Could the Empty Homes in England Fix the Housing Shortage?

There are hundreds of thousands of houses and flats that sit empty in the UK for various reasons. Some might be reusable or appropriated to meet the housing shortage.

According to the UK website EmptyHomes.com, Government data on vacant dwellings show there are 610,000 empty homes in England. More than 200,000 of those have been vacant for more than six months. This information is derived from local authority Council Tax base data as of October 2014.

So does that suggest there is ample accommodation for the estimated 1 million UK households waiting to find a home to buy or rent?

The housing charity Shelter - which counts 279,000 long-term privately owned empty homes in England - calls it “a real waste of housing when there are so many homeless families looking for somewhere to live.”

To a certain degree it makes sense to use what’s already there. But note how Shelter also advocates for the building of new homes. This is because many of those empty homes are not located where people need and want to live. Indeed, many are second homes largely used for holidays. The organisation has no quarrel with either housing associations constructing modern, energy-efficient homes or private investors such as real asset fund managers who turn raw land into new neighbourhoods for middle- and upper-income residents.

The more homes in total, the less homelessness overall. According to a January 2015 report in the Mirror, there are almost 61,000 homeless households in the UK as of September 2014.

That said, George Clarke - architect, writer, lecturer and TV presenter on architecture and empty homes shows - makes several key recommendations on how derelict empty homes can add to the country’s useable inventory of residences:

• Treat demolition as the last option; refurbishing and upgrading is always preferred.

• Proper community consultation, done openly and transparently, is required for regeneration programmes.

• That a developer has full planning approval and secures construction financing for new building before demolishing existing structures on the site.

• Use a “mixed and balanced” urban design scheme to preserve salvageable existing properties in combination with new builds.

• Local authorities might promote and encourage homesteading, cooperatives and “sweat equity” schemes for procurement of empty homes for use.

• Where properties decanted for renewal are then left empty for a half-year or longer, they should be offered for temporary accommodation in a safe and habitable state.

The need to establish sufficient housing exists at all strata. The homeless need homes. Working people want to form households and yet rents and purchasing prices are beyond reach, particularly in London. Even the moderately well off cannot afford to live in Central London because year upon year of double digit price increases have sent the costs of residences above £2 million in many instances.

Government-sponsored lending programmes such as Help to Buy are having an impact, as is private investment in new communities by property fund managers. Homebuilders have consequently responded in 2014 and 2015 by increasing output. But given the rate of population increase in the UK and the demand it creates, the housing inventory needs to expand by a broad variety of methods.

Private investment in real estate is critical to the landscape. But individuals who look to real estate for asset appreciation should do so only after consulting an independent financial advisor. Various methods come with a broad range of risk.

Why are UK Property Funds a Good Investment?

Investors seek profits on the exceptional housing demand. Fortunately, public and private programmes synergistically encourage home building.

“Everyone needs a home over their head at the end of the day.”

This is what a UK residential property fund manager said in January 2015 to Professional Pensions, a website dedicated to institutional investors who are tasked with achieving the highest returns for their clients. It was his way of saying that the UK property funds market is worthy of his company’s investments.

The fund manager (from M&G UK Residential Property funds) described being involved in the property market with built-to-let properties as well as participating as an investor in the development of new-build homes. The 25-34 age group is a focus of this funder, which means they target properties that are near public transport.

That particular age cohort is indeed important, not because of where they stand in wages but more because they represent pent-up demand. With tight lending in the UK - particularly after the 2008 financial crisis - homebuilders were reluctant to construct new homes at the entry level for first time buyers. In the past decade, this has slowed housing formation altogether or put people into the rental class who would likely be owners under other circumstances (working people who rent now comprise about 19 per cent of the market, up from 11 per cent a decade ago).

Homebuilders and developers are fully aware of this demand, but were waiting on the sidelines because of the difficult financing matter. Today, there are several factors addressing this blockage to building - which have spawned creativity in the private sector as well as from the government:

Help to Buy programme - First time buyers and home movers are provided equity loans on properties with purchase prices up to £600,000. Buyers need to contribute at least 5 per cent of the property price for a deposit while the Government provides a loan up to 20 per cent of the price. The buyer then needs to qualify for a 75 per cent mortgage loan. No loan fees are charged for the 20 per cent Government loan for the first five years of home ownership.

Starter Homes programme - Available at a 20 per cent discount to under-40 buyers, this housing bill is targeted at increasing the UK housing stock by 200,000 residences. All homes will be built on brownfield (previous use) land. It is favourable to self-builders and smaller home construction companies with reduced bureaucracy and a streamlined neighbourhood planning process.

Property fund management of strategic land - From an investor’s perspective, this is a way to help increase the country’s housing stock while achieving asset growth. The problem for homebuilders is they prefer not to go through the planning process and tie up capital in buying UK land for development; their skills are in designing homes, building and then selling them. With increasing frequency, they are able to buy lots on streets that have utilities installed and planning approvals already cleared, thanks to the work of developer-investors. The investors, typically working in joint venture partnerships, identify where homes are needed most and find land that can increase in value if allowed a use designation change by the local council. Once that is accomplished, they sell lots to builders.

Crowdfunding - Start-up investment companies are launching a global stock exchange for residential properties in the UK and possibly abroad. Launched in early 2015, Property Partner has properties in London and the South East where more than 1,000 investors have invested as little as £50 on up to £50,000 in homes, hoping to receive rental income and possibly capital growth. The shares are highly liquid and can be traded via a one-off transaction fee of 2 per cent. An additional 12.5 per cent fee is charged for advertising, letting and managing the property.

It took an improving economy to convince investors that the homebuyers and home renters were ready to jump out of their parents’ flats and into their own homes. Government programmes have had a measurable impact, but entrepreneurial thinking on the part of strategic land partnerships and others has made the private sector a good partner. With a shortage of one million homes, it will take a decade or longer to bring supply up to demand.

Investors should always be versed in the risks of their positions. Consulting with an independent financial advisor can help identify tolerable risk, particularly in relation to other wealth development goals.

What UK Land Investors Should Know About Strategic Land Investments

Strategic land stands alone among land investments. It answers the pressing need for home building by increasing land designated for that purpose.

There are a number of ways in which investors can select land as a means of growing their assets. For some, farmland is attractive simply for its sizeable value increases in the past decade; most owner-investors are interested in a long-term position that requires little work other than to collect rent from the actual farmer. Others choose real estate investment trusts (REITs), a market-traded security that tends to rise and fall with the market’s unrelated stocks and bonds. The buy-to-let landlord is an altogether different investor, willing to take on property management responsibilities in a buy-and-hold strategy.

Strategic land investing is quite apart from these types of investments, even though all share certain characteristics. Land ownership in various forms is about acquiring a finite resource, made increasingly valuable with population growth and the resultant increased demand for housing, food production and commercial enterprises. The following are distinguishing characteristics of this form of land investing:

What is a strategic land investment?

What strategic land does differently is it is about the conversion of land to a new purpose. What may be farmland now can become housing if granted approval by local planning authorities. Once that approval is achieved, the strategic land developers then build components of infrastructure such as roads and utilities according to their design.

Is this asset category right for now?

England and the whole of the UK are in a housing shortage that is aptly described as a crisis. A number of reasons might be cited for this (failure to build social housing, unanticipated high rate of population increase, stringent lending that limits a young buyers’ market, etc.). But as the Government addresses these issues, and as the UK economy has improved, the numbers of people able to purchase a home have increased. Homebuilders want to serve this market, and gradually the pace of building is picking up. But with urban density it’s increasingly important for new land to be available - what property fund managers work to make happen.

There is a need for one million new homes in the UK and they have to be built somewhere.

What is the smartest way to go about strategic land investing?

Most individual investors lack the expertise and capital to go about this on their own. A better method is to identify some alternative investment funds in which a management team is dedicated to the task. These land professionals understand how to pick properties that can be purchased, converted to residential or commercial use and be built-upon with expediency.

Choosing the fund that is best for the investor would be the first step. Some funds involve joint ventures and co-investments with large institutions and investors, all of which should be taken into consideration. What is key is the degree to which the strategic land investment partners can claim expertise in the essential tasks of land site assembly: land acquisition, finance, planning, infrastructure delivery and project management.

For most investors it makes sense to engage a third party, an independent financial advisor, who provides guidance in choosing a fund. An IFA will also identify how much weight to give strategic land investing in the context of an overall wealth portfolio.

What are Joint Venture Partnerships?

The collaboration of talent and capital is, arguably, what makes the world go around. JVPs in strategic land development are a good example of how that works.

Almost all successful business ventures have at their core a talent for collaboration: a sharing of ideas, goals, risks and rewards between parties that enable individuals to accomplish more together than they would if they went about the enterprise alone. This basic concept is fundamental to what forms joint venture partnerships (JVPs).

A very clear application of a JVP and its benefits would be in something such as joint venture land opportunities. This would be in a scenario such as strategic land, where the JVP would convert raw UK land through all the required steps to establish build-ready plots for homes and commercial enterprises. Capital and a broad variety of skills and experience are needed throughout the process. An individual rarely would possess all of these things - sufficient financing and expertise - and therefore many would-be investors would be excluded from participating in the significant asset growth that often comes from land site assemblies. It is JVPs that make this possible.

Joint ventures come in different models, including the following:

Company limited by shares (CLS) - A very common form of a JVP, a CLS company divides share capital into shares of fixed amounts and can subsequently issue them to shareholders. Some companies encourage share ownership by staff, which brings a sense of involvement in the ultimate success of the venture.

Limited partnership (LP) - Partners share directly and proportionally in profits and losses.

Limited liability partnership (LLP) - New since 2000, this is a hybrid that combines the safeguards of a limited liability corporation and the flexibility of a partnership.

Private finance initiative (PFI) - This is most often a way of funding public infrastructure, such as schools and hospitals, with private capital. PFIs are somewhat controversial due to the sense that it underplays public deficit and debt when it is often a more expensive form of borrowing for public entities.

Company limited by guarantee (CLG) and industrial and provident societies (IPSs) - Typically used for non-profit distributing and commonly a source of financing for housing associations.

Joint venture partnerships engaged in raw land and site assembly enable investors to basically buy into local knowledge. This is because the strategic land developers do much of their work “on the ground,” studying local economic conditions, assessing locations, negotiating purchases, presenting to local planning authorities, designing a site and building the infrastructure of roads and utilities. The developers also have relationships with homebuilders, who ultimately buy the house lots and build homes to sell to homebuyers.

Investors should always consider the broad sweep of considerations relative to any investment. The pressing need for housing in the UK is certainly a driver that makes property and raw land more valuable than ever before. But for an objective perspective, investors are encouraged to work with an independent financial advisor who can assemble all variables into a pragmatic, investment-decision making process.

UK Land as a Capital Growth Investment

The greatest wealth over the centuries has been built with land. In a modern age, there are many different ways in which land can yield strong capital growth.

Among the many assets that create capital growth - investment trusts, convertible securities, traded options, fixed interest securities, etc. - it seems that equities get all the attention. And yet UK land, a tangible alternative investment, consistently and robustly achieves capital appreciation. Under certain configurations, in particular raw land that is converted to housing, land can grow significantly in a relatively short period of time (less than five years).

The primary reasons for this are the housing shortage in the midst of population growth and a continually expanding economy. The proper context for all this is the 2008 financial recession and recovery, of course. But continued capital value growth has many fathers. The outcome of the May election has removed worries over Labour’s proposed mansion tax, boosting sales of £1 million-plus residences. Government schemes to loosen up lending to first-time buyers, in particular, have also brought more buyers into realistically being able to afford to buy homes. Even the price of land dedicated to agricultural use has risen for the past several years.

In other words, land is finite while demand for it in all uses continues to increase.

Which is where land-based capital growth funds come into play. Investor groups, assembled by land specialists, focus their money and expertise on raw land for site assembly and to ultimately set up the property for home building. Because it involves the crucial step of achieving council planning approvals for land use changes, this is a way to rapidly and significantly increase capital growth in a land investment.

It bears noting that those investor groups, often called strategic land partnerships, do not typically build the homes even though these investments are driven by the high demand for housing. Their tasks are to identify where housing is in high demand, to buy land in those areas from existing owners, to present and negotiate with local planning authorities (LPAs) on use designation changes, and very often to design the site and build the infrastructure (roads and utilities) that pave the way, literally, for homebuilders to buy and then go to work on construction. Structured correctly, the original investors and later the homebuilding companies complete their development work with a profit.

Other investors might prefer these means to achieve asset value increases in their land:

• Buy stock in homebuilders - Following the May 2015 elections, homebuilder stocks jumped as high as 14.4% (Berkeley Group Holdings Plc) in one day after the Conservatives’ victory. But of perhaps more long-term significance is how new housing starts rose by 31% as of late May. These companies know that buyers can get mortgages.

• Buy farmland - The price of agricultural land across the UK has risen 250% since 2005. However, weak crop prices and other factors suggest more land will be available for sale - which will contribute to stagnant price rises, if any.

• Buy-to-let in hot neighbourhoods - A column in ThisIsMoney.co.uk in 2014 outlined tips for would-be landlords on how to buy buildings or land in up-and-coming districts, which might be distinguished by the presence of niche food chains (independent coffee shops, restaurants and delicatessens), along tube lines a stop or two down from expensive postcodes, where 20- and 30-somethings live and where new grocery stores, schools and motorway or train access is within five miles. Given that a larger share of the population now rents, property made for them is in increasing demand.

Note that no recommended schemes for investors include land banks. The Financial Conduct Authority has determined most land banking schemes to be scams, which have bilked UK investors of £200 million in recent years. These differ from true capital growth land opportunities in that for the latter, the land is certifiably amenable to home building. Land banking scams typically involve land that is far less likely to be developed on any kind of scale.

Investment decisions in land or any other real asset, bonds or equities require a comprehensive analysis of market conditions as well as the wealth building strategies of the investor. It makes sense to engage an independent financial advisor to ascertain what to buy, when and for how long.

The Various Roles in UK Joint Venture Land Investments

The advantages of investing through a joint venture partnership include reducing risk and acquiring the knowledge and skills of other partners.

A huge portion of wealth in the UK and across the globe, today and historically, comes from real estate. What’s less understood, however, is that modern investing in land is often done through joint ventures; in the past it was more of a single-family pursuit, largely those with noble titles. This means that an acquisition and development today are done with teams of people with different assets and skills that, ideally, complement each other.

The simplest means of dividing up the roles is there are funders (investors) and there are property fund managers. Most (but not all) investors have minimal experience in strategic land investing, particularly where it comes to site assembly. This is the process by which raw land is transformed by way of a use designation change, granted by local planning authorities, and where the site is designed and where supporting infrastructure is built. These require specific skills and experience.

The investor obviously provides the financial capital to enable the purchase and transformation of the land. But rather than being completely passive in the joint venture, an investor is advised to engage in the following:

Objectives - Know what the development is about and what factors suggest it will succeed. Real asset portfolio investing typically entails accounting for physical features, such as the location of the site relative to workplaces, transport, schools and such. With a raw land conversion to housing, the local economy and job growth in particular play an essential role.

Timing - Ask how long it will take from start to finish, the end point being when land is sold to homebuilders who complete the task (this process is commonly split between site assembly and construction to amortize risk and to allow experts to complete the project phase they know best).

Relationships - Are the fund managers familiar with local entities such as employers, planning authorities and other political leaders? What about other funders? Do the managers have investors who roll from project to project, clearly pleased with asset growth?

Reporting - Periodic updates on progress are to be expected. There are multiple milestones to be met and investors should be informed if they have or have not been achieved and why.

Profit sharing scenarios - What is the potential return on investment? How might that goal not be met?

Regulatory and tax issues - Some projects are subject to taxation while others may benefit from Government programmes that actually reduce costs to the venture partners. This can usually be determined in advance.

Exit routes - How liquid is the investment? Is the JVP structured such that it is illiquid up to a certain point? When would it be optimal to make a withdrawal, as allowed?

One final point: an investor should always engage a disinterested party to provide an objective viewpoint. This is where an independent financial advisor is highly recommended. They can examine a single investment as well as an entire family portfolio, considering all relative factors.

Is Strategic UK Land a Real Asset Worth Investing In?

Real assets can provide real rewards, but some investments are subject to odd volatility. Strategic land has many solid economic factors in its favour.

It’s understandable that investors might be skittish about investing in real assets. Price volatility is almost the norm for such investments as precious metals, antiques, art and classic cars. Some antique cars rose in value by 257 per cent between 2005 and 2013 (source: Coutts private bank), however that assumes you pick the right model and year, and that your garage and insurance costs are not exorbitant. In February 2015, ten international banks were named by the U.S. Department of Justice and the Commodity Futures Trading Commission for possible rigging of precious metals markets, according to The Wall Street Journal. Real assets sometimes come with real problems.

But we are in an era where UK land, the historically most dependable real asset, is in a class by itself. With little reservation, most investment advisors see a great deal of value growth in strategic land - enough so that any investment portfolio of a good size should allow room for strategic land investments.

There are several reasons for this. Here are the key factors favouring good returns on the strategic conversion of raw land to housing:

1. Shortage of housing - New housing starts in England in 2014 numbered 137,780, up from 112,610 in 2013 - a 22 per cent increase. But the Department for Communities and Local Government estimates the annual addition of new homes should be 221,000 units, and that the country is already one million residences shy of where we should have.

2. Growing population - There are several reasons for this shortage of homes. But chief among them is the growing UK population, found to have increased a stunning 7 per cent from 2001 to 2011. This is due to immigration, higher birthrates and extended lifespans, where our pensioners are able to stay in their family homes longer than before.

3. Shifting sentiments toward expanding housing - A YouGov poll taken around the time of the 2015 General Election found that 67 per cent of adults in England believe that the number of new homes being built should increase. But exactly where those homes should be located is a point of disagreement and, perhaps, some confusion. That same percentage of the 4,500 people polled feel it’s important to protect Green Belt land from development, and even more (83 per cent) think that building on brownfield land should be supported. But when asked about building on greenfield land – distinguished not by location but by having never been built upon - more than half do not oppose building there. There is widespread misperception that Green Belt is universally areas of outstanding beauty, when in fact much of it is not. Further, if housing is located beyond the official Green Belts it creates an exurbia phenomenon that requires greater commuting distances, which is precisely what Green Belts are supposed to prevent. In some cities, swaps of brownfield land are being made with Green Belt acreage, enabling parks within the urban core and expanded housing where it is in close range of workplaces.

4. Alleviate strain of unaffordable housing - The housing charity Shelter maintains that increasing the housing stock at all price levels alleviates price pressure at the lowest levels, reducing rough sleeping and making rents more affordable for young families.

5. Government-sponsored lending assists - With the successful Help-to-Buy programme, first-time home buyers are able to get the deposits and loans necessary to get on the property ladder. At least 70,000 homes were purchased in 2014 under Help-to-Buy.

As should be evident, societal as well as economic factors favour investing in home building. Managers of UK property funds, who identify land that is ripe for use designation changes, lead these efforts on behalf of investors. Once the land is approved for a use change by local planning authorities, they construct infrastructure that provides lots for individual home construction, typically by homebuilder firms.

Should you invest in a real asset of any kind, including strategic land? It’s best to consult with an independent financial advisor who can assess where in your portfolio such an investment might fit.