How to Identify Qualified Joint Venture Partners in Land Investments

Qualified land investment joint venture partners a lynchpin of smart investing.

The history of land investment and developed real estate are instructive. Having the right joint venture partners is a key component.

In the UK, Canada and American real estate circles, the 1980s story of Olympia and York (O&Y) is often cited as a lesson learned. The highly-capitalized firm ran into an unfortunate set of circumstances with its Canary Wharf (London) and Manhattan properties in the late 1980s and early 1992, ultimately declaring bankruptcy with $20 million in arrears to various banks and investors.

The family running the firm, the Reichmanns, were seasoned real estate professionals. However they were overleveraged in two markets that were going through a pronounced slump. Their story provides a sobering picture of how even experienced investors can get involved in property and land investments that sometimes fail spectacularly.

Still, real estate in general is the means by which many of the world’s greatest fortunes have been built. And it’s not a game of Monte Carlo-like chance: there are key characteristics of joint ventures in land that increase investors’ odds of achieving asset growth. They include:

• Experience in the type of land investing being undertaken – There are many ways to invest in real estate: existing commercial properties, raw land, industrial warehousing, residential development and real estate investment trusts (REITs). One or several partners in a joint venture should have expertise in the type of investment where you put your money.
  
  For example, a raw land investment would best be managed by professionals who understand how to turn otherwise dormant property (or what might be currently used for agriculture, for example) into viable residential development. This requires acumen with local planning commissions, being able to judge the likelihood of a zoning change that would benefit the local economy. It is not a task for amateurs.
  
  
• Shared ROI interests – Some investors expect a return on their investment in one year. Others are patient to wait two, three, four or five years or longer. What doesn’t work is when a joint venture partner is on a different schedule and therefore wishes to exit the investment early. Investment managers should be able to project when a real estate investment will provide an optimal payout – and then deliver on that projection.
  
  
• Appropriate allocation of funds (e.g., focus on a single property) – To avoid the mistake made by Olympia and York, it is important that the fund investment managers have a demonstrable track record of success. Just as important, their funds and managerial attention should be focused on properties where economic factors are promising. For example, in the UK market a growing population and under-investment in the housing stock during the past ten years is driving high demand for housing. Whether those properties are built for sale or to let is a matter for further discussion, but suffice it to say people need to live somewhere and that need shows no sign of abating.

Ultimately, remnants of O&Y recovered some of the company’s fortunes in the UK and Canada (but not the US). They and their investors learned their lessons – and prove once again that great fortunes can be achieved with real estate and land investment.

Be certain to work with a personal financial planner when considering any type of investment, be it in real assets or traditional market-traded securities.

How Property Fund Investors Can Fare Better than Real Estate Developers

Are real estate developers disadvantaged relative to property fund investors?

Most real assets are performing better than the volatile stock market. But for some, property funds hold greater attraction over developed real estate.

Since the financial crisis of 2008, investors have soured on traditional investments due to factors of poor performance. Instead, they’re turning toward alternatives that include land investments and property funds. The reasons for this are easily understood: The growing housing shortage in the UK portends good near- and mid-term value growth for all aspects of residential real estate, particularly in light of robust (7 per cent since 2001) population growth.

Of course, not all real estate is the same for investors. Within real estate are two distinctly different types of investments, built properties and raw land. Some investors choose built properties or to invest in the developer who is managing the construction and sale of homes and commercial structures. An option to that is raw land, ripe for plan rezoning from, say, agricultural to residential-designated land.

Both have their merits, of course. But land investment might hold the advantage for at least three reasons:

• Adaptability to market needs – Raw land can be converted (pending approval of Local Planning Authority approvals, of course) to the use that is most critical to the local economy. This flexibility allows the land investment fund to prepare parcels for what will be needed in a relatively short period of time. On already-built property, investors have only what is there unless circumstances allow for the extraordinary expense of demolition and rebuilding – which only rarely makes sense from an asset growth perspective.

• Less investment in development (and associated risks) – The boom-bust cycles of the past several decades remind us of how a billion Pounds can be squandered rather quickly when a large property comes online at the precise moment when no one wants it. See “Canary Wharf, Olympia & York” for a spectacular illustration of how badly property investments can fail.

• More liquidity (but still not volatile) – Perhaps the Achilles Heel of real land assets is the illiquidity of land, with or without property. But land investments that at most involve the light infrastructure required of residential neighbourhoods (roads, sewers and other utilities) are much more easily sold than property involving structures. While that pales in comparison to real estate investment trusts for liquidity, real property is not nearly as subject to market fluctuations as are REITs.

To be sure, both investors in property funds and land investments tend to achieve asset growth in well-managed situations. But from land to property development, the path is quicker. With a seasoned team of land investment professionals, a joint venture partnership can identify and manage properties for maximum value appreciation and resale between 18 months and five years after acquisition.

All investments carry risk and should be considered in relation to one’s full portfolio of financial instruments. Be sure to contact a personal financial consultant before embarking on any investment.

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

Joint venture planning teams should communicate frequently with investors.

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

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

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

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

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

• Investors should be informed before they invest.

• Investors should be informed on a periodic basis

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

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

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

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

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

UK Housing Sector Offers a Variety of Opportunities for Investors

With the 2008 property bubble burst sufficiently in the past, the demand for housing – particularly rental – provides new means to grow income and assets. 

There is increasing interest on the part of investors in housing in the UK. This is evident in statements from a multi-asset manager at Henderson Global Investors to a personal finance columnist at The Telegraph. Noting that property funds now yield about 4.5 per cent, surpassing gilts and corporate bonds, he said, “It’s a valuation story. If you look a the cost compared to the income you can get, property looks compelling.”

Portfolio managers at other multi-asset funds concur, and the Telegraph columnist (Emma Wall) notes that property can be an inflation hedge, given how rents tend to track with the price increases of other goods. Still other real asset investing advisors see growth in homebuilders and building material manufacturers, as well as lenders that specialize in buy-to-let mortgages.

As an asset class – and the property bubble burst of the past five years notwithstanding – residential property over the past three decades has been one of the best performer for investors. While this traditionally was an investment that largely benefitted individuals – small- and large-scale property investors and developers – institutional investors have historically stayed away from housing. That is, until more recently, when key economic factors including population growth and low-prices on distressed properties, came into play. Also, residential housing has generally been a capital growth strategy and less one that produces income; however, with a growing renter class that scenario has become more attractive.

All factors considered, there remain several key investment opportunities for the broad range of investors, from individuals to institutional players:

• Single property investments – While largely the province of the individual, buy-to-let has traditionally been a means for property-inclined investors who are willing to manage the physical property, leasing and such. Government programs continue to support this type of investor.

• University to-let housing – It is hard to argue with 99 per cent occupancy, as is the case in student accommodations in UK university settings. What is particularly attractive about this category is how the Higher Education Statistics Agency reports that more than 300,000 non-domicile students were at UK universities in 2012, part of a steady annual rise of about 1.5 per cent per annum.

• Funds related to housing – Real estate investment trusts (REITs) in commercial properties are part of the story, although they have performed poorly in the volatile swings of market traded securities where valuation is more a function of external (market) factors than the performance of the property itself. But those are stabilising and with the launch of the UK’s first residential REIT in early 2013 – notably focused on student housing – investors are looking at this as a new type of real asset fund.

• Strategic land – Land investment funds are typically managed by capital growth partners who are skilled in site selection, acquisition, zoning change processes and infrastructure development. They will assemble groups of investors (typically, the price of entry is £10,000 or more) who then can track the development of a single property, which is then parcelled and sold to homebuilders who construct the residences and sell them to buyers. The time frame for delivery ranges from two to five years in most scenarios.

While some investors are sceptical about the Help to Buy and Funding for Lending schemes, both in terms of effectiveness (a weak push on demand) or the opposite, creating a new real estate bubble, most concur that the fundamental factors are in line to make real estate investing a good play as part of a diversified portfolio.

“Prime real estate is finite and still very much in demand,” said one advisor-investor to The Telegraph, adding “the weakness of sterling continues to make it attractive.” But almost all investment advisors caution that an independent financial advisor should be consulted before investing in land or any other asset – the risks and rewards should be considered in relation to one’s complete financial portfolio.

Track Your Strategic Land Investment Growth

Land investment growth can and should be tracked with professional guidance.

Alternative investments such as land can yield better-than-the-market returns. Investors can also track the investment’s progress over time.

Investing during the worldwide recession has been a difficult road for individuals most accustomed to trading in stocks and bonds. Returns have been disappointing since 2008, and the Eurozone crisis portends very little good news for traditional investments in the near term.

Investors instead have turned to alternative assets, the growth from which has been considerably better in recent years. These assets include hedge funds, exchange funds, private equity and rarities (coins, art, jewelry, antiques and antique autos). One alternative asset that is particularly attractive is raw land. Unlike developed property – where market value is well established, value growth may be minimal and buildings need to be maintained over several years – undeveloped land can grow in value under well-managed circumstances and in a relatively short period of time. Those circumstances currently include the housing shortage and growing UK populations, where market forces suggest millions of homes need to be built over the next decade.

Professional land management companies often pool investors into a single property fund that buys land, after which a zoning change is sought with the local land planning authorities. With that change, some infrastructure may be put into place – roads, water and other utilities, for example – and then sold to builders.

A substantial investment is necessary, typically beginning at £10,000 and often several multiples of that amount. Of course, at that level the investor could and should engage themselves throughout the time the land is owned, tracking progress according to a pre-established set of milestones. Not everyone gets rich on land, but following a few crucial tips can help the investor improve his or her odds:

• Hire the best consultants. Buying land that needs to be rezoned is not a hobby for amateurs. Professionals who understand potential future value, as well as the local landscape for land planning authorities and area housing needs, are necessary to make the investment successful.

• Select a land investment that is consistent with yours in timing and returns. Some land will mature to a profitable position in 18 months. Other tracks may take five years and perhaps longer – which may or may not fit your own financial management goals and needs. A professionally managed land investment will be able to project this with some accuracy. You can also expect to be given updates on progress, such as when planning has approved new zoning, whether infrastructure investment is necessary and how well it is progressing. Land is an exciting, tangible investment that shows progress you can sometimes see and touch, if you are so inclined.

• Acquire land with the most promising properties. When you work with professionals, they should select tracts with certain, important characteristics: proximity to high growth, where housing stock is in greatest demand, where the land can be rezoned and where significant improvements (cleanup of contaminants or expensive infrastructure such as bridges) will not be necessary.

Because land is a significant investment, it is smart to first talk to an independent financial advisor in advance. You need to examine where a land investment would factor into your investment portfolio, and how the timing of the investment could affect your tax structure and living or estate needs.

To What Degree Is UK Housing Affected by Land Use Expansion?

The UK’s greenbelt policies hugely affect land planning. But the experiences of other countries show flexibility can favourably impact home affordability.

An important tenet of land planning in the UK for more than 60 years has been preservation of “greenbelt” areas, institutionalized in the Town and Country Planning Act 1947. The intent and result is to control urban sprawl, maintaining areas dedicated to forestry, agriculture and outdoor recreation.

While deemed largely successful in its goals, the greenbelt movement and dictates for land planning have come under question as the population continues its increase in England and Wales. The current and future housing shortages – the number of people living in the UK is expected to rise by 27 per cent from 2008 through 2033 – are debatably related to these restrictions.

A purist approach to greenbelt preservation would be to continue developing only within the urban confines, building up and not out. But this is happening only to a certain degree, and the sharp increase in home prices is a critical, unintended result. Home purchases have been so inaccessible that the proportion of people in the UK who now rent has risen by 17 per cent since the 1990s.

This is a large part of why the National Planning Policy Framework, established in March 2012, has taken a more nuanced approach to greenbelts. The NPPF still checks unrestricted sprawl from occurring, while it seeks to retain agricultural, forested and recreational lands in their optimal state. But it concurrently allows local authorities (empowered by the Localism Act 2011) to go through a process that can weigh special circumstances, for example re-purposing for development greenbelt acreage that fails to serve its original intent.

There will always be some degree of public resistance to all development, much of it well placed. But because home construction and land availability are tied to the economy, often a factor when employers seek to establish new workplaces, the business community, land investors and builders are naturally interested in expanding development beyond urban centres.

But this development push isn’t solely from the business sector. Advocates for social justice and affordable housing at the Joseph Rowntree Foundation (JRF) assembled a Housing Market Taskforce to study the matter of land supply and how it affects housing market price volatility and affordability. The task force sponsored a report, “International Review of Land Supply and Planning Systems” (Monk, Whitehead, Tang and Burgess, University of Cambridge, March 2013), which looked at data in 24 countries, at literature from 11 countries, and consultations with stakeholders and country experts in England.

The report concluded that residential land supply is indeed a contributing factor to housing affordability problems in the UK. Some key findings in this report are as follows:

• The idea of controlling urban sprawl to protect agricultural land is nearly universal. All countries prefer to accomplish this, but England lacks a “strategic level of decision-making between national and local.”

• Effective planning policies in other countries tend to share core elements: “Incentives and mechanisms to bring forward land for development; responsive growth management policies that recognize both the benefits and costs of growth; and a secure source of funding to provide infrastructure” were deemed as pluses in sensible development.

• There is “no new magic bullet,” but in fact many of the effective mechanisms identified in other countries exist in some form in the UK already.

From this, JRF states that the “key to long-term reform to land supply in order to reduce volatility in the housing market is for planning authorities and their partners to become more proactive in the land market, especially in the case of publicly owned land.”

Land investors are already becoming involved in joint venture partnerships or investing in UK property funds to develop land where the market need calls for it and where local planning authorities enable it. Those who provide this financing clearly do so from a profit-motive perspective. But as the community-wide benefits of development become more clear – even to the point of achieving more affordable housing within a social justice framework – the profits become effectively shared across communities.

Individuals who look to join in land investment schemes should do so under advisement of a qualified and independent financial professional.

How to Avoid the Problems of Investment Property

Ensuring that an investment property isn’t problematic comes down to due diligence.

The lure to invest in UK real estate grows as the country’s population increase fuels a housing shortage. But property investments are tricky and quiet varied.

The widely reported housing crisis in Britain is unquestionably drawing interest from investors large and small. Large real estate companies are buying up raw land and buildings where growth is likely to occur, even if who is going to buy what and how are yet to be determined.

The demand for housing is at the root of this. Since 2001, the UK population has grown at a brisk 7 percent rate. And yet, due to recessionary and stringent lending practices, home building has fallen woefully behind. Young adults cannot afford the necessary upfront money to make a purchase, forcing them to rent or remain living with their parents. Young families are outgrowing the homes they purchased a decade ago and face similar barriers. Given these factors, many property developers are building to-let instead of for sale; indeed, the about a fifth (19 percent) of the UK housing stock is now in the private rented sector, with the value of that stock rising an extraordinary 250 percent since 2002.

But the rising tide does not necessarily raise all boats. There are many ways to achieve asset gains in investment property, and just as many ways to fail. Key factors to consider:

• Identify the differences between built property and raw land. Whether it is a single-family residence, an apartment building or commercial property, the advantage of built property is that valuations can be determined in relatively short order. Calculating for comparable properties, current income flow, costs for maintenance and renovations are a simple task. But because those factors are easy to determine and assess, the margins on such investments are narrowed because other investors can determine those valuations just as easily. Raw land that is purchased with the intention of development involves more variables: Will the local planning authority approve a zoning change (e.g., from agricultural to residential designations)? Will there be demand for housing or commercial use in that area, and what kind of buildings? Will infrastructure development costs work favourably within the overall economics of the investment? Will a two- to five-year development time frame provide a favourable return on the investment, given the uncertainties of the economy that far into the future? Call it right and you can do well, but of course the opposite can prove true as well.

• Study the volatility of market-traded REITs. Since 2007, real estate investment trusts (REITs) have been available to UK investors. The funds performed poorly even before the economic crisis the following year. And while many have recovered initial losses, REITs have been subject to the volatility of the markets and less evaluated by the economic health of the properties themselves. The advantage of REITs is in their liquidity.

• Compare REITs to raw land. In comparison to REITs, undeveloped land is far more illiquid. When purchased in joint venture partnerships, land investors commit to multiple-year development time frames. The difference is where investors can increase the value of land, regardless of market dynamics, through strategic site selection, zoning changes, infrastructure development and the timing of the sale (many land investors do not build on the property but instead turn that over to developers).

• The price of entry in strategic raw land investing. Investors are strongly advised to work with land investment consultants and property fund managers who understand the myriad dynamics of this type of investment. To work with a group of investors, one would typically need a minimum of £10,000 to invest.

• Understand the direction of Local Planning Authorities. This is a land investment specialist’s skill, to be able to read localized economics and determine where the municipality would be amenable to zoning changes. While sometimes a volatile topic unto itself, national planning policies have provided greater latitude to the local authorities in recent years, which generally favour new and expedited development.

As should be clear, there are many options to getting involved in property investments. But don’t bet the farm on it – you would be wise to work with real estate investment professionals whose life’s work is land and property.

Anyone considering investments of any kind should of course work with an independent financial advisor. Discuss where investments – and the timing of those investments – fit into your overall financial portfolio.

Does a JV Investor Need An Attorney at the Outset of An Investment?

Should a land investor working in a joint venture partnership engage a solicitor?

The popularity of joint ventures for land has soared with the Limited Liability Partnerships Act 2000. But other types of partnerships might be considered.

Joint Ventures (JVs) are a common means for several individuals to collectively invest and grow an asset. As should be obvious, the risks and rewards of that asset are spread among the partners – enabling smaller investors to participate in capital growth just as much as the super-wealthy who are more able to do it on their own.

But the risk part of JVs is no light matter. Poorly managed joint venture partnerships are the stuff of legal and financial legend – even large entities such as the alliance between Honda and Rover (1981-1994) can end badly. In that case, the assets brought to the partnership included car design, engineering, distribution and marketing capacities, which proved to be a poor fit over time.

Land investment joint ventures are a bit different in that they generally require capital to invest in the land itself and the expertise to turn the property into a more productive asset. For example, in the UK a pressing need for housing makes it likely that land currently in use for agriculture on the periphery of population centres will be converted to residential and commercial uses. Land investors working in joint ventures with UK land fund mangers can do well to purchase tracts that can optimally serve these purposes. But to do it right, the investors must also know how to select land that is likely to achieve local planning authority goals for growth, and they must build the infrastructure on the land that will attract developers and builders.

Still, what needs to be central to the investor is how to limit his or her exposure in this type of investment. Savvy decision-making is the province of the investor and his or her advisors. But the engagement of legal counsel can play a role as well, by various degrees according to the type of partnership that is established.

Three types of partnerships – and questions the JV investor should

A prominent London-based law firm with a large, property joint venture practice advises its clients to look at the three most common types of partnership vehicles to assess the relative risks and appropriateness for them and their proposed investment:

General partnerships – These require no formal declarations, a relationship that is tax transparent (each participant is tax-liable for income and capital gains, not the partnership). The largest risks lie in how each member of the partnership is jointly and severally liable for debts; they are not able to ringfence losses and liabilities. The Partnership Act 1890 governs general partnerships.

Limited partnerships – These need to be registered at Companies House, and include two types of partners: limited and general. Limited partners are liable only for their investment, and they are forbidden from involvement in the management of the business under the partnership. The general partner is exposed to all liabilities, and is tasked with full management responsibilities of the business itself. The Limited Partnership Act 1907 governs this arrangement.

Limited Liability Partnerships (LLPs) – Considered a hybrid between companies and partnerships, investors enjoy limited liability (as the name implies) but also offers them involvement in the management of the business. Members are taxed only on their share of profits from the investment, which has made the investment very popular since introduced by the Limited Liability Partnerships Act 2000.

According to the solicitors who work in this area, investors need to weight the pros and cons of these three joint venture structures, as well as private limited companies and unit trusts. The process of determining which is right for the investors and the investments might take into consideration several factors, as follows:

• Development or investment? The nature of the land investment – and its size – can determine whether a simple or complex structure makes the most sense. 

•  Investor relationships. A collection of several passive investors is different from long-term partners who are comfortable with joint and several liability. In other words, the degree of familiarity with your partners can make a big difference.  

• Tax transparencies. Not only should investors’ current tax scenario play into such a decision, but ask whether the structure of the investment or your own situation will change at some future point that might affect tax liabilities as well. 

•  The liabilities in land – If a property needs remediation, for example, the partnership will have additional expenses and potential legal exposure. Good advance research should uncover this before entering a contract to purchase the property, of course, but as with any business venture there can be liabilities against which investors must protect themselves.  

• Exit routes – Should an investor need to cash out of the investment, would he or she be able to do so? Understand the liquidity and flexibility of the structure to know whether or not this is an option or risk.

As important as legal counsel may be in some investments for some investors, of equal importance is the role of an independent financial advisor. All investments should be undertaken with regard to one’s portfolio, risk tolerance and expected returns, which often benefit from the review and analysis of a professional third party.

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.

What Is the UK Community Infrastructure Levy?

The purpose and implementation of the Community Infrastructure Levy is part of the 2008 UK Planning Act.

The increased burden on infrastructure from new developments is real and should be built into development costs. But is the CIL the way to do it?

The Community Infrastructure Levy (CIL) is a product of the UK Planning Act 2008, enforced since 2010, as a means of making developers pay for the increased burden on infrastructure that comes with new homes and businesses. It is an outgrowth of earlier recommendations in 2003 from economist Kate Barker, who felt that planning gains that went to developers should be partially channelled to overburdened infrastructure features (roads, schools, utilities, etc.) and to increase the stock of social housing.

UK strategic land investors, of course, need to take this into consideration. Infrastructure will make the properties they develop more valuable – but only if funds from the CIL are put to use in ways that materially affect the new developments. Evidence suggests this does not always happen that way.

In its most basic form, the CIL is charged on any building that has some degree of human occupancy (i.e., not parking or warehousing) including residential, commercial and retail space. Only buildings adding or constructing anew 100 square metres or more of floor space (gross internal area) on or after 6 April 2013 are subject to the levy. Changes of (existing) building uses are not liable, nor are structures that are not actually buildings (such as warehouses or wind turbines). Social housing development and buildings owned by charities are exempt as well.

Implementation of CIL has of course met some criticisms, many of which make a legitimate point. Because local planning authorities collect the levy and apply it as they choose – within prescribed parameters, of course – they are instructed to establish charging schedules. This was to be completed as of April 2014 but now is likely extended to April 2015. Those authorities can also set different rates for different sized developments, however they must establish evidence to justify those different rates.

Importantly, a “CIL in kind” provision allows that developers themselves may be best suited to build certain infrastructure components using cost-effective methods. For example, when building a community of 50 homes, the developer or homebuilder might be able to establish water and other utility services with the equipment they already have in place, where they are most familiar with the land and adjoining infrastructure. It could be much more cost efficient than to channel funds through a bureaucracy that then hires a third party to do the work.

A columnist for The Guardian who writes on local government issues took a swipe at the CIL for having a significant unintended consequence. Ian Blacker wrote in October 2012 that the CIL may actually be reducing the number of affordable homes. He cites how in London, the mayor wants to channel CIL funds to the gargantuan Crossrail project, not social housing. Also, that the CIL funds in any planning authority can be geographically used anywhere in that authority, well removed from where the infrastructure needs are increased by new development.

Blacker concludes the CIL is uncharted territory, stating, “we are entering the realm of unintended consequences.” To the developer, joint venture land investment managers as well as the local planning authorities, this may be unsettling news.

But the demand for housing is largely unmet; investors in development still find places to build and where the return on investment makes it worthwhile. Whether or not the CIL cuts into planning gains is yet to be determined; would-be capital growth fund investors are encouraged to consider CIL costs and speak with an independent financial planner to see where real estate investments might fit within a broader investment portfolio.

The Purpose of the London Development Panel

The London Development Panel speeds public land to private development.

Land investors and homebuilders are robust participants in urban development. The LDP helps them to revitalise neighbourhoods more quickly.

Because of the impactful housing shortage in the UK, the Government has adopted a scheme to speed the sale and development of underused, publicly owned land to private investors, who will then build much-needed homes. The London Development Panel (LDP) exists solely to expedite the procurement process.

To the land planning and investment community, this is a useful tool. After all, time is money to just about everyone, not the least of which include those who work in joint venture land investment.

In England, there are an estimated 7,500 hectares of publicly owned land that is suitable for housing but is currently vacant or under-used. Under the Department for Communities and Local Government, the “Community Right to Reclaim Land” policy allows individuals, organizations and businesses to petition for such land conversions. The LDP maintains a framework agreement between developers and public landowners, fostering a more efficient procurement process that spurs quicker delivery of homes.

The service delivery from the LDP covers the entire span from concept to sale or rental of properties. This includes:

• Raising capital
• Planning permission approvals
• Design, construction and supply chain management
• Design and construction of infrastructure
• Sales and marketing
• Aftercare and maintenance

In concert with other city-provided programmes (such as the Mayor’s Building the Pipeline fund of £136.5m to build 6,190 homes), these initiatives might be credited for attracting increased private investment activity in the housing sector. In early 2013, Prudential Property Investment Management announced an acquisition of 500 new rental homes – a return to the sector after a 30-year absence. Industry analysts say it was a wise move because of the increased share (20 per cent) of housing that is now in the to-let category. The number of renters is due to the tough mortgage-lending environment, leaving more working people off the housing ladder.

Real estate investment trusts (REITs) have begun to show promise on the exchanges, largely reflecting activity in the commercial sector, while a REIT for residential assets was first launched in 2013. Still, the largest asset growth is more likely found through limited joint venture land investment groups who focus on only a handful of developments at a time. Other investors such as in capital growth planning ventures are working with land specialists who convert raw land to housing by way of planning permissions.

With increased activity in the real estate sector, investors who are new to real asset investing are advised to speak with an independent personal financial advisor. The level of risk in real estate needs to be in appropriate proportion to the remainder of the investor’s entire portfolio.

Is New Housing Construction Encouraged in the National Planning Policy Framework?

It’s a myth that sustainability goals of the NPPF will get in the way of development. Quite the contrary – newer housing and development only needs to be smarter.

Much has been written in recent years about the restrictions on growth created by the UK’s land-use regulations, such as those that limit development on greenbelt lands. While incorrectly blamed as the cause of the housing shortage that is acute and building – the issues are multifactorial and complex – the complexity of those regulations has been discouraging to developers and would-be land investors.

That said, several bright spots have emerged in just the past two years. One was the passage of the Localism Act, which essentially streamlines regulations as it cedes authority to local planning authorities (away from regional authorities, which were widely blamed for stymying economic growth). Part and parcel with the Localism Act is the National Planning Policy Framework (NPPF), which sets out government planning policies for England. The NPPF works under the auspices of the Department for Communities and Local Government, which issued an extensive overview of its policies in March 2012.

To what extent does the NPPF encourage the construction of new homes? In general, the localism theme allows for a variety of approaches – much broader than was previously the case. Without question, the environmental sustainability ethos engendered by the NPPF strives to encourage reuse of structures, such as the conversion of abandoned industrial, commercial and educational structures to housing, where feasible. But following are several points from the Framework where new building on raw land might on the whole achieve a positive outcome within sustainability objectives:

• Growth is a goal. “The Government is committed to ensuring that the planning system does everything it can to support sustainable economic growth. Planning should operate to encourage and not act as an impediment to sustainable growth. Therefore significant weight should be placed on the need to support economic growth through the planning system.”

• Build it for modern, green transport. “Encouragement should be given to solutions which support reductions in greenhouse gas emissions and reduce congestion. In preparing Local Plans, local planning authorities should therefore support a pattern of development, which, where reasonable to do so, facilitates the use of sustainable modes of transport.”

• Build holistically. “Planning policies should aim for a balance of land uses within their area so that people can be encouraged to minimise journey lengths for employment, shopping, leisure, education and other activities.”

• Working, productive relationships between developers and planning authorities. “Local planning authorities have a key role to play in encouraging other parties to take maximum advantage of the pre-application stage. They cannot require that a developer engages with them before submitting a planning application, but they should encourage take-up of any pre-application services they do offer. They should also, where they think this would be beneficial, encourage any applicants who are not already required to do so by law to engage with the local community before submitting their applications.”

• Flesh out problems and objections in early phases. “The participation of other consenting bodies in pre-application discussions should enable early consideration of all the fundamental issues relating to whether a particular development will be acceptable in principle, even where other consents relating to how a development is built or operated are needed at a later stage. Wherever possible, parallel processing of other consents should be encouraged to help speed up the process and resolve any issues as early as possible.”

In other words, planning has made some significant steps forward in ways that are friendly to development. If this attracts more investors to land and real estate, all the better. A growing UK population needs homes to make ownership and renting more affordable, so a cooperative working environment with clearly articulated goals is certainly a good foundation on which to build it.

Would-be investors in land need to consider all the variables: market needs, available sites and the objectives of local planning authorities. Before embarking on a land investment, the investor needs to consider whether to “go it alone” or participate in a joint venture partnership with professional land development specialists among its advisors. An independent financial advisor can help that investor identify also the degree to which land should occupy one’s full portfolio.

Advisory: None of the information contained on these pages constitutes personal recommendations or advice. If you are unsure about the meaning of any information provided on this website, then please consult your financial or other professional advisor.

How Do Housing and Infrastructure Development Compare to Population Growth in the UK?

With the population of the UK expected to hit 66.8 million by 2030, there are many ideas on how that should be managed. The good news is solutions are being discussed.

The growth of the population in the United Kingdom runs counter to trends in many developed Western countries, where population is either flat or even in decline. For the most part, it is viewed as a positive, a revitalizing factor that energizes the economy and the culture. But it would be disingenuous to say that it does not come without challenges – and there are differing opinions on how it can be managed.

Aside from the housing shortage in the UK – attributable to a great degree to population growth, but matters of economics and lending standards from skittish financial institutions factor in as well – there is also a great deal of concern about the strain that ever-increasing numbers of people place upon the country’s infrastructure. From transport to resource demands to schools, more people require more of everything. How can the country manage if things continue on the same course?

The Building and Social Housing Foundation (BSHF), an independent research organisation that promotes sustainable development, has long held that increasing the private to-let and social housing sectors is essential, along with the supporting infrastructure necessary to support that. Without this, deep social inequity develops that negatively impacts just about everything else.

Another organisation, the UK-Green Building Council (UKGBC), devised the Sustainable Community Infrastructure, which seeks to deploy “integrated, cost effective, sustainable infrastructure such as community-scale power, cooling and health, water harvesting, waste disposal and telecommunications.” It places emphasis on urban planning and smart building, architecture that strives for net-zero energy use (power generation by the building itself through renewable sources, along with buildings that simply require less energy in the first place).

The UKGBC sponsors the country’s LEED certification program, but green building hardly stops there. The “Passivhaus” concept, pioneered in Germany, has taken root in the UK with 24 structures built thus far that achieve a very high degree of energy use efficiency. While perhaps too expensive to be built on a mass basis, these homes introduce ideas on sustainability that educate traditional homebuilders and which help develop a building materials supply chain with innovative products that can benefit all.

Forum for the Future, a London-based sustainable development non-government organisation, tackles the question on many fronts. It challenges the notion held by many that containing population growth is sensible or desirable. In its report “Growing Pains: Population and Sustainability in the UK,” the organisation argues that growth is inevitable and that all major public infrastructure bodies need to plan accordingly, preferably in cohesion and in consideration of many possibilities (i.e., with flexibility). A central point made is to “use what he have more efficiently,” meaning seek out improved technologies, renewable energy, improved water efficiency, a coherent and efficient transport system and innovative approaches to reducing flood risk. Where populations are located will matter, including how regional planning processes might shift where people live today to less populated areas (the report cites a skilled worker shortage in Scotland, for example).

The existing planning mechanisms in the UK have in recent years shifted authority to local councils, which can be an asset. There still are national directives, national schemes for increased homebuilding and national trend lines. But when an investment group, for example, asks to have a parcel of land rezoned to accommodate new housing, the local council has the opportunity to examine the proposal relative to very local needs. This is designed to speed up the process of land use changes and development overall. What is particularly important about this process is that market-led forces generally are more likely and more able to deliver what is most needed.

Investors in sustainable construction more typically see returns on investment over longer periods of time – say, seven years instead of three, because renewable energy features such as photovoltaic cells or tighter building envelopes carry front-loaded costs. That may not be workable in many development scenarios, however the imposition of carbon taxes, beyond the very low petroleum tax and climate change levy (CCL), would change the homebuilder ROI to something more immediate.

Individuals who consider joint venture land investment schemes should ask land investment advisors about matters of sustainability, as it might affect the viability of a project. But before getting to that point, an independent financial advisor should be consulted to determine if and how development risks and rewards factor into their personal financial portfolio.

Advisory: None of the information contained on these pages constitutes personal recommendations or advice. If you are unsure about the meaning of any information provided on this website, then please consult your financial or other professional advisor.

Understanding Joint Venture Investments

There are many advantages to joint venture investments, including how the partners can bring experts together with a pool of investors.

Joint venture investments are vitally important to many types of enterprises: For new or revitalising companies, in technological research, and to businesses that work across national borders (where the joint venture partners bring financing and local expertise together). Joint ventures in real estate are a special category because of the nature of land development.

To the individual investor, a joint venture investment in land provides several advantages. A lone investor would bear all the risks – and rewards – of real estate development. But this can be too large an exposure for many individual land investors. The advantage of a joint venture investment in land is that individual investors can participate in larger acquisitions with better knowledge, expert management and economies of scale.

The nature of land investing raises many questions. Is it ripe for development? Are there barriers to development, such as local zoning or economic uncertainty? What are the opportunities that are not readily apparent to investors who are geographically removed from a particular parcel? In a joint real estate venture, appropriate expertise and analytical tools can help to answer these questions.

In a recovering economy, land located in favourable regions, counties and countries offers promise for capital growth through development as well as from market forces. Joint venture investors have already begun to seize the opportunity.

Joint Venture Land Opportunities in the UK

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

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

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

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

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

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

Do All Joint Venture Participants Bring Expertise to the Investment?

Expertise is critical to joint venture investments – from any participant.

Joint venture land development investors are largely involved to earn a favourable return on their capital. Most investments benefit from third party expertise.

Joint venture partnerships (JVP) between multinational companies and in-market owners of capital, brands or knowledge, are a proven successful formula. This is particularly evident in the global economy. The McDonald’s Corporation’s expansion to scores of countries, many in the developing world, has been monumentally successful because the company typically works with an investor-manager in each of those markets. The restaurant company understands how to effectively run its establishments, while the JVP ensures that customers, employees and regulatory agencies are working with locals who understand their region’s needs and interests.

Joint venture property funds can follow a similar model, but not all investors necessarily bring land expertise to the table. The nature of buying, repurposing (through the planning process) and reselling property absolutely requires that the team has expertise in those particular tasks. Indeed, successful independent real estate investors can amass significant wealth when they have these skills themselves or within their staff. But many joint venture participants only bring capital, not land-specific expertise, to the investment. The investment and the task to grow capital are left to one or more, but not all, parties in the investment.

Whether or not this is an optimally beneficial arrangement is subject to circumstance.

Consider two different joint venture land development investment scenarios:

Scenario 1: Some but not all investors are the land specialists. A degree of trust needs to be established between all parties when some investors lack knowledge on how to make strategic land investments.

Scenario 2: An independent land investment advisor works collectively with joint venture participants. Because such advisors attract investors over time, they need to establish a track record that demonstrates their ability to maximise their returns to investors’ capital. That track record over previous investments is how they establish the trust that investors place in them to grow their assets.

The points of expertise required for strategic land investments are as follows:

1. Acquisition of land – Only properties that show strong and probable asset growth potential are considered. Sometimes the land tracts are held by several owners, which consequently requires acquisition negotiations on several fronts (not necessarily an easy task).

2. Site assembly – Achieve granting of outline planning consent by the local authorities, clearing the way for repurposing and building on that land. While this is typically understood in advance of the acquisition, the process needs to be managed carefully, working through the proper channels (e.g., submitting an optimal design) to a successful outcome.

3. Sale of the property – The moment at which the investment can provide a return on investment – according to the original joint venture asset growth goals – is when the investors benefit from their advisors’ expertise.

As should be clear, individuals wishing to learn more about a joint venture in strategic land should discuss their specific and overall investment goals with an independent, qualified personal financial advisor.