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.

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.

How Environmental Issues, Zoning and Planning Affect Land Value

Environmental, zoning and planning considerations affect Land investments.

The Localism Act 2011 reset the rules for land investing. Concerns for local control in planning, zoning and environmental matters can be an opportunity.

Among the many implications of the Localism Act 2011 are those that affect UK investors in land. Formerly, a land investor needed to heed regional decisions regarding land use if the goal was to convert undeveloped property to residential or commercial uses. But a new set of rules shifts those decisions to local councils. The effects of the act are only beginning to be felt, but no one should characterize it as all good or all bad for the investor.

The Act altered the landscape, so to speak. That is not necessarily a bad or good thing – as illustrated by the following points:

• Sustainable communities/Environment – The imperatives to develop in ways that are favourable to the environment are necessary and satisfy the consensus of thought about such matters. While this may negate some plans to use certain properties for certain uses, we now have a clearer idea on what can and cannot be done. It is that certainty that the investor needs.

• Sustainable communities/Local economy – The land investor is now required to make a case for the long-term impact a land use designation change might have on the local economy. So be it! The land investor wants only to increase the value of property, and that cannot happen if the end-use fails to meet a market need.

• Planning – With planning functions now distributed to local councils, there will be theoretically smarter decisions made and plans drawn. We say “theoretically” because it assumes expertise and rational thought in all municipalities, which may not always be the case. Investor groups are tasked with providing a convincing case for how a development will ultimately benefit the community at large.

• Zoning/Land use designation changes – As local decisions are made about zoning changes, they can also be subject to a voter referendum where the majority vote wins. Is it a good thing when citizens overrule elected officials on land use? There are probably as many answers to that question as there are sheep in Australia.

What should be clear is that entering into UK land investment is not a casual affair. One needs to go about it strategically with a convincing land site assembly plan. As more UK investors are drawn away from the stock market to alternative investments, many elect to work with UK land fund managers who are schooled in all of the factors cited above and who can best predict how to achieve asset growth from strategic land development investments.

As should be the case with all investments, individuals should work with a personal financial consultant to identify which investment strategies fit their individual needs and risk tolerances.

Land-To-Housing in the UK Engineered in Key Steps

What are the key issues in master planning of land-to-housing development in the UK?

Buying land, building then selling houses might seem like a simple idea, given the UK housing shortage. But even with cash, you are advised to work with professionals.

With the difficult housing shortage in the UK, it might seem that investment in housing development would be a “slam dunk” opportunity for strong real asset growth. Indeed it can be – but it is not a business for amateurs. Master planning of a land-to-housing scheme is the realm of experienced UK land investment specialists, and they must shepherd an investment through all stages of the process – which typically requires multiple years. Rare is the lone investor who works from his or her own experiences, knowledge, associations and cash.

The main questions that investor groups centre on include “where growth is strongest?,” “where the need is greatest?” and “where is appropriate land available for development?” – all within a time fame that satisfies investor expectations. To that end, the qualified land investment company will journey through the following tactical stages:

•    Trends research – The leading numbers come from the broader economy, of course. Current key drivers include the housing shortage, the uncertainties of modest economic growth and stagnation, as well as stringent lending standards. The Cameron government is trying to drive the housing market with the multibillion-Pound program known as the Funding for Lending Scheme, which is reportedly driving a modest uptick in buying.

But drilling down from the macroeconomics one finds key opportunities in specific areas where local employment growth is robust. That is where housing needs are particularly acute and local planning authorities are most amenable to zoning changes that will allow housing development.

•    Location analysis – Still, not every acre of land will accommodate housing or be available at a reasonable price. Using financial modelling as a guide, land investors will enlist site investigation teams, value appraisers and advisors on tax and legal issues. Their jobs are to collectively identify risks and returns within acceptable and optimal ranges.

While it may not be possible to establish with complete certainty that a zoning change can happen, the management team will have a fairly solid read on what the local authorities are amenable to do. If the investors’ business case is solid, all such location factors will encourage and not impede development.

•    Strategic acquisition and assembly – Rarely is a property identified by accident. Seasoned land consultants maintain proactive relationships with statutory bodies, bankers, corporate finance and commercial agents who effectively scout such locations. With sufficient investment capital, a well-managed fund is able to avoid debt financing.

Once the optimal property is identified and acquired, site assembly commences. Riveted on an expected internal rate of return (IRR), the site is developed according to plan and a schedule that matches investor expectations with homebuilder needs.

•    Exit plan – The forward sale works optimally with top-tier homebuilders. With established relationships between the investors and developers, most transactions are ideally made by private treaty (off-market transactions), with obvious cost savings in such arrangements. Many such sales are contracted long in advance, satisfying local planning permission bodies that the land will be developed relatively quickly.

The fact that the end-buyers exist long before construction commences is reassuring to land investors and those planning authorities. Under current housing shortage conditions, this could remain a driving factor for several years into the future.

Persons interested in land investment via joint investor groups should independently work with a personal financial advisor. It is important to consider the risks and timing of land development programmes in relation to one’s comprehensive portfolio.