UK Land investment

The Benefits of Land Investment

Land investment has appealed to smart people for centuries. Adam Smith, the 19th century economist commented, "Land is the basis of all wealth". Mark Twain remarked, ‘Buy Land, they’re not making it any more’.

Although English land was not specified by these commentators, UK land does represent some of the best investment land available. Historically, the UK has been a densely populated country. Each year population density increases. It is one of the largest economies in Europe, so a buoyant property market prevails. These are precisely the conditions an investor should look for as a backdrop for their land investment.

The key features which make land investment one of the pre-eminent UK investments are as follows:

UK Land Investment – a real asset
You can see, use, walk on, and most importantly, build on investment land. You will hold the legal title deeds to your investment land as surety. There are no complicated concepts in land investment, just a burgeoning demand for UK land on which to develop and a finite supply thereof. See next point.

Investing in Land – strong UK investment returns
A finite supply of available UK land partially explains its rising historical trend, and implies it is unlikely to depreciate.

Recall what Mark Twain said: if something is unable to be manufactured (e.g. UK land) and the underlying demand for it is constant, then ceteris paribus, its value will tend to rise. Demand for English land is, at the very least, constant (the property market increases reflect soaring demand for houses from an ever growing population). Therefore, UK land investment is likely to offer strong returns.

It is not unreasonable to achieve the equivalent of 30-35% annually in a 5 year UK land investment project. This equates to compounded returns of around 400-450%. Such returns are hard to realise with other UK investments: e.g. if the FTSE tracker returns 10% p.a, it is considered in recent times to have had a good year. The money markets (short term deposit accounts, Commercial Paper etc) often return 5% or less in the current interest rate environment. Few UK investments have the ability to provide returns such as those from UK land investment.

Investment Land – UK investment ’in the real world’
The value of property assets is clear and transparent. This is not always the case with all UK investments, such as derivatives. Even with traditional equity investments, the average investor rarely knows whether the equity is genuinely under-valued (buy signal) or over-priced (sell signal).

Stock market scandals resulting from accounting malpractice highlight the limitations of the average investor’s understanding of their exposures. With land investment, investors are usually already active players (as homeowners) so they already have some experience of the market.

English Land - lower entry point compared with buy to let
The Land Registry’s quarterly report, published 8th November 2006, showed that the price tag on a typical property is £211,453. However, a plot of investment land, whose investment performance is correlated with the property market although it offers substantially larger relative returns, can be bought for just £10,000.

The Iron Law of Investment, which few people would contest, is that of diversification. The old adage – ’Don’t put all of your eggs in one basket’ – captures the iron law of diversification. Because land investment has a significantly lower entry level than property, investors can observe the iron law.

In other words, whereas property as a UK investment typically requires around £200k, a diversified land investment portfolio could be created for less than £50k. Investing in land, with its lower entry point, therefore gives the investor more ‘chances’ to pick a lucrative UK investment.

However, it is by no means essential to build a huge portfolio of land investments: the key considerations for anyone considering UK land investments are those of:

• Choosing good quality UK land;
• Choosing a good land investment provider.

The 12 guidelines for land investment will help you make these choices.

Land Investments – capitalising on UK’s housing crisis
Investing in land is the most lucrative means of capitalising on one of the key contemporary challenges: the UK’s housing crisis. Supply pressure is being felt in both affluent and less affluent areas up and down the country. The number of UK council homes has fallen sharply over the past 25 years: in 1981, there were 6,305,000 properties rented from local authorities; by 2005 the figure had dropped to 2,803,000.

Over the same period, homes rented from social landlords increased from 473,000 to 2,154,000. Owner occupation rose by 50% - from 12,442,000 to 18,405,000. Government figures show that right-to-buy legislation led to a steady erosion of the stock of social housing from the early 1980s onwards.

It is the combined effect of multiple factors, of which the above is just one, that make investing in land a sensible choice when allocating assets in a UK investment portfolio.

Land Investment - passive and hassle-free
All UK investments demand careful consideration when entering and exiting the investment. But some UK investments also demand active management during the life of the investment (e.g. equity and commodities trading). Land investment, on the other hand, is entirely passive which makes it popular with many investors. This is because investment land purchased by investors will usually be managed on their behalf by the land investment provider. Investors are of course kept fully appraised of progress of their investment land via newsletters and other media, but no actual demands of the investor are made Investors should only choose those land investment providers who do not request capital for the planning process above and beyond the initial investment.

On a wider point, investors who are considering investing in land should exercise extreme care when ‘entering’ their investment, since it is the nature of that entry (ie who they choose to invest with), which dictates the exit of the land investment.

The land investment provider with whom you invest will define (or, at least, should define) what is the exit strategy. This should be enshrined in a legal document, and usually entails the land investment provider reacquiring the land from investors at its new value with planning permission, in order to sell it on to a house builder.

As stated above, UK land investment does not require active management during the life of the investment, and the exit is determined by the entry. Therefore, the most important aspect of a land investment is that of the entry point. If you choose badly, you may get an undefined and distant exit strategy. If you choose well, using the 12 Land Investment guidelines, you will have the opportunity to enjoy a clear, legally-recognised and highly profitable exit strategy.

Land Investment – low volatility of returns
Volatility of UK investment returns is an important consideration for many investors. It refers to the extent to which the value of the investment rises and falls in its lifetime. Most investors prefer as little volatility as possible – it makes it hard to know when to exit an investment. Indeed, if the investor’s portfolio is fluctuating wildly in value (which is the case with volatile assets), they know not their wealth at any given time.

Land investment is not volatile. In fact the value of a land investment tends to follow a linear path. In other words, investing in land is relatively predictable: in a 4-5 year project, the value of the land investment in years 0-3 will tend to rise relatively modestly (i.e. only by the effect of ’organic growth’, what we commonly term ’inflation’). It is years 4-5 that the land investment typically rises sharply in value. And once it has experienced this sharp rise, it tends not to rise or fall significantly after that point. At any rate, the land investment is divested of at this point, and profits are taken.

For the investor then, this means that with a degree of certainty they can more easily estimate the future value of their portfolio with land investments than with other asset classes. The corollary of this is that the investor can plan for future funding requirements (e.g. school fees, university, holiday home for retirement etc) if they have UK land investments which may not be so easy if the investor has more volatile exposures.

Land Investment – create real wealth by compounding returns
As we have seen, land investment returns of 400-500% in a 4/5 year project cycle are entirely possible if an investor chooses good UK land and an experienced land investment provider. Therefore, an initial investment in land of £10,000 could grow to £50,000.

If these returns are then reinvested into another UK land investment project with comparable returns (with the same or different investment land provider), then the initial land investment could grow from £10,000 to £250,000. This is so because after five years, a £10,000 land investment returns £50,000; £50,000 investment land returns reinvested in UK land at 500% after five years will be in the region of £250,000.

This is the effect of compounding in land investment: a concept that has been adopted by some of the most successful individuals involved in investing in English land. This approach requires a slightly longer-term view, but the rewards are significant. Compounding in land investment can offer more than just good investment returns: it can create very substantial wealth.