How Towns Make Zoning Changes Through Local Planning Processes

Planning changes can revitalize local economies, benefitting old and new inhabitants alike. But how does planning work – and what does it mean to developers?

When the new UK National Planning Policy Framework was published in March 2012, it signaled several bold and important steps forward for communities, developers, UK land investors and their ultimate occupants, both residents and businesses. Priorities included shifting authority for local plans to communities (as opposed to regional or national authorities), a reduction in paperwork and jargon, expedited approval processes, as well as an emphasis on historic and natural environment preservation as well as raising design standards.

This comes after a long evolution of the planning process that is necessary in a growing, modern society, but one which was often regarded as obstructionist and bureaucratic. Modern planning as a discipline in the UK began in the late 19th century with the “garden city movement,” which emphasized parks (or “greenbelts”) surrounded by self-contained communities, with what were considered to be appropriate proportions of agriculture, residences, commerce and industry.

Evolving building methods, the skyscraper in particular, along with an increasingly motorized society and the Second World War ushered in new eras in how cities and towns function and are organized. Planning methods and priorities have evolved over time to accommodate these changes – and not without politics, competing economic interests and occasional rancor. The Localism Act 2011 and the Planning Act 2008 are the most recent iterations of this evolution.

What Britain encounters today in broad brush is an increasing population – 7 percent growth between 2001 and 2011, which other parts of Europe are experiencing stagnant and sometimes declining populations – and a current shortage of housing to keep up with this growth rate. Further, a widespread concern for the environment is affecting planning on two levels: one is to build in such a way as to minimize humanity’s impact on natural systems, and the second is to protect new development from the impact of climate change. The country remains committed to the provision of social housing, however how much and to what degree will always generate debate.

How planning changes unfold

With greater authority on the local district or borough level, planning does its best to negotiate these many variables. In the evolution of modern planning in the UK, a top-down authoritarian process has yielded to a hybrid of professional expertise overlaying a very democratic planning and development method. This necessarily means that economic interests driven by elected officials, employers and developers will intersect and often (but not always) complement the interests of community organizers and social workers.
 
In some districts, the need for new development is clear and universally felt, with all parties amenable to a zoning change that will rapidly lead to the arrival of bulldozers, utilities and new street grids.

But that is not always the case. An employer or employers may decry the shortage of appropriate workers in a region and hesitate to establish or grow operations before housing and transportation are expanded to bring in those employees. But while the general populace may not be aware of that, elected officials and planning authorities might be in conversations with developers and investors who want to build to accommodate growth. Then, the proposals for new development may be aired through a public consultation process.

It is then beholden on developers to solicit input from existing residents and businesses regarding the zoning changes. Larger developments might conduct community education programs through local media, including online as well as traditional print and broadcast outlets. Input from environmental and heritage agencies is often solicited as well.

While this can involve extensive campaigning and political deal making, the process of getting community approval for planning changes can also be smooth and collaborative. Ultimately, it is in the developers’ best interests to establish friendly and cooperative relationships with the neighbors.

Investors in land development – those who buy raw land or brownfield tracks that might be remediated, as well as those who construct homes, retail stores, commercial structures and industrial buildings – of course hope for a smooth and easy process. Some properties and planning authorities are simply more likely to make changes than others, for a variety of reasons. Currently, the pressing need for housing provides strong impetus to alter land use zoning.

Individuals interested in investing in land or real estate development necessarily should be concerned about local planning authority’s oversight of land use. But as with all investments, those investors need to consider how buying real assets fit within their overall financial portfolio. This is optimally done with an independent (i.e., neutral) investment advisor.

Overcoming Difficult Landowners In Strategic Land Investment Transactions

Strategic land investing can often entail buying from difficult landowners.

Landowners’ financial, occupational and emotional conditions affect their willingness to sell property … and the land buyer benefits from knowing this.

Investing in raw land for the purpose of strategically increasing its value in a relatively short period of time – typically, turning unused property into housing or commercial development over a period of 18 to 60 months – involves several moving parts that require expert management. One part is to achieve a planning authority change, allowing development where it was previously disallowed. Another part is to develop it for what the market needs (for example, the UK’s housing shortage strongly suggests that residential development is in greatest demand). But a third part is actually the first critical step, to acquire the land at a feasible price.

In most instances, this means that someone, such as a strategic land investor, will need to buy from a farmer or other landowner. This farmer or other landowner may well be content with the land’s status, probably across several generations of ownership within the same family. Acting rationally, the landowner (which is sometimes a group, such as family heirs of a recently deceased owner) will clearly wish to be paid an optimal price for the land.

This becomes a problem when the landowner’s expectations are greater than what the market will bear. They may have heard planning authorities are considering changes in land designation that would increase the value of their specific land tract. He or she may hear of quarter-hectare properties selling in nearby towns for £20,000 or £30,000 to developers. And yet they do not realize those prices come after several costly improvements are undertaken, such as site assembly and infrastructure additions (roads, water, etc.).

In such scenarios, the landowner(s) might retain legal counsel to either resist selling or to hold out for a higher price. There is nothing illegal or unethical about that, of course. But the land investor needs to be a skilled negotiator, which includes having information about the seller’s position. For the buyer, there is great benefit in knowing the following:

• Taxation on the landowner’s proceeds of a sale – The sale price hardly represents a clean economic gain for the seller. In most jurisdictions they will need to pay taxes on the sale, hence the buyer should be sympathetic to that argument. The amount they must pay can be ascertained with minimal research.
  
  
• Sense that the value will likely increase in the future – As landowners are aware of the increasing value of land and the critical need to build more housing in the country, they may subscribe to the idea that the longer they hold the property the greater that value will be. Challenging that notion, however, is the fact that land valued almost across the board decreased in the recessionary cycles since 2008. Regional shifts – and the investor having options to buy elsewhere – can affect this.
  
  
• Patience (or impatience) at turning the land into a new asset – A long-held property in the hands of one owner or a family may have outlived its use to them, the obvious case being land held by a retiring farmer. But some sellers are perfectly happy holding onto land for its use, or non-use, and therefore are less motivated to sell. Often, heirs who have recently received the land are the most motivated to sell the property – in particular if taxes on the property exceed its value to them.
  
  
• Sellers’ emotional attachment to the land – Not all land is held for rational purposes. If an individual holds an emotional attachment to property, perhaps because that person is the last in a long line of several generations of owners, they will be less motivated to sell.

Some of these factors may kill the deal, but in many situations they can be overcome and intrinsic to the negotiation. Skilled land investors never bet the bank on a single piece of land, opting instead to conduct simultaneous discussions with different landowners in different areas of a town or borough.

Investors in land funds are similarly wise to consider all investments within their portfolio with the help of a personal financial advisor. Strategic land investments can yield strong returns, but are less liquid than REITs and other market-traded securities.

How to Mitigate Risks in UK Land Investments

What are UK land investment risks and how are they mitigated?

Three factors improve land investments for housing: Funding for Lending, local planning authorities and splitting risk between investors and builders.

The rate of building new homes in the UK should be about 230,000 per annum, and yet the country’s homebuilders are constructing only about half that number. Naturally, that translates into very high housing demand – which to the alternative investor in any form of development (including those who acquire raw land to develop into residential property) should be indication of a pretty good financial bet.

But the housing market can be tricky. First, there are many who are quick to criticise the government for failing to provide programmes that can effectively restart the housing sector. Second, planning authorities answer to local political considerations more than investors’ needs to seek a return on their investment; they often cite greenbelt traditions and restrictions as reasons not to grant zoning changes that would allow development. Third, building structures on speculation there will be buyers may not be the land investor’s best talent.

These tend to be problems encountered by the unseasoned investor, however. Note that while inadequate, about 100,000 homes still are built every year. How do professional land investment fund managers do it? The answer largely lies in how each of those confounding factors are mitigated:

• Government programmes – The Funding for Lending scheme, instituted in 2012, is beginning to show signs of having a positive effect. Unfortunately, it hasn’t unleashed a boom in homebuilding and home buying just yet and is criticised for its downward effect on returns to savers. That said the stakes are high in political circles to find solutions that will truly stimulate the economy. To the land investor, perhaps the best advice is to acknowledge the government might be able to help things along, but it would be unwise to depend on it.

• Local planning authorities – It would be foolhardy for any investor to purchase land without some knowledge on how the local planning authorities would rule on a petition for a zoning change (note: generally speaking, a use re-designation can be a very fast way to add value to some properties). Professional land development specialists have relationships with the political structure and members of the LPA that allow fair knowledge on what might be granted.

• Building on speculation – While in past eras the land investor covered the full range of development, from dirt to doorsteps, the process has been bifurcated to allow homebuilders to assume some risks and rewards. Investor groups, working with specialists, can acquire land and build infrastructure to support building (roads and utilities, primarily). But the actual home building and capital it requires can be handled by homebuilders. This not only mitigates risk, it brings in two sets of business analysts to assess the potential for the property at an early state.

What should be apparent is that land investments are like any other asset: there will always be some risk. Would-be investors are advised to speak with independent financial advisors to determine what degree and type of risk is tolerable in their portfolios.

New UK Housing Sector Investor Advice

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Lucent Group Attracting Global Investment

When it comes to investing in UK strategic land, it’s all about timing.

There is an acknowledged housing shortage in England and a population forecast to increase by 17.5% within 20 years. Existing housing stock needs to increase by 29% by 2031. This presents a huge opportunity in land development to which Lucent Group is uniquely well placed to respond.

Lucent is the only group in the UK able to undertake a rigorous land acquisition process backed by the proven "in-house" land skills that are necessary to bring land forward for development. This is done without bank finance given the Group's own international fund-raising capability via the Luxembourg-domiciled and -regulated Lucent Strategic Land Fund (LSLF).

An International Proposition

Given that land is obviously such a country-specific asset class, the UK has been a natural and very supportive market in terms of investor inflows. The positive and compelling fundamentals that are driving the market in UK strategic land have, however, also been recognised by international investors. Since its launch in September 2010, the LSLF, an open-ended SICAV–SIF domiciled in Luxembourg, has attracted investors from the Far East, Latin America and other countries in Europe as well as from the UK. This has not happened by chance. Lucent’s global distribution network has worked hard to bring the opportunity that the Fund presents to an international audience. Seminars have been held, and visits made, to all of the above regions in order to support the Fund's distribution. The response of these various markets has been positive without exception. In today’s global marketplace, wherever an investor is based, a sound investment proposition from anywhere in the world, is something that will be considered.

The Opportunity

Timing has of course been critical to the Fund's success. The launch of the Fund in 2010 was in response to the circumstances created by the financial crisis and its impact on the strategic land market and its participants. House builders have been forced to find ways of reducing their building costs because of constraints on their equity resources. Finding more capital-effective means of acquiring land ready for development has been critical to them, and Lucent has responded to that need. The Fund has been ideally placed to act as the leading platform in preparing and delivering land ready for construction to the national house builders. The LSLF undertakes the acquisition, design, master planning and promotion of strategic sites and then sells consented land onto the house builder market.

The Fund is undertaking an intensive acquisition and planning period in order to deliver "oven-ready" sites to the house building market as demand for development land peaks. There has been a lot of activity in the house-building sector over the past four years. House builders have undertaken rights issues to raise capital and replenish their land stocks so that they are able to deliver new housing at a time when demand is greatest. The impact of this is already apparent. Development land values are rising. The strategic land market is being driven by a very different set of fundamentals from those affecting the property market in the UK.

Market Background

Given the above, the launch of the Fund in 2010 was well timed at an industry sector level. The same is also true when considering the timing of the launch in macro-economic terms. At a macro level the market in UK strategic land is being driven by demographics, and when a market is driven by demographics, its progress is unstoppable. The BRIC (Brazil, Russia, India and China) economies are testament to this. Figures from the Office of National Statistics (ONS) show a significant increase in the UK population over the next 20 years. It is not the fact that England is currently the most densely populated country in Europe that is key – it is the fact that this density is set to increase markedly. There are currently 395 people per sq km.  By 2031 there will be 464 people per sq km., an increase in population from 61.3 million to 71.6 million. When this map is considered in conjunction with the chronic housing shortage that exists in the UK (reference to which you see regularly in the press), the growing demand for strategic land with residential planning consent becomes obvious.

According to the Department for Communities and Local Government (DCLG), in a report published in November 2010, the number of households in England is projected to grow to 27.5 million by 2033, an increase of 5.8 million (27%) over 2008. All regions throughout England are in need of major urban expansion. Little wonder, then, that there is such strong cross-party political support for the need to bring more land forward through the planning system.

Trends in Financial Services

As mentioned earlier, timing is critical. For the LSLF timing has been perfect. Not only have the micro- and macroeconomic fundamentals and the political and demographic backdrops been supportive, but so too have been the recent trends that have evolved within financial services. A recurring theme, reported by Independent Financial Advisors (IFAs) in all the markets from which Lucent’s global distribution receives business, has been the demand of clients to "show me something different." In the past, UK strategic land investment was an asset class dominated by large institutions and the super-rich. The LSLF has made this asset class available, for the first time, to individual investors. It is delivering a new option at a time when clients are demanding something different as a consequence of their dissatisfaction and disappointment over the past few years with the major asset classes. The Fund has helped IFAs to meet this client demand. Predictably that enthusiasm has gained momentum with IFA’s and their clients, family offices, High Net Worth individuals and Discretionary Fund Managers as the returns available from strategic land have become apparent to them.

The LSLF has provided returns in excess of 50% since launch and has significantly outperformed the FTSE All Share Index over that period. IFAs have also been able to use the Fund as a means to address clients' increasing concerns over future inflation. History has shown that investment in a "real" asset such as land is a very effective, timely hedge against inflation. Lucent Group is the foremost land site assembly specialist in the UK. The LSLF has been launched by a group with direct land experience – not by a fund management company with no such experience. That much at least is not just about timing.

~ Chris Westerman, Lucent Group UK

Understanding Property Funds

A property fund allows investors to participate in real estate opportunities with the added benefit of diversification.

With greater awareness of the opportunities present in the current real estate market, many investors are looking carefully at property funds. The volatility of traditional investments, especially publicly traded stocks and bonds, drives interest and investment in various forms of real estate and property investment instruments.

A property fund allows the investor to diversify – and minimise risk – by buying multiple properties that are appropriately vetted (before acquisition) and managed (after acquisition) by skilled property fund managers. This differs from individual investors who are sole owners of single or multiple parcels of land. The lone investor may face headwinds from external factors, such as change-of-use resistance or an adverse change in local economics, whereas a property fund will strive to avoid such situations. While the nature of land will always be subject to externalities, the diversified nature of property funds leaves the investor with proportionately less exposure.

An alternative to a property fund is a REIT (real estate investment trust) fund; however, the two have key differences. A REIT is more liquid – an advantage to some investors and a disadvantage to others. But this also tends to subject the investor to market volatility, something avoided by a trust fund. REIT funds incur management fees that are generally greater than those found with property funds.

Does Capital Growth in Strategic Land Require Building Structures?

Learn how building structures can affect capital growth in land.

Strategic land investments are affected by many factors, primarily in adapting to the strongest market needs in the present. Existing buildings can diminish value.

The Daily Telegraph reported in October 2012 that a jump of 1.3 percent in house prices at the end of the summer was more an anomaly than hopeful trend. The article quoted Robert Gardner, chief economist at Nationwide (which issues monthly house price surveys) as saying “we should never read too much into one month’s data…the housing market is firmly in the doldrums, although the national average does mask significant regional differences. That said, in parts of London where there is a shortage of decent family homes for sale, there is still significant competition from buyers and prices are holding quite well.”

Gardner’s comments did not address specific properties outside London, but investors looking for capital growth in land understand there are opportunities elsewhere. The seven percent increase in population across the U.K., as identified in the 2011 Census, is a strong indication that new homes need to be built, particularly in towns where the local employment base is expanding.

But the matter of existing homes and buildings raises important points of discussion for the land investor. Typically, land investment involves raw properties, perhaps zoned for agricultural purposes but where the local authorities are predisposed to a zoning change. The astute investor – increasingly, land investors join together in joint partnerships that include an advisor with extensive experience in land capital growth – typically looks for undeveloped land.

The reason for this is simple: existing structures and the community infrastructure built for previous purposes may not serve current-market needs. There is less growth potential for the investor if, for example, 30-year-old multi-unit structures occupy the property because those buildings might require expensive renovation or demolition. With undeveloped land, the buildings, street configurations and utilities can be designed to meet modern needs.

This does not mean that historical buildings necessarily have to be demolished. Some developers are able to save barns and other aged structures to provide a development with character. For example, the Reigate & Banstead Borough Local Plan Policy on redundant rural buildings (in conjunction with the Department of the Environment Planning Policy Guidance Notes’ PPG7, “The Countryside and the Rural Economy” and PPG2 “Green Belts”) advises that barns of specified vintage and characteristics be preserved, preferably for industrial or commercial use. In such a case, it is entirely possible that a structure could be woven in as an integral economic component of the new community built around it.

As the economist Gardner stated, there are specific regions where demand defies the broader market downturn. In such cases, the capital growth-minded land investor is wise to work with experienced strategic land investment advisors who understand where opportunities exist and where they do not. The investor should also consult with an independent financial advisor to discuss where land investments might fit into an overall personal financial plan.