Over the past few years both the UK residential and commercial property investment markets have fluctuated significantly, at times struggling to maintain capital values and investment returns. You might therefore be led to believe that now is also a poor time to acquire land investment opportunities and building plots for development… but not a bit of it. UK Residential Land Market Consider the following facts… let’s take the UK residential land market first. In the UK the residential land market is primarily affected by demand from house-builders and property developers which in turn, is linked very closely to the strength of the housing market itself. Generally, there are relatively few development land opportunities available on the open market at any one time, and therefore a single house-building company desperate to acquire good building land can push-up the price for such sites much higher than normal… a simple supply versus demand situation.
Optimising Investment Land Values Getting the timing right to optimise land investment values is vital, but the groundwork needs to be completed well beforehand and all consents ready and in-place as the market begins to reach its peak. All this means starting the land value enhancement process when the demand for investment land is at a low point, and this is usually when the best land acquisition deals can be done.
Land Investment Opportunities While it is true to say fewer homes are currently being constructed the future demand is significant with a large under supply of new homes already causing problems. Because of growing demand for land that is capable of being built on house-builders and property developers will at some point be forced to purchase even more land with an allocation or preferably with a planning consent already in-place. You see, the major UK house-builders have traditionally built-up their stocks of building land (often called a strategic landbank) which helps to cushion them against the time it takes to buy building plots and development land and then obtain the necessary planning permissions for new homes. Over the last few years UK house-builders have typically reduced their land acquisition activities and so have not bought as many new development sites, tending instead to use up their strategic land stocks. It is not rocket science to deduce from this scenario that there will eventually come a time when their land reserves reach a critically low point. At this point they will then be forced to buy more development land on which to build houses. And if you own the types of land that they want, then you are in pole position when it comes to securing the best values for your investment land.
Greenfield Land Then there is the greenfield land to consider. Greenfield land needs to be correctly promoted and allocated for development purposes before it can be granted planning consent… that, again, takes time. The amount of development land currently being promoted by the large UK house-builders and promotion companies is reducing, therefore leaving a gap in the future market. Enhancing Land Investment Values In any case, never loose sight of the fact that land is a tangible fixed asset… its value may vary but it rarely reaches zero, so it always has a base value. The value of land can also be significantly enhanced by activities such as planning promotion, obtaining statutory consents (planning permissions) or acquiring complementary land interests. As we have already discussed, house-builders and property developers will usually look to acquire development land with the benefit of planning consents although occasionally they will manage the planning processes themselves. As with any investment, to get the best value from your land investment you should always be aware of the underlying land and property value cycles and look to sell your land when demand is strong.
Different Ways to Invest in Land • If all this leads you to believe that investing in land represents a good investment opportunity in the current economic climate you will no doubt want to turn your attention to the best ways of doing so. • There are a number of direct and indirect ways for investors to acquire investment land assets that should be carefully considered and they are: • DIRECT LAND PURCHASE • Direct land investment purchase where land is acquired in the traditional sense of ownership. • COMPANY OR CONSORTIUM • Indirect land acquisition, where the investor purchases a share within a formally structured company or consortium owning one or more land interests. • SPECIAL PURPOSE VEHICLE • Indirect land acquisition, where the investor purchases a share within a Special Purpose Vehicle (SPV) investing in one or more land interests. • Additionally, there are other routes to land ownership and each has its advantages and disadvantages for an investor and you will need to consider them very carefully before proceeding to buy.
Investment Land Considerations • Your own judgement is also called for when it comes to the detail of any investment land deal. • Your access to sources of capital, approach to risk and investment strategy will all impact your decision making processes.Itis often very useful to ask yourself the following questions: • HOW MUCH? • How much are you prepared to invest in land? Or, better still, how much can you honestly afford? • INVESTMENT RISK? • How much investment risk are you prepared to take, bearing in mind that the greater the risk, the greater in all probability will be the reward? • HOW LONG? • What sort of time-scale are you contemplating, working on the assumption that when considering land investments, short-term is 1-4 years; medium term around 5-8 years and a long term is anything in excess of that?
Making the Most of Land Value Cycles While the UK investment land market is fairly fragmented and can be quite complicated to understand, the essential point on which to focus is the fact that once land has been allocated for development the owner of that land can decide the time-table for turning it into a consent to optimise their position in the property value cycle. As it takes time for land to be allocated and planning consent to be granted the best time to begin the value optimisation process is near, or at the bottom of the property value cycle. In other words, when property values are low or stagnating. So, particularly if it is part of a balanced property investment portfolio, it is certainly worthwhile giving some thought to investing in development land as an investment opportunity.
Expert Land Investment Solutions As leading independent land and property investment specialists Investment Property Partners offer expert advice and support to clients across our specialist areas of expertise helping them to achieve their investment objectives. If you are a property developer or investor looking at land investments or development opportunities please contact our property experts today to discuss how Investment Property Partners can help you.