What If No More Homes Were Built in the UK?

Home building is finally picking up after years of recession. A lack of adequate housing can otherwise have far-reaching effects.

The Wall Street Journal told its readers in 2013 that Americans are increasing their investment in UK rental housing. The reasons they cite for this phenomenon is because the number of people who own their own properties in the UK has fallen by 200,000 in just four years, evidence of the effects of recession and general difficulties in achieving financing (per data from the Office of National Statistics).

So why are American greenbacks flying east over the pond now? Home sales by the end of the year (2013) are expected to climb to about one million, thanks to the government’s involvement in loosening lending, found in Chancellor Osborne’s “Help to Buy” scheme. There also is, in simplest terms, huge pent-up demand for housing that reflects increasing population even while construction lagged woefully behind during the recession.

With a little bit of goosing from the Exchequer, the long-awaited solutions to the housing shortage may have been found. And yet, these rosier scenarios are still based on projections, not end-results. A third-dip recession could derail hopes and lead to a retraction.

If that were the case, what would be the outcome? What would happen if developers and homebuilders cut back construction and no new homes were built? A report issued by the UK Parliament, “What influences house prices and why do governments intervene?” (2009), considered the close interdependency of the housing sector and the economy. Relative to available housing inventory, it suggests the following:

• Home prices will rise – “Given the forecast demographic changes over the next twenty years, clearly if the housing stock does not increase alongside this, available housing will become scarcer and thus prices will rise.”
  
  
• Fewer single-person households – Up until 2009, there were 3.6 million singles who owned their one-person residences in England alone, roughly a quarter of all owner-occupied dwellings. And yet, with rising prices against single incomes, this allocation of singles may drop. As with their married-and-parenting siblings, a shortage of housing will force them to share homes or remain living with relatives.
  
  
• Government impetus to intervene – Depending on one’s economic policy philosophy, a shortage of affordable housing can trigger government intervention in the housing market; others may argue instead for laissez-faire approaches. Note that this point, written in 2009, portends the 2012 lending scheme now taking effect.

Fortunately, the developers and builders have adjusted to a different attitude about housing. Through years when ownership became inaccessible, more and more working families have become adjusted to renting instead of owning. The Office of National Statistics reports that since 2009, 3.8 million more people are living in rentals, a whopping 23 per cent increase. In the first quarter of 2013, rents increased by an average of 2.4 per cent, with the national average monthly rate at £835. Just how long these renters wish to stay that way – if they plan to become owners at all – remains to be seen.

There is no edict against building new homes, fortunately, and the current uptick in building suggests a corner has been turned. Land investors are identifying specific areas where demand is greatest, which they turn into new developments that are fetching market-rate prices. Helping prompt this is the bifurcation of investment and risk between site developers and homebuilders, with the former making strategic land buys and site preparation before reselling the land to the latter, who construct homes that meet product and price expectations.

Individuals who choose to invest in real assets such as land and housing development should consult a qualified personal financial advisor. As with any investment, the risk profile of real estate needs to fit with the investor’s overall financial strategies.

The Simplicity of Buying Undeveloped Strategic Land

The secret is out … undeveloped strategic land offers simplicity to investors.

Property that lacks buildings and, sometimes, infrastructure provides an uncomplicated formula for significant asset growth, for several reasons.

Throughout much of history as much as today, investments in real estate are how fortunes are built. But land acquisitions can also be losers, of course. On a small scale, a purchaser of a multi-flat apartment building may find out the lift needs to be repaired or replaced at significant cost. Investors in larger properties such as commercial office buildings or shopping centres might find the tenant market turns downward a year or two after acquisition, bringing an unwelcome and unexpected drop in income and asset value. Occasionally, property that was occupied then abandoned might come at an attractive price, only for the buyer to discover that toxins exist on the land and need to be removed – at profit-killing expense.

Undeveloped land, in agricultural use or simply in a natural state, generally provides a simpler physical situation. There are no aging building issues to deal with, which avoids both atrophying structures as well as environmental toxins. All that needs be disposed of might be some brush and trees, but with green thinking, smart architecture can make the best use of natural resources in a sustainable way.

Other matters of how land investments in the UK are freed of complexity for the investor can be summarised as follows:

• No uncertainties about the value of the buildings (or costs). Many factors impact the price/value of built structures. Aging is of course one of them but so too are shifts in regional economies: if a major employer closes down nearby, it reduces the spending power of the employees left behind. With less to spend, homes and retail properties take a hit.

• No “brownfields” issues. As is widely reported in the media, properties formerly used for industrial purposes (which can also include car service stations and parking facilities) might have dangerous toxins lurking below the surface of the soil or in the walls and basements of structures. Undeveloped land almost never has such issues.

• Use designation/zoning. The strategic land investor quite often (almost always, actually) is looking to achieve a change in use designation (zoning) from the jurisdictional municipality in which the property is situated. There are favourable economic forces that drive land from non-use to use that are arguable less likely to happen when the property is already built (for example, changing a commercial district to residential).

• Can develop for current and future market needs, not adapt from old purposes. Along similar lines to a change in use designation, the economics of converting empty land to built property are often advantaged over adapting existing structures to what the market demands today. Homes built 20 years ago will lack the environmental features that are now standard, for example. Or, if a town is in greater need of residences than retail space, empty land can be designated for whatever is most needed.

The task of strategic land site assembly is complex. But when investors work with professionals who have appropriate experience in land site assembly, the process is made much simpler. Contact a personal financial consultant to identify where your best opportunities for alternative investments may be.

How Undeveloped Land Is a Better Investment Diversification Strategy

Any investment diversification strategy should involve undeveloped land.

Don’t trust the national numbers on housing values as the final word on all real estate investment. Regional differences are significant and opportunities abound.

The conundrum for investors who are intrigued with UK land and real estate is, with a growing population and so little building in the past decade, why aren’t more houses being built?

After all, Census 2011 showed a growth rate of about 7 per cent since 2001, a much healthier addition of population than most countries found in the Eurozone. England and Wales in particular are a strong draw for immigration, and the birth rate has remained relatively strong even through the financial recession of the past six years. Exacerbating this further, pensioners are living longer and in greater health, keeping granny from moving out of her granny flat.

Savills research offers some data and analysis that suggests some fundamental ways in which housing will be built in the years to come. It offers a different perspective to anyone involved in land development, as investment on UK strategic land and raw acreage is most adaptable to market needs before buildings are constructed.

Specifically, the firm offers the following data points:

Regional differences mask home prices – Overall, homes in Britain have seen an average value increase of 6.4 per cent since 2007. Which is all well and good, except it masks the differences between North and South: in the South East and London, increases in home values are in the ballpark of 10 to 20 per cent. In the North of the country, values have fallen. This is not to say a land investment in those areas will not make sense, as real estate is sometimes tied to hyper-local factors. But the larger point is that in London and the South East, better opportunities are likely to be found.

Generation rental – Of greater significance is the shifting of ownership to rental for many middle class families. Savills reports “the value of Britain’s private rented stock has risen by 42 per cent over the past five years and an extraordinary 250 per cent in the past ten years.” The 4.8 million private homes that are rented today represent 17 per cent of all dwellings, when just ten years ago to-let housing was a mere 10 percent of the national inventory. What has caused this? Increasingly, working families are unable to afford the necessary deposits required for purchase, and tighter lending standards by banks also make it more difficult to get mortgages.

Best opportunities for those with cash to invest – All those rental homes still need to be built, begging the question: Who will finance them? According to the director of Savills research, “There is now a real opportunity for investors with cash, particularly those ready to invest for income, because capital value growth will be muted over the mid term.”

Real estate developers are on the front lines, constructing the right buildings for the market. But before they can do that, land investment companies identify parcels nearest to where building of one type or another should take place. This often is where employment is growing, or for any other reason the population is sufficient to fill new housing. Strategic land development will usually involve property zoned for agriculture or commercial or industrial purposes which local planning commissions will identify as more appropriate for residences, factoring for local economic conditions and growth opportunities.

Individuals who want to participate in land development and investing in real asset classes should first work with a qualified, independent financial advisor to be certain they are working with legitimate players and that the investment fits their overall financial goals.

Does Undervalued, Undeveloped Land Still Exist in the UK?

There absolutely are opportunities to increase asset value in UK land with development. But it takes at least four groups of leaders to make it happen.

The value of land has always been understood, going back centuries to when invaders and explorers sought new sources of agricultural products, minerals and places to live. It was a matter of economics that Christopher Columbus sailed for Spain, having convinced the King and Queen that their investment in his adventure would yield a great return.

Surprises in land value appreciation surface from time to time, of course. The Bedouins of the Saudi Arabian peninsula lived a nomadic subsistence for centuries until they discovered oil in the 20th century beneath the undulating sands of their desert kingdom. In a modern world, some land becomes more valuable when an industry (“Silicon Valley”) or a major point of transport is established in previously middle- or lower-value areas.

It’s hard to imagine that some land sites in the UK could be undervalued. The population is growing more so than in the Eurozone, the country being attractive to immigrants of every stripe. This tends to make one think that all land in the British Isles is simply going up in value at roughly the same pace. However, certain sectors – London and the South East in particular – are faring better than their neighbours in the post-Recession economy. Less fortunate are the counties to the north and west, where recovery as of 2013 was slower and less robust.

But in both these favoured and less-favoured areas of the UK there exists land that is hiding in plain sight, ready for investment and development. This is property that for one reason or another could accommodate residential development, but perhaps for the lack of people able and willing to make it happen. These people fall into four groups, and each of them is necessary to take undervalued, raw land and turn it into something much more productive and valuable:

1.    Business leaders – Residential development of market-rate housing rarely makes sense unless there is new or growing employment opportunity in the vicinity. With new jobs must come new people within relative proximity of the new workplaces.

2.    Land investment and planning use specialists – The time and capital required to take raw land and turn it into streets, utilities, homes and homebuyers is typically two to five years, when all goes well. So someone has to carry the considerable costs. While banks historically have done this, stringent lending standards are driving more developers to find private investors (who, it should be noted, are flocking to real estate because of disappointment with other types of investments). This is typically a “round one” of the development process, where the investors’ money is used to acquire sites, work with local planning authorities to get appropriate zoning approvals, develop sewers, other utilities and streets, before selling the land in “round two” for construction.

3.    Local planning authorities – Only towns where growth is desired will approve land use changes necessary to support development.  Thanks to the Localism Act and other efforts under the National Planning Policy Framework, the decision-making power has been decentralised to enable smarter planning in the hands of those most affected by it.

4.    Homebuilders – These are the “round two” leaders who complete the process. They identify the size, type and value of homes that are needed and are most likely to be sold successfully, after which they construct them.

Of course, each of these groups acts out of self-interest. But they must work in cooperation to a certain degree, and usually share the goal of financial success for the community as a whole.  Lately, there has been a surging interest between civic leaders, business leaders and property fund managers to create joint venture partnerships and pool their resources for mutual gain.

The place for individuals to participate in this leadership process includes the investment side. Anyone with £10,000 or more to invest can work with the land development specialists. But before doing so, such individuals are encouraged to seek advice from an independent financial planner, someone who can objectively review the alternative investment opportunity to see where it fits the investor’s risk portfolio.

Where Does Strategic Land Rank Among Alternative Investments?

Alternative investments such as strategic land should be comparatively evaluated.

While fraught with apples-to-oranges comparisons, would-be property funds investors should consider all alternative investments.

The Reuters news agency reported in October 2012 that the lustre of hedge funds is diminished. The reason, according to one prominent financial advisor cited in the story, is that hedge funds basically became too popular. They attracted institutional investors that have effectively reduced risk taking. While hedge funds gain on market inefficiencies, those inefficiencies are effectively “ironed out” by the proliferation of participants in this type of asset – ironically reducing the net return from the funds.

The primary reason investors went to hedge funds in droves over the last several years is because of the poor returns they were finding in traditional market-traded stocks and bonds. So what about other alternative investments? Do land, developed real estate, precious metals, art and antiques (including antique cars and rare coins), commodities, energy or natural resources yield managed risk and above-market returns? Consider the news on each (as of the third quarter 2012):

• Gold – After rocketing to historic highs in mid-2011, the only investors who are assured a good return on their investments are those who purchased the precious metal in 2008 or earlier, according to the head of a private banking firm.

• REITs – Real estate investment trusts are tied to large portfolios of developed or developing properties, primarily commercial buildings. The natural fortunes of REITs rise and fall with the markets, tied both to vacancy rates (which roughly correlate with the market) and the general performance of stocks and bonds.

• Undeveloped land – Strategic land investments, approached as property funds, allow small groups of investors to work with a land development advisor to convert unbuilt tracts to more productive uses. With the UK population increase (7 percent in the last decade) and housing shortage, market demand for housing should buoy asset growth in this category.

• Antiques, rare coins, art and antique cars – For the aficionado, rarities such as these can be an enjoyable avocation as well as a good investment – spectacularly good in some instances. Emerging wealth in China and India is placing upward pressure on the finite supply of rarities. But each investment must be made with expertise. Whole movies have been produced around art heists, rare book forgeries and falsified provenances of Stradivarius violins, telling the sad tales of rarities investments gone wrong.

• Agricultural commodities – Climate change is a significant factor relative to agriculture, with drought plaguing some areas and excess rain, shortened growing seasons and premature spring hitting others. FarmingUK.com reports, “The poor [2012] UK harvest compounds a series of challenging weather events for farmers around the world, most notably drought in North America. The resulting tight supplies of many feed grains have driven up the prices of agricultural commodities around the world. These UK harvest results will do little to alleviate the global dynamics of commodity prices, with the prospect of relatively high commodity levels through to 2013." What is bad for consumers may be better for investors, but the inherent uncertainty of weather is unnerving to many investors.

• Energy – Volatility defines the world price of petroleum, and uncertainty has led key players in the offshore wind industry (General Electric, Doosan Power Systems and Vestas) to shelve plans in 2012 to build turbine capabilities in the UK. “Renewable energy in particular needs the policies that are investment grade,” says Dr. Rob Gross, director of the Imperial College Centre for Energy Policy and Technology, who argues that carbon pricing will not be sufficient to drive demand for renewable energy development. Political factors cloud one’s vision as to what might happen next.

Alternative investments can provide significant asset growth, but clearly one needs to approach them with expertise. Every investor’s goals, timing and wherewithal varies, therefore it makes sense to weigh personal variables with the advice of a personal financial counsellor.