Land Development

All investors – in any asset class - need an exit strategy from their investment. Typically, investors are rewarded with more capital growth the longer they tie-up their money. And nowhere is this truer than in land.

As we know, land offers very substantial medium term returns. Broadly speaking, it is about as liquid as property. (‘Liquidity’ describes the ease of selling or ‘liquidating’ an investment).

In economist’s terms, land is therefore a ‘fairly liquid’ investment. This can be contrasted with

But it is not the nature of land’s liquidity; it is the exit strategy at the conclusion of the cycle which is of primary importance.

There are 3 key aspects to consider in respect of the exit strategy:

Firstly, the exit strategy must be enshrined in a legal contract. The contract should be viewable by the potential investor and any legal counsel prior to commitment.

Secondly, the point of exit (ie the valuation of the land at which the ‘buy-back’ is exercised) should be transparent. This can only be achieved if the land is valued by an independent chartered surveyor appointed by RICS.

Finally, the contract must ensure that there is no risk to the investor of what is termed ‘ransom stripping’. A ransom strip is a portion of a site that can stop a development from moving forward if it is not included in the final sale of the land to the developer.  This can include a strip of land as small as two meters in width along the access way to the site or even a small portion of the site which is integral to the design in it’s entirety.  Option agreements must be put in place between all land owners and the developer which will ensure that a site can be sold in it’s entirety and developed without being hindered by previous owners.

If one developer does not control all portions of a site then that development can be hindered indefinitely, or at the very least the profit margin of the development can be adversely affected and thereby the land value.