The Rise of UK House Building and Implications for Land Investing

Housing starts and completions in England are up. But it takes the tenacious and well-advised investor to help the country meet the strong demand for homes. 

Toward the close of 2014, the official Government statistics on house building in the UK are mixed but promising. This offers some degree of hope for investors and builders in the housing sector.

According to the Department for Communities and Local Government, seasonally adjusted housing starts (138,640 homes) now are 93 per cent above the recession trough (March 2009). Completions of homes over 12 months (the year preceding September 2014) hit 116,930, a hike of 8 per cent over the previous comparable time period (the year preceding September 2013).

As is well understood, the country needs to add at least 200,000 homes per year to meet pent-up demand in the face of England’s growing population. So there is no lack of need for even greater residential building in the UK. Investors through such programmes as joint venture partnerships understand this very well and seek optimal scenarios for achieving asset growth in relatively short (two to five years) development timeframes.

How do land investors accomplish this? Note that the land investor is different from land speculators and others who may engage in land banking: the individuals involved in strategic land development typically work in a sequence of well-managed steps to bring land into productive use for homes and businesses:

Step 1: Identify appropriate land for purchase - Professionals in land investing comb through economic development statistics to find where job growth is greatest and where locating a workforce optimally serves both employers and employees. From there, negotiations with existing land owners (public and private) with appropriate acreage results in a transaction of land to the investment group.

Step 2: Achieve planning authority approval for use designation - In Step 1, there is a good sense of where local planning authorities (LPAs) may be amenable to a zoning change (often from agricultural to residential). In about half of the country, local authorities have complied with the National Planning Policy Framework (NPPF) to establish local plans for development. In other places, the land fund investment managers make the case for how new development will benefit the area economically, physically and culturally.

Step 3: Build infrastructure - Once LPA approval is in place, the investment group goes about the business of building roads and utilities, site preparation that is essential to orderly and sustainable development.

Step 4: Construct and sell completed properties - At this stage, many investor groups sell the land to homebuilders. This allows an earlier exit from the investment with reduced risks associated with construction and sales. Homebuilders have greater expertise in what the eventual homebuyer wants and can afford.

Investors typically understand the need to work with specialists (e.g., experts at real asset investing) who can combine capital with expertise to produce asset growth. Similarly, the investor should consult an independent financial advisor to identify broader strategies for including real estate within a family wealth-accumulation portfolio.

The Differences Between Investing in Housing and Mass Infrastructure

From an investor's perspective, the ROI in housing might be greater than that achieved from road and rail projects. But infrastructure is fundamental to development and deserves holistic thinking.

The relationship between housing and public infrastructure has always been strong, even if indirect. One need look no further than the London Crossrail project, which is adding 75 miles of commuter trains to the city's system and where, to no one's surprise, housing values near new system stations are rising rapidly.

But to an investor, if a choice must be made between financing various kinds of infra (transport, utilities, broadband, flood mitigation, and more) and residential development, it can be challenging to determine which might yield the greatest return on investment. These are not simple "apples to apples" comparisons, and the potential for growth in some types of real assets funds is not always easy to ascertain. Yet because the two are interdependent it is entirely logical for investors to consider them within the same investment decision-making process.

This discussion is ramped up by the pressing need for additional housing in the UK. This is strongly incorporated into the National Infrastructure Plan 2014 by HM Treasury, the Government's economic and finance ministry. The report cites several infra projects where housing and public amenities could be inextricably linked if the Plan is fully implemented, as well as where previous public projects have succeeded:

• Suburban network rail connected: A Government loan (contingent on a principal heads of terms agreement) of £55 million to extend the London Overground to Barking Riverside, predicted to help deliver 11,000 homes.

• Land remediation and infrastructure: In Ebbsfleet, a £100 million infrastructure fund will enable up to 15,000 homes to be built in a new garden city.

• Rail upgrades: Already, a major upgrade since 2010 of King's Cross Station rail unlocked 2,000 new homes.

• Road transport and public spaces: A spend of £23 million for a road crossing between Swindon and Wichelstowe (on the M4) opened a new site for thousands of homes. Meanwhile, construction begins in 2015 to provide transport links and public spaces that will transform Battersea, Nine Elms and Vauxhall, with the potential for creating 16,000 new homes.

Very often, both housing and major infrastructure programmes are a mix of private and public funding. But housing exists in a different sphere, providing returns to investors in relatively short order and the majority of homes are built by the private sector. True, financiers, including those who work in real asset portfolio investing, may need to go through planning authority processes, but it is largely a transaction amongst owners of UK land, site assembly professionals, builders of utilities and structures, as well as the private individuals who buy the homes.

Investors working in infrastructure through municipal bonds are not as common in the UK as they are in the United States and other European countries. The majority of local government borrowing is historically through central Government, but since 2014 a consortium of local councils has begun to fund the Local Capital Finance Ltd. Agency, which takes bonds to investors. The Chartered Institution of Highways & Transportation called for a greater sense of interdependency in public and private projects in a 2012 report (Action Plan for Change; Infrastructure Funding & Delivery), stating "A hybrid public and private sector infrastructure fund should be created for a discrete geographical area which, whilst not generating mainstream capital market investment returns, would deliver infrastructure that benefits local land values and local businesses." The problem, argue some, is that infrastructure lacks data and benchmarking, lending an opacity to municipal investments that makes councils and investors skittish; the broadest benefits of roads, rails and flood abatement are at best proven over decades, not quarters or fiscal years.

Investors need to weigh many factors relative to development in the UK. While the overarching economic factors of population growth and housing inventory suggests strong opportunities, individuals are wise to engage an independent financial advisor to examine where development projects fit wealth building objectives.

How Have Greenfield-Brownfield Swaps Already Enabled House Building?

Local councils are tasked with writing home building agendas. That might require eating into green belts - but "third way" solutions can lessen the loss.

A community meeting at the Wilmslow Library in Cheshire (south of Manchester) in January 2013 illustrated both the problems and solutions around homebuilding in the UK. For anyone considering investing in capital growth properties, listen up: These local residents and their planning authorities hold the cards on development.

In this standing-room-only meeting, campaigners for green belt preservation challenged the consultants presenting a Draft Local Plan, which proposed that a number of homes be built on what is technically Greenfield and green belt land. Included was a proposed community in adjacent Handforth, largely self-contained with 1,800 homes with area for an additional 500 homes in future years. Opponents argued that at least 800 homes could be built on brownfield land. Defending the plan, one consultant said, "Clearly locally there will undeniably be considerable impact on green belt. It would be foolish to suggest otherwise, but rather perhaps that we put an impact in a concentrated way than perhaps scatter it far and wide."

The entirety of the conversation was far ranging, but it provides evidence that a “nibbling” into green fields is being pursued for homes development. This community is required by the Government to develop a long-range plan to increase housing overall, a national imperative to accommodate a growing population and to overcome the deficiencies in building over the past decade. And yet, the solutions are not simple.

The Campaign to Protect Rural England (CPRE), which advocates for absolute preservation of green belt land, fears that the Localism Act of 2011 endangers green space overall. In contrast, Chancellor George Osborne seems to indicate a nuanced position, that trading off some green space for development in workable if land elsewhere is brought into the greenbelt. Counter to the insistence by CPRE that greenbelts be preserved, former Under-Secretary of State, Department for Communities and Local Government MP Nick Boles speaks about the viability and deliverability of land for housing, which in many places means that green fields and green belt lands are more economically feasible than brownfield land. Some such locations where this approach is already in some level of discussion and planning:

• Nottinghamshire/East Midlands - In Broxtowe, more than 1,100 dwellings are proposed, with an additional 5,000 homes in Rushcliffe.

• Cambridge/East of England - With 11,000 homes built on green belt lands since 2003, with an additional 1,880 proposed. An area north of Waterbeach Village is being proposed for a green belt swap.

• Bedfordshire/London Metro Green Belt - About 11,000 homes are proposed for construction by 2031. Additionally, a 52-hectare area is requested for a rail freight terminal.

• Epping Forest district/London Metro Green Belt - With the release of 1 per cent of this green belt, 1,250 dwellings could be built.

• Cheshire East/North West - To accommodate 5,680 homes, the council proposes swaps and extensions that alter the green belt footprint.

• Christchurch and East Dorset/South West - 3,000 homes in the Local Plan Core Strategy on green belt territory.

• Birmingham/West Midlands - The construction of 30,000 homes would be in addition to 43,000 dwellings on brownfield sites. This is on green belt land, where the Birmingham Airport might expand along with the addition of a major high-speed rail line.

Of note, there are things other than homes (rail lines, airports, office parks) that are part of what nibbles at the green belts. All speak to overall population growth, and the challenges of maintaining metro boundaries set forth almost a century ago.

Where does this leave the investor? For individuals and institutions that recognise the pressing need for and opportunity in development, it’s a recognition that English cities are bursting at the seams. A capital growth fund focused on housing and commercial development looks for ways and places to build which support the economy and alleviate the housing shortage. But it need not be an either/or situation. A distributed approach to green fields, adaptive to commercial centres and efficient and clean transportation modes, helps address 21st century needs with coherent solutions. Green-brown swaps, if developed in good faith, might be the "third way" means by which to satisfy all parties.

Investors should also approach all involvement in real estate with a balanced understanding of the risks and rewards. Be certain to consult an independent financial advisor before entering any investment.

Can the UK afford to Shift Land Use from Agriculture to Development?

The beautiful countryside is indeed a national asset. But housing and commercial development are not necessarily less "green" than farming.

The UK is blessed with two very important resources: A growing population, which is testimony to the vibrancy of the culture and its economy. Also, the country is verdant, with green countryside making up the vast majority of the country's total land mass, 43 million acres dedicated to arable farms and rough grazing land, with another 13 per cent of land either greenbelts or "areas of outstanding natural beauty."

Unfortunately, these two factors appear to many to be in conflict, that the growth of population necessarily leads to a reduction in green areas. This is a debate that has influenced public policy for at least one hundred years, going back to the establishment of the first green belts that wrap most major and mid-sized cities. And while builders and investors (such as those who do real asset portfolio investing) are more typically associated with building on agricultural and greenbelt land, there is also some degree of development that can be feasible on brownfield and infill sites in towns and cities.

The country depends on its home-grown agriculture for 59 per cent of the food consumed here, importing about £32.5 billion of food from outside the country, mostly from Western European countries. Of note, UK agricultural and food industries also export about £14 billion worth of goods per year.

So the question must be asked: What might happen if increasing amounts of land are given to development at the expense of agriculture? Does UK population growth mean the country will increase its dependency on other countries for its food? Might the current policy that favours brownfield development be pursued more robustly in order to minimise land loss to housing and commercial enterprise?

Several points are due consideration in answering these questions:

• Agriculture is not necessarily a clean, environmentally friendly endeavour. About 90 per cent of ammonia emissions (315 kilotonnes per year) are the result of spreading livestock waste. This acidifies soil and leads to eutrophication of soils and water (harmful to habitats).

• Agriculture also contributes heavily to greenhouse gas emissions, including 38 per cent of methane and 66 per cent of nitrous oxide of the country's total. Methane is 21 times and nitrous oxide 310 times more potent than carbon dioxide.

• By calculations presented in a report from Institute for Sustainability Leadership at Cambridge University (Andrew Montague-Fuller lead researcher), more efficient farming methods, reduced consumption of meat and a reduction in food wastage could reduce the need for agriculture land by as much as five million hectares.

• Urban areas of the UK constitute about 9 per cent of the country. Green belt areas occupy 13 per cent of the landmass. Even in the heavily-populated South East, about three-quarters of land is either woodland of farmland.

• 90 per cent of Britons live in this 9 per cent of urban-defined areas. Compare that to Germany, where only 75 per cent live in cities, Italy (65 per cent), Ireland (62 per cent) and India (30 per cent). England is densely populated with lots of green land surrounding us.

Now, to be clear the green fields of the British Isles are about more than just agriculture. The country's robust tourism industry promotes this heavily. Says the website for Visit England, "there's nothing quite like the English countryside for rural escapes with its patchwork hills, dramatic dales, ancient woodland and winding country roads." No one can argue with that. But with an increasing emphasis on sustainability - including an eco-tourism industry that admires sustainable building as much as habitat - might not a shift from industrialized farming to environmentally conscious development be viewed as a positive as well?

Developers must respect the heritage and character of the country. Whether building in England, Wales, Scotland or Northern Ireland, investors such as those working in joint venture land opportunities should work with sensitivity to how new homes affect the world around them. But at the same time, treating agriculture as sacrosanct can be counterproductive on many levels. A balance must be struck in a growing country.

Investors of all types - individuals and institutions - are increasingly attracted to land and real estate for many of the reasons stated above. For individuals, it’s wise to discuss any such opportunities with an independent financial advisor to gauge how real estate fits with overall capital and income growth goals.

The Difference Between Open-Ended and Closed-Ended Investments in Real Estate

There is a broad array of means to invest in land and property in the UK. That variety spells different kinds of opportunities for different kinds of investors.

Investments in UK land and property have always held a strong portion of individuals’ wealth portfolios and the assets held by institutional investors in the UK. But in an era far removed from a time when a select aristocracy controlled vast estates, real estate has matured and broadened in the 20th and 21st centuries.

For example, millions in the middle class – 14.3 million households, about 66.7 per cent of families and individuals – own their own home, although that portion has slipped from about 70.9 per cent in 2003, the historic peak. About three per cent of the country’s housing stock is owned by small-holdings landlords; the 1988 Housing Act made buy-to-let investments attractive to individuals who enjoy rental income, rising capital value and a lower perceived degree of risk relative to other investment classes.

Other forms of investing in real estate are through a joint venture land opportunity. This is where a group of investors work with strategic land specialists who identify land that could and should be developed. The expertise lies in identifying where development will serve local interests, such as to provide a workforce to nearby employers, as well as how to work with local planning authorities to achieve appropriate use designations. Contrast this with investing through a real estate investment trust (REIT), where the investor has a more distant relationship with a broad portfolio of properties (almost always commercial in nature).

An important distinction within real estate investing is whether the asset is a closed-end or open-end investment. In brief, these differ as follows:

Close-ended investments – This is a method for raising capital by way of an initial public offering, which typically is listed on a stock exchange and also referred to as an investment trust. The investment fund is actively managed and very often contains multiple securities, a fixed amount of share capital, and there are no further issues or unit redemptions according to shifts in demand. Share prices are not determined by net-asset value (NAV) but rather supply and demand. Closed-ended investments tend to be used for illiquid securities.

In the UK, a REIT needs to satisfy certain conditions, including being listed on a recognised stock exchange, having one class of ordinary shares and to be a closed-ended investment company.

Open-ended investments – By definition, an open-ended fund involves taking an ownership stake in one or several properties under management of the fund. When several investors are aggregated in an investment and they are able to redeem their shares by selling it back to the fund, it is known as an open-ended investment. Unlike with a closed-ended investment, the investor can simply redeem his or her shares from the fund without finding a third-party buyer.

In the case of a real-estate open-ended fund, such as a joint venture that exists to develop land into residential or commercial property, redemptions might vary depending on the size of the shareholdings. Larger investors might have longer tie-in periods (e.g., a 12-month tie-in versus a five year tie-in) to smooth out liquidity concerns.

Individuals who wish to participate in UK land investment – be it through open-ended or closed-ended programmes – should seek advice from independent financial advisors.

How Might Greenfield-Brownfield Swaps Promote House Building in the UK?

Investors in UK housing are sometimes stymied by limitations on Greenfield development. Shifting green designations (and vegetation) to post-industrial sites are an option.

The topic of how to utilise UK land has been a hot topic for years. In a 2012 interview with a television reporter, George Osborne favourably credited Cambridge for “swapping some bits of the green belt for other bits.” This upset many, including the National Trust, who felt it overstepped the bounds of what had been promised in the recent liberalisation of planning policy rules. Protection of green belt and Greenfield lands was to be maintained.

But what Osborne was proposing was nothing new. In Cambridge and Cheshire East, green belt swaps are actively proposed and discussed as a means to address the critical national housing shortage. Such swaps ideally result in residential property development, including those financed by joint venture partnerships, on what was previously designated as green belt lands or designed for Greenfield use. The “swap” is to establish Greenfields elsewhere – in areas where they can be of better benefit to society. In some cases, that might even include remediated brownfield land closer to urban centres.

This is important to the sources of financing for house building for several reasons. One is that it opens up options for where new housing might be located. Another is that brownfield lands can be poorly located for where people need to live (i.e., far away from employment or transport) or that remediation of sites that were once in industrial use can be unfeasible. (Brownfields are strongly advocated for use in housing development by rural preservation organisations; that can work in some but not all instances.)

The proposal for Cheshire East hints at the impact this kind of exchange can bring. There, stakeholders request that the council release 80 hectares of publicly owned agricultural land, on which 1,800 homes would be built. Additionally, another 2,000 homes would be built in nearby Crewe. This will require a mix of green belt land and what is deemed “green gap” in local planning. The swap will mean allocating 800 hectares that separate Crewe and the town of Nantwich to establish a new green belt.

Shelter, the housing charity that advocates for broad thinking in development – and which holds the position that development of homes at all price points helps effectively makes all housing more affordable – looks favourably on these land swaps. “In order to achieve economic growth, areas that are of economic importance need to expand,” says the organisation in a 2013 publication it developed in partnership with KPMG (“Homes for the Next Generation, Lessons from the West Midlands”). “Land swaps, driven by the council, can ensure houses are built in areas of high demand while the total amount of green belt land is not reduced.”

And what of those brownfield lands that might go undeveloped as a result? The Government’s Forestry Commission has held since at least 2007 that some brownfields might be better used to establish non-residential community greenspace, which require less stringent remediation efforts. “Trees and plants have been shown to demonstrate huge potential in the reclamation and remediation of brownfield land,” the bureau said in an Information Note titled “Greenspace Establishment on Brownfield Land: the Site Selection and Investigation Process.”

Further, it’s a barrier to sustainable residential community development when a brownfield-to-housing conversion is done where those residents might depend on cars to travel to their places of work. Public transport systems are largely designed around existing population distribution, not necessarily where redundant factories now are shuttered (and may have been for decades).

The savvy participants in joint venture land investment are wise to study such matters of greenfield-brownfield conversions, as it can have a significant impact on where communities are established and why. But would-be investors should also speak with an independent financial advisor to judge where any form of land and real estate equities or bonds fit a general asset growth/income plan.

Can Nick Clegg’s Garden Cities Deliver the Housing Needed in the UK

Many more homes must be built in the UK. While garden cities might deliver homes on a large scale, smaller, privately-financed developments are already being built.

Deputy Prime Minister Nick Clegg made a definitive statement of support and intent in 2014 to build garden cities in the South and South East portions of England. Modelled around “good life” and sustainability concepts, the planned communities would contain 15,000 or more homes each – a scale much larger than developments currently being built in and around towns and cities.

No one questions the need for more housing in the UK, where home prices and rents are rising ever upward and the number of households waiting for a home is estimated at one million. Public policy and support with infrastructure development (roads, schools, utilities, etc.) are required for both garden city developments and those brought about by private investment, and Clegg acknowledges that at least £1 billion will be required of the national Government through a Large Sites Fund to stimulate development of sites involving at least 1,500 homes.

Private capital growth fund investors may get involved in these schemes. Fortunately, those investors are already working on multiple projects of lesser scale that are delivering much needed new-built homes today. The involvement of the private sector, from both individuals and institutions, remains an essential factor in market-rate and affordable housing.

The economics of development always include some cost sharing between the private and public sectors on infrastructure, but the degree of red tape can stall projects to a maddening degree. With high-level support from Clegg, however, there is the promise these issues will be handled in an effective way. But when the Government attempts large-scale programs, it also draws higher-profile opposition. According to the report “Unlocking Garden Cities/March 2014” (from the London-based GVA organisation), “political opposition and the planning process are at least in part responsible for delaying or preventing delivery at large urban extension sites.” The Guardian reported in August 2014 that special compensation may be necessary to appease existing homeowners whose properties are affected by garden city developments in their close vicinity. Clegg cites the development of large housing districts following the Second World War (Milton Keynes, Welwyn Garden City, Corby, Aycliffe and Hatfield among them) as examples that provide a model for addressing 21st century housing needs.

Whether or not the Coalition Government, or its successor after the May 2015 General Elecion, can effectively develop garden cities in the next five years is subject to question, debate and decision-making. In the meantime, individual investors working through such entities as property fund partners are building new homes on, arguably, a more organic basis. Rather than the creation of new municipalities – what garden cities essentially are – smaller scale developments achieve planning approvals to develop raw land into homes and the infrastructure required to support those homes within extant jurisdictions. In most cases, the land is purchased at a market rate (pre-development) and the properties created are largely sold at market rate prices (post-development). With greater local housing supplies the costs to buy or rent experience downward pressure.

No investor should go it alone on real estate schemes, however. People interested in participating in the UK’s land-to-housing development boom need to speak with an independent financial advisor to determine an appropriate risk level for their investment.