do land investors wanting capital growth find those solid returns? Real estate investment trusts (REITs) have had at best middling success since being introduced just prior to the recession. They seem more subject to the dynamics of market trading than land and building supply and demand.

Strategic land investors working with land development experts often do so in micro-markets. In areas where employment is growing, for example, there may be strong incentives for local planning authorities to grant land use changes from agriculture or industrial to residential (to accommodate economic development). A strategic land investment will necessarily require work on the part of the investors (or their joint investment advisors and agents) to achieve the zoning change, design and develop infrastructure, then sell the land to homebuilders. This process is perhaps too slow for speculators, taking 18 months to five years to complete and to achieve a return on the investment.

Even with the more strategic approach to land development, an investor is strongly advised to work with an independent financial advisor. This helps the investor weigh the relative risks and rewards of land development against his or her capital growth planning and make decisions based on objective criteria.

The Growing Importance of Transparency in Capital Growth Investments

Success in capital growth investments can’t be achieved without transparency.

Scandals and fraud in financial markets and alternative investments undeniably happen. But transparent companies with smart strategies still achieve capital growth.

Institutional and private investors, including endowments of major universities, have been piqued of late because of their land investments in Africa. Many of these investments as “land grabs” according to Oxfam, the nongovernmental organization that works on global food issues. Land grabs occur when developing nations trade land for cash with buyers from Europe, the US and Asia. Private companies purchase huge swaths of agricultural property, then convert it to uses that do not benefit local populations – for example, when food crops are converted to biofuel crops.

Oxfam’s advocacy chief, Max Lawson, told The Telegraph, “We want higher standards to govern these investments to ensure that the deals are transparent and that the people on the land can give their free, prior and informed consent.” The matter is slated for the G8 group of nations meeting in 2013.

Indeed, it’s transparency that investors want as well. Individuals and institutions often wish to put their money where their conscience is, but the distance between financiers and the investment is often considerable. Agents of the investment serve as information intermediaries, therefore trust needs to be built between investors and fund managers, for example.

Another reason why transparency is top-of-mind with investors comes in the wake of scandals such as Bernie Madoff in the States, the opaque worlds of derivatives, Parmalat, Barings Bank, BRE-X and BCCI. Simply put, trust left the room but skepticism stuck around. Investors should demand to know how their money is working to make sure it fits their moral sensibilities and meets their financial objectives.

More and more, the need for transparency is becoming part of the financial services culture. One firm trading in traditional securities, Schroder UK Growth Fund, invests in what it considers “quality” UK companies. The definition they provide for quality is in three parts:

• A strong product or service
• Companies with credible management
• A sound and transparent business strategy

The emphasis on each of these, especially the importance of credible management and transparency, should be the guiding light for all investors in all types of instruments.

As a Christmas present to the world on December 24, 2012 – unexpected and perhaps not entirely appreciated – none other than Bernie Madoff wrote a letter to the American financial news station CNBC. He said the types of scandals seen in the past few years, including his own, are nothing new. The notion that insider trading is a recent phenomenon is “false,” he says. “It has been present in the market forever, but rarely been prosecuted.” In other words, someone is deciding not to share information with those on the losing side of insider trading. That’s not very transparent.

Land investments experience a bifurcated perception: Good capital growth can be achieved in well-managed, transparent strategic land investments. Yet highly publicized, fraudulent enterprises that target less sophisticated investors – often through telephone solicitations – create a much different impression. One ruse is the sale of property in far off lands: it usually exists, but offers no economic value (e.g., land located on steep hillsides).

Individuals and institutions find legitimate land investment a smart alternative to market traded securities. In anticipation of a strong housing surge – to meet a shortage in the face of a growing UK population – undeveloped property is being purchased for planning redesignations (rezoning). The price of entry in a land capital growth fund ranges between £10,000 and £25,000 investment.

Instead of offers to buy land in Turkey or Belize or Morocco, investors are advised to look for properties in the South and East of England, where population growth is strong.

Any kind of alternative investment requires close study. For a full analysis of risk, as well to learn how certain investments fit within your portfolio, speak with a personal financial advisor.

Sustainable Development in Rural Areas is the Intent of the National Planning Policy Framework (NPPF)

Greenbelt lands are thought to be sacrosanct in resisting development. But that’s not the absolute rule – the NPPF encourages vitalization of rural areas.

The growing UK population brings up much debate over development in greenbelt lands. This is not just about adding residential and commercial tracts – even a proposed new poultry farm near Bath met council resistance in 2013.

In that particular planning consent application, the proposed agricultural-purpose enterprise and structures were deemed likely to “result in an unacceptable degree of harm to the landscape and to the openness of the Green Belt…the dwelling constitutes inappropriate development,” said a report in the Bath Chronicle.

And yet, there is growing support by voices in the government and the general population saying that the greenbelt is not sacred and that some development will be necessary to accommodate a growing UK population.

The current situation is the worst housing crisis since the post-War period, placing families stacked two or more generations into flats and bungalows, as homebuilders have not found economic incentive to build since the 2008 financial crisis. The country is focused on finding solutions, some of which can come from the build-rural recommendations of the National Planning Policy Framework (published March 2012). Those recommendations include the following:

• Planning policies should support economic growth in rural areas in order to create jobs and prosperity by taking a positive approach to sustainable new development.

• Support the sustainable growth and expansion of all types of business and enterprise in rural areas, both through conversion of existing buildings and well designed new buildings. 

• Promote the development and diversification of agricultural and other land-based rural businesses. 

• Support sustainable rural tourism and leisure developments that benefit businesses in rural areas, communities and visitors, and which respect the character of the countryside. 

• In rural areas, exercising the duty to cooperate with neighboring authorities, local planning authorities should be responsive to local circumstances and plan housing development to reflect local needs, particularly for affordable housing, including through rural exception sites where appropriate. 

• Planning policies and decisions should not attempt to impose architectural styles or particular tastes and they should not stifle innovation, originality or initiative through unsubstantiated requirements to conform to certain development forms or styles. It is, however, proper to seek to promote or reinforce local distinctiveness. 

• Planning policies and decisions should address the connections between people and places and the integration of new development into the natural, built and historic environment.

In an earlier document, “Planning Policy Statement 7: Sustainable Development in Rural Areas,” by the Office of the Deputy Prime Minister (Crown Copyright 2004), these points were also made:

• Focus most development in, or next to, existing towns and villages.
• Discourage the development of “greenfield” land, but, where such land must be used, ensure it isn’t used wastefully.
• Promoting a range of uses to maximise the potential benefits of the countryside fringing urban areas.

What should be clear is that development in greenbelt and agricultural areas is far from discouraged. Instead, national planners prefer that it be done consciously.

Strategic land investors are looking at brownfield as well as greenfield land as opportunities to serve the critical housing needs of the country. Generally speaking, the residential and commercial building they foster follows the presence of employment in a local economy, where having the right kinds of workers living nearby the business itself will do better.

Investors looking for capital growth and who consider such areas for development are advised to work with land specialists who understand the processes and priorities of local planning authorities. For the new investor, participation in such schemes needs independent review by a qualified financial advisor.

Strategic Land Investments Can Be Smart - or Rife with "Red Flag" Problems

What are the “red flag” problems to look for in potential strategic land investments?

A sucker is born every minute. But some of the scams in land investments are so obvious that the would-be investor taken in by them must be a sucker without web access.

In the 1980s an American company called Lunar Embassy embarked on its scheme to sell one-acre plots of land on the moon for approximately $20US per acre. Simply put, it was a strategic land investment scam that is out of this world. The company reportedly still thrives, legally, through Internet sales, claiming 2.5 million acres sold – despite the fact the United Nations prohibited states and individuals from owning extra-terrestrial property since 1967.

That noted, contemporary land investments on Earth can be just as dodgy and have been happening since long before human space travel. Perhaps this is due to the fact that great wealth has been built on fortuitous investments in undeveloped land (the 2012 movie “The Descendants,” starring George Clooney, uses as a demonstrative sub-text the great fortunes connected to ideally-situated, once-remote property). Or, it may have to do with the idea of hidden treasure. The best example might be the Oak Island Money Pit, a Nova Scotia (Canadian Maritimes) tourist attraction that has repeatedly drawn investors to buy and attempt to excavate sinkhole land in search of fabled treasures. The deep hole on Oak Island has yet to yield treasures but myth and tourism keep the dream alive.

These ventures into space and fantasy are relatively harmless compared to land scams that target unsophisticated investors. Operating within legal limits, many land banking companies use telephone marketing techniques to contact potential investors with offers that sound too good to be true – because in fact they are. The characteristics of these modern day rip-offs include the following:

• Land in a remote location, unlikely to be visited by the potential investor. Quite often the countries for these once-in-a-lifetime opportunities are Brazil, Cayman Islands, Costa Rica, Cyprus, Indonesia, Turkey or Ukraine.

• The land is truly in the UK (but will not likely ever be developed). In fact there is land that is well situated near population centres where development might seem logical. Except it may be on protected greenbelt tracts, or on a steep hillside or otherwise inaccessible to roads, rendering it highly unlikely to be developed.

• The land has explosive value-increase potential. The pitch is that planning permission is already guaranteed making it likely the underused farmland is about to become a five-star resort (often the pitch for sunny, seaside properties), or for a about-to-be-valuable agricultural crop (acai or cocoanut plantations in Brazil, or biofuel land in Indonesia, for examples). The investor has to ask, “if it’s such a good deal why are they offering it to anyone who answers a telephone?”

• The product being sold is exotic and exists only on paper. Sometimes land is just too simple for scammers and their prey, so instead worthless paper is created to sell carbon credits, diamond rights or options thereof. Sales people will assure their targets that the contracts are honoured by the “International Court,” as if such a thing exists.

• The investment will come with a 100 per cent or 1,000 per cent or greater “guaranteed return.” Who would possibly be so stupid as to turn it down? Other than the person who asks, “Why is anyone not simply hoarding this investment for his or her own gain?”

In fact, legitimate land investments are available, providing excellent capital growth for investors, in the UK. But such investments require very strategic approaches made by seasoned land investment professionals. Typically, a solid land investment will require a minimum of £10,000 and make no specific promise on the ultimate return on that investment (which would violate standard financial industry ethics). Before getting involved in any kind of investment, the investor is wise to discuss it with a personal financial planner who can provide an independent evaluation.

How Climate Change is Affecting Strategic Land Investing

Savvy strategic land investing now must consider climate change.

Two factors face land investors and developers: How to minimise their impacts on the environment, and how to mitigate potential damage from a changing climate.

The year 2012 was the wettest on record for the UK, according to the National Flood Forum, a coalition of community groups throughout the country. The organization warns that flooding is possible anywhere – flooding in never-flooded-before West Sussex in June of that year provides an instructive example – and should be considered a top emergency priority.

Part of what is so surprising about this is the drought that preceded these floods by mere weeks; widespread hosepipe bans were in place as recently as March 2012. But by the end of the year, nine people had died from excess rains and runoff. Such is the experience of weather volatility under conditions of climate change.

Meanwhile, the UK is undergoing a housing crunch that calls for no fewer than 4.4 million new homes to be built by 2016. Housing traditionally taxes both the demand for water, a problem during droughts, while concurrently establishing hardscape land (surfaces that do not naturally absorb rain) that exacerbates storm water runoff.

The Committee on Climate Change (CCC), an independent group that advises the UK government on means to prepare for and manage climate volatility, stresses that land use planning should be factored into national policy. “Climate risks appear not to be fully incorporated into some major strategic decisions,” the organization said in a report titled Adapting to Climate Change in the UK/Progress Report 2011. “Embedding climate change more fully into decision making could reduce future adaptation costs, such as building new flood defences and maintaining existing defences, and also ensure that climate risks are appropriately balanced against other risks and benefits.”

Of course, England is cited worldwide for the construction in the 1970s and 1980s of the Thames Barrier, which prevents flooding in London during exceptionally high tides and storm surges. Used only once each year up until 1989, it was closed six times in 1990, 9 times in 1993, 6 times in 1999, 10 times in 2000, on 15 occasions in 2001, 19 times in 2003 and 11 times in 2007. The Barrier responds to ocean conditions, a different dynamic but also a function of a warming planet. This is a country that can mount heroic efforts to deal with natural forces, and perhaps similar tasks can be accomplished throughout the country.

CCC notes that water supplies are near their lower limits in some regions, and are more vulnerable to patterns of development and demographic trends. To mitigate this, they recommend several measures be taken:

• Improve water use efficiency, which can include lower-flow bath and kitchen fixtures, and the use of rainwater catchments for landscape watering and other uses. Up to 45 percent of water resource zones will be at risk of shortages by 2035 if remedial actions are not taken.

• Reduce building vulnerability to flooding by situating new development appropriately and by designing homes that can withstand flooding when it occurs.

• Design water absorption systems (bioswales and rain gardens) that naturally absorb storm water in situ that precludes flooding.

The UK Green Building Council certifies construction of residences and commercial structures according to the LEED (Leadership in Energy and Environmental Design) standards used around the world. The organization also celebrates the UK government’s Code for Sustainable homes, introduced in 2006, which calls for “zero carbon” homes by 2016. Hundreds of buildings in the country have been certified in the LEED system while many others apply these standards without applying for certification. The net result includes development of materials and techniques that often becomes standard for all construction.

To those involved in land investment, a conversion of unbuilt to built property is typically the goal and end result. Building according to LEED standards may be exactly what the market calls for, although the bulk of homes and businesses that achieve certification tend to exist at the higher end of the cost/value spectrum. These structures operate at lower energy costs, so a longer-term perspective by buyers might drive more sustainable building methods; ROIs are achieved anywhere between three and 20 years into the future, depending on technologies used.

Investors who are considering land as an alternative investment should consider also the questions of sustainability. Be sure to discuss it with experts, just as any financial decisions should be weighed with the advice of a personal financial advisor

Fraud is Driving Investors from Precious Metals to Land and Other Real Assets

Real assets – including land – are providing safer haven to investors wary of gold scams.

Gold, silver and other precious metals historically hold unique attraction. But recent experiences with fraud lead investors to other real asset investments.

The soaring price of precious metals, gold and silver in particular, has lured millions of investors from around the globe who are fatigued with poor performance of traditional investments and who regard them as a hedge against economic uncertainty. But just as a hot commodity is attractive for its ability to deliver rapid asset growth, so is it able to attract frauds and scammers.

In mid-2011, the American newspaper South Florida Sun-Sentinel reported that more than 45 companies were selling precious metals in just two counties (Broward and Palm Beach counties) in that state. Because there are no licensing or reporting requirements for that industry, it has been easy for individuals to open up telemarketing and web-based businesses there, doing business around the globe including in the UK. Many of the individuals who run these telemarketing firms have criminal records, and have subsequently been arrested for running Ponzi-scheme operations that collected investor money but never owned the gold they claimed to customers.

This is nothing new. Gold and silver have a long history of investment scams, in part because it has been universally valued for centuries, and because it is highly portable and liquid. On some levels to certain individuals, it can be a wise “safe haven” investment; its meteoric rise in price has exaggerated these notions in the past few years. Individuals who might not invest in traditional stocks or bonds might be lured by aggressive marketing into precious metals investments. Fraudsters use a variety of schemes to get money from investors without actually delivering bricks of the metal, arguing that shipping and security costs would be prohibitive, and claiming that this is the way wealthy investors own gold.

Alternative investments to gold: Real assets, such as land

Economic conditions always drive the long-run returns on all investments. While broad market factors uniformly affect the day-to-day prices of company stocks, for example, those companies’ valuations ultimately are determined by the firms’ abilities to turn a profit. But each of these has their pitfalls as well.

Investors in alternative investments – which range from hedge funds to fine art to raw land, and yes, precious metals – need to be savvy. Consider the ways to win or lose at any of them:

Hedge funds – When they were novel, hedge funds were the province of the rich to (as the name implies) hedge against losses with private, actively managed funds that are designed to deliver a positive return, regardless of market rises and falls. But because these funds are private, they are not as transparent and are thus subject to abuse and fraud. The Bernie Madoff Ponzi scheme was essentially a hedge fund.

Rarities (art, antiques, jewellery, antique cars) – The rise of wealth in China and other countries have driven up prices for many segments of the rarities markets. After all, it’s about increasing demand with a finite number of available goods. But to buy art, antiques, jewellery or cars takes expertise in each category. The new collector is easily fooled.

Land – It’s possible since 2007 to buy real estate on the exchanges through real estate investment trusts (REITs) in the UK, although the nature of the investment almost qualifies it as a traditional versus alternative investment. Compare REITs to buying strategic land, where investors select sites where they are confident a zoning change will enable development to occur. When that happens, the asset value can increase dramatically.

Individuals who are considering land or any other type of investment need to pursue it with care. All investors should work with a personal financial advisor who can independently advise clients on their full investment portfolio – which includes allocating risk among different investment types.

Would Alternative Investments Be a Good Long-Term (10+ Years) Strategy?

Should a 10-year investment strategy incorporate alternative investments?

Alternative investments that might include art, classic cars, rare diamonds or raw land have performed well in the past decade. Can the asset growth continue?

The performance losses of hedge funds in 2012 set off warning bells for many investors as they look for smart investments in 2013 and beyond. As Reuters reported in July 2012, “performance losses at many funds resulted in total industry assets shrinking.” The financial news agency quotes Hedge Fund Research, which noted the average fund dropped by 2.7 per cent in the second quarter of that year alone, a time marked by net outflows in the billions from all types of funds. Some analysts attribute this to the sheer proliferation of hedge funds, reducing their vaunted performances earlier in the nineties.

All investing involves risks and rewards, ideally in commensurate quantities. As traditional market traded securities have proved volatile and ultimately disappointing since the financial crisis of the past several years, many people have turned to alternative investments. These include hedge funds, but can include art, fine wine, classic cars and precious metals, as well as real estate and land investments, among others. Most of these have performed well against the stock market – but will they in the decade to come?

Of course, the owner of the crystal ball that holds the answer would ultimately be the richest person on earth. Lacking that, the best we can do is to look at the history of alternative investments and factors that may favour or diminish their prospects in the years to come:

• Wine – Bordeaux reds tracked by the Liv-ex Fine Wine Investables Index between 1999 and 2009 found a 138 per cent return on such vintages as Lafite Rothschild 1982. Of that variety, 12 bottles purchased for £2,613 in 2000 sold nine years later for £25,500. In other words, pick your wines wisely and you can do extremely well.

• Art and jewellery “passion” – Fine art requires an expert, as with virtually all investing, to predict which artists may perform well over time. They can prove to be spectacularly wrong: Mega-selling artist Damien Hirst, whose provocative use of dead animals and even a human skull (encrusted with diamonds) has earned him US$350 million in his relatively short career thus far,  saw some of his earlier work plummet in price by 30 per cent in 2012. Yet, London-based Emotional Assets, which promotes itself as the “convergence between collecting and investing,” is part of a category known as “passion funds,” which claim returns that best investments in stocks and bonds. KPR Capital, a Cayman Islands investment firm launched a rare diamonds fund that returns between 15 and 17 per cent per annum in 2007 and 2008.

• Classic cars – The largest classic car auctioneer in the UK, Coys, says the value of cars  – including the brands Ferrari, Mercedes Benz, Porsche and Aston Martin – has gone up since 2000 by as much as 200 per cent. That said, a firm spokesman told The Guardian that a Jaguar XJ220 that sold for £120,000 has not increased in value at all, and a Ferrari Daytona sold in 2008 for £190,000 was worth £30,000 less in 2009. Again, expertise on the part of a buyer or a buyer’s consultant is advised when looking at this type of investment.

• Raw land – Land that is poised to be rezoned – typically, from agricultural or commercial purposes to residential – offers the most likely upswing in value. Because the characteristics of land are so variable, it is difficult to cite broad investment returns from one location to another. But advice and management of the investment by seasoned property fund managers are more likely to yield a favourable return. The 7 per cent growth rate of the UK population over the past ten years while housing stock did not increase commensurately all suggest that land investments should perform well for the foreseeable future.

The characteristics of best performers in almost all alternative investments include a finite supply, attractiveness to foreign investors from developing countries (China, in particular) or increasing natural demand (e.g., the increasing UK population needing housing).

No investment should be undertaken without the counsel of a personal financial advisor.

What Incentives Do UK Housing Investors Get From the Government?

Lending schemes from the government might be helping buyers, but the real way to increase housing stock might lie in programmes that grow rental inventory. 

The Guardian columnist Matt Cavanagh wrote an article in 2012 criticising the Chicken Littles of Britain who worry population growth is out of control and leading the country to ruin. “Should we see a rise in our population as a problem, or an opportunity?” he asks. “Are we simply ‘too crowded’ to cope with more immigration?” he continues, before proceeding to provide his own data and opinions that refute the worriers.

Cavanagh concludes that UK population growth has been decried for the past 100 years, and that with smart planning, lots of building and technological innovation – already underway – those problems can be mitigated.

Part of the writer’s argument is that England is not static, that the country has historically done well as it adapts to change. Also, that the land mass can support a larger population quite handily. One such change already underway is the shift from an ownership to a renter society, as illustrated by how things have changed in the past ten years. A decade ago new housing included about 10 per cent of inventory for rental; today, that number is closer to 17 per cent, and it’s projected to rise to 20 per cent within the next decade.

HM Treasury, the government’s economic and finance ministry, issued a report in 2010 (“Investment in the UK Private Rented Sector”) that acknowledged a plethora of factors favour increasing the country’s stock of rental housing to ease the burden of a housing undersupply. These factors include macroeconomic stability, meeting peoples’ housing aspirations, creating sustainable communities and establishing labour market flexibility. By increasing to-let housing, the country will get more affordable homes overall.

Since then the government has created two programs to encourage investors (such as those who seek UK joint venture land opportunities) to put money into both social and private housing development. One, a scheme for affordable housing with debt guarantees, enables the raising of debt with government backing. This effectively makes it possible to build more new rental homes because borrowing costs are lower. For building in the private rented sector, investors are also given similar debt raising support with the same expected outcome of additional building.

The Royal Institution of Chartered Surveyors (RICS) is proposing some new ideas as well to goose the rental housing market. In a report released in June 2013, RICS recommends new tax bands for higher-value properties, and it suggests providing incentives for pensioners to downsize to smaller homes. RICS was critical of much ballyhooed government schemes that help homebuyers, arguing that those are most beneficial to people who could afford to buy anyway; until there is an increase in he housing supply, millions will continue to be shut out of buying altogether.

Instead, RICS proposes releasing public lands for more residential development, which could accommodate building up to 250,000 new homes in the next few years. Another proposal is that developers be required to build within three years of receiving planning consent. Also, RICS proposes a scheme to enable lower-income renters to accumulate a “portable home ownership discount” over time that would ultimately enable them to buy their homes.

RICS also suggests that self-invested pensions (“Sipps”) could be directed to investments in new-build residential property.

Cavanagh, the Guardian columnist, acknowledges that population growth will require not just housing but investments in infrastructure and public services. But he doesn’t read these as insurmountable problems. Rather, it would take the creativity of ideas such as those provided by RICS to figure out solutions to these concerns.

Investors in the housing market – be it for-let or for sale – are advised to keep current on such lending schemes and the direction of policymakers on the local and national level. When determining to invest in strategic land or real estate, such as with capital growth investments (in a Sipps programme, for example), the advice of a personal financial consultant should be enlisted to ensure a good balance of risk within an overall wealth development plan.