What are the Differences Between Rampant Land Speculation and Solid Land Investment in the UK?

With foreign investment driving up land prices, speculation strategies beckon. But land development investments are more stabilising for investors - and the country.

The discussion about the differences in land investors - those who speculate on rapid value increases versus those who make their money by building things - is nothing new in England or elsewhere. But the rhetoric in the UK has ratcheted up a bit in 2014, along with the rise in real estate prices.

How would someone investing through UK land fund managers think of themselves? Are they speculators, or solid land investors? Does the fact that land funds largely involve the conversion of unused land into developed property - housing and commercial use - place such an investor in one category and not the other?

Anyone with the pounds to invest and who follows the topic of UK strategic land development might be familiar with the arguments. A laissez faire advocate would suggest that natural market forces should be allowed to rule, meeting the demands for commercial, residential and agricultural uses at the simple intersections of supply-demand curves. If holding land for several years turns into healthy profits, why should it matter? At the other side are those who present the housing shortage as cause for different kinds of regulation, incentives and taxation, and that even greater value increases can be realised by the mid-term investor compared to the speculator.

An example of the latter is advocated by ShiftingGrounds.org, an independent organisation that proposes alternatives to the status quo of British politics. In a recent (November 2014) post by economist Joe Sarling, an argument is put forth to impose a land value tax on the ownership of land, irrespective of buildings that sit on it.

Among Sarling's principal points for this is it would prevent speculative buying-and-holding. "It would encourage land owners to better use their land…bring it forwards for development...[and]...stabilise land prices as investors would have to think carefully about how they use the land and their build-out rates," says. "As a result, land speculation would be discouraged and prices would stabilise. This, in turn, will stabilise house prices which helps the consumer plan to buy and the developer as they have confidence in predicted values - i.e., it would dampen the boom-bust cycles and bring developments forward more quickly."

Labour shadow housing minister Emma Reynolds has her own beef with unused land, more specifically large empty homes that are often owned by foreigners as mere investments. She points out that the very active home-sales market in Cambridge provides a good example of this happening - which she would like to slap with a large council tax to discourage.

Looking at these and other arguments on land speculating vs. investing, one must also consider the farmers who remain engaged in the business of agriculture. Investments by billionaires, both from within and outside of the UK, of prime arable land illustrate how they too have their economic equations to consider. Over the past decade, the better tracts of farmland have appreciated by 210 per cent, including an average increase of 11 per cent in 2013 (and up to £11,000 per acre in Herefordshire and Eastern England, according to the Knight Frank Farmland Index).

Speculators can be big winners or big losers, depending on the larger forces of global economies. But developers and farmers, working closer to the ground (so to speak) at making land productive are subject to less volatility. Getting past the rhetoric, investors who consider strategic land development programmes (i.e., buying land to achieve planning authority permission to build) are nonetheless advised to speak with an independent financial advisor to examine more closely which type of land investment best suits their needs.

Two Million Working Adults in the UK Live with Parents - What is the Investor's Opportunity?

The numbers are unfavourable to both buyers and renters, particularly those under 40. So employers, investors and homebuilders are looking outside of London.

A significant social trend has been happening in the UK that has gone quietly unnoticed. Almost two million working adults, ages 20 through 34, still live with their parents. That’s 48 per cent of people that age. This delays the start of new households, it affects consumer spending, it often leads to family strife – and it may be up to investors and developers to fix it.

The obvious problem is that housing is too expensive, with prices rising annual by double digits in many cities even while wages remain relatively flat. Young, working adults have to save longer to get deposits on homes, which continue to be priced beyond their grasp. A clear solution is to build more and perhaps decentralise where workplaces exist, which can mean building in places other than London and its fringes. UK land fund managers, who help convert unused properties into residential and commercial districts, understand well how this pent-up demand represents a strong emerging market for homes and flats in the decades to come.

In Japan, this has been happening for more than two decades already. Faced with a stalled economy, an entire generation of unmarried adult children have opted instead to remain living with their parents and spending their earnings on consumer goods (the common term is “parasite singles”). In southern European cultures, it is historically common to remain at home until and even after marriage. But in the UK, the US and many other countries, launching into adulthood has meant finding their own place to live as soon as possible. And that is not currently happening for about half of Britain’s young people.

With data accumulated by Nationwide, the UK mortgage company, it’s clear why this is happening. Prices have climbed back to near or above 2007 levels, the historic peak (higher in London, Bristol and Cambridge, lower elsewhere). Mortgage payments themselves have become more affordable since the 2009 interest rate cuts (now consuming, on average across all age groups, 16 per cent of homeowners’ incomes). But deposits required of first time buyers are now around 20-25 per cent of the purchase price, which is rising rapidly with the prices of homes. With fewer people buying, more are renting – driving up the rental rates as well. This is a primary reason why those young people continue to struggle with finding an affordable place to live.

The problem is somewhat regional, of course. Homes in London for first-time buyers are on average 7.5 times the average earnings of workers there. But across the country, that ratio is lower at 4.3 times earnings. Still even the lower figure is high by historical standards.

So what is the role of the developer, homebuilders and investors? Simply, to increase supply that will create downward pressure on prices for both buying and renting. But given the regional nature of high housing costs, something new is happening: younger people are leaving London. According to the Office for National Statistics, thirtysomethings are moving to places such as Birmingham, Bristol, Manchester, Nottingham and Oxford. These are people who are on the move, not interested in becoming “parasite singles.”

Given that, investors need to start thinking outside of the London box. This is why employers and alternative investment funds are increasingly looking west, north and southeast of the capital city for land where homes can be built and be affordable at market rates to buyers. This also has the effect of diminishing wage pressures on employers.

UK land investors should consider the opportunities of pent-up housing needs, but also where any type of real estate investment fits into their own wealth building strategies. An independent financial advisor can guide individuals on questions such as these.

The UK's "Rent Trap" - How Can Land and Housing Investors Provide Solutions?

Fewer people are buying than renting homes in 2015. This likely has broader social and economic impacts in Britain - which private sector investment can mitigate.

Home ownership has generally climbed in the UK over the 20th century, in fits and starts and with major disruption in the aftermath of World War Two. But in the past decade, particularly in the wake of the 2008 financial crisis, ownership rates have dropped from 69 per cent to 67.5 per cent (from 2004 to 2008)  - due to the rapidly rising prices of homes against flat wages and more stringent lending practices. According to Government statistics (Department for Communities & Local Government, English Housing Survey 2012-2013), of the 7.5 million private renters in the UK, two-thirds are unable to save up money for a home-purchase deposit, probably because on average 40 per cent of their income is spent each month on rent.

This is a key consideration for the residential building industry as well as its financial backers. Strategic land developers work at unlocking areas that contain no housing to get planning authority approvals to build; this is an essential component of increasing the country's inventory of residences. If the supply of homes can rise - a key task that almost no one opposes - then simple economics dictates the price of owning and renting will plateau and perhaps even drop.

The social impact of fewer owners can play out in many ways. Households that fail to get on the property ladders, the so-called Generation Rent said to be in the "rent trap," are arguably disadvantaged as are their children and communities. Some statistics to bear in mind include:

• Wealth accumulation - Owners see their investments grow over years in which they occupy their homes. While economic crises can alter this in the short-run, historically homes rise in value even as mortgage-based costs remain relatively static.

• Ripple effect - As values of homes rise, those who own feel richer and tend to spend more. Within reason, that is good in that it feeds the broader economy.

• Advantages over market-traded investments - The markets tend to be more volatile than home prices. In the two years following the 2008 crisis, market shares traded as much as 50 per cent lower than their peaks, while home prices dropped only 10 to 20 per cent (depending on location). Stocks and bonds have the advantage of liquidity, of course, but the fact that people do not sell based purely on the rise or fall of prices further stabilises against volatility.

• Community stability and investment - The rule of thumb is that owners take better care of their buildings and communities, have higher voter participation rates, have children who fare better in school and experience lower antisocial factors (teenage pregnancy, drug use, school dropout rates, etc.).

A number of years ago, an article in The Economist ("Shelter, or burden?" April 16, 2009) presented a pros-cons case for ownership, challenging some of these assumptions. One could argue that ownership simply isn't for everyone, and that ownership creates rigidity in where people live such that they are hesitant to move for job opportunities in other cities or towns.

But one fact affecting approximately one million British households is this: they cannot find an affordable home through either renting or buying because the supply falls woefully short of demand. For them, it’s not an academic debate. There simply aren't enough houses or flats available to make it affordable for working families.

Public policies such as the Help-to-Buy scheme address this problem from a lending standpoint. A counter-argument made to this from many quarters is that looser lending only pushes prices higher. This Government programme needs to be met by the private sector, where most of the building is done. Even then it is almost always a public-private endeavour, given how investors involved in strategic land partnerships must achieve local planning authority approvals to build. But endeavour they do, adding infrastructure to raw land that enables homebuilders to do their work and create new residences.

Investors in housing come from all areas: foreign and domestic, individuals and institutions. For individuals who are looking at real estate investing for the first time, meeting with an independent financial advisor is highly recommended to gain a full perspective on where such assets best fit the investor's individual needs and objectives.

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.