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What are the implications of the current uncertainty in the property market for investing in land?
Although the property market appears to be slowing, buying land as a land investment still makes sense, writes Alex Way.
For those considering investing in land, this is the first time for a number of years that conditions have not been entirely benign. However, the challenges currently faced by firms involved with land development are a function of short term property market conditions, rather than long term structural factors. Lending in the property market, once the major banks have repaired their balance sheets, is likely to recover. Moreover, although in some areas land development firms have capacity in their UK land banks, in the majority of areas there remains an acute shortage of homes. Looking beyond these short term factors, long-term structural considerations - net immigration, social trends and the existing national shortfall of homes - suggest investing in land remains perhaps the best investment available.
At any rate, it is far from certain that the property market is on the edge of a precipice: the market often slows in the winter months and some see the current situation more akin to the modest property market cooling in 2005 rather than resembling anything like the sustained property market crashes of times past. Indeed, many commentators have remarked that in the interests of the long-term health of the property market, slower growth in prices - or even modest price falls - are required.
UK land investment projects, e.g. Site Assembly investment land projects, typically have a medium term time horizon. This means that anyone buying land now as a UK land investment gives themselves plenty of time to ride-out property market fluctuations. At any rate, whilst the returns from investing in land are correlated with the property market, it is not the case that UK land investment gains would be cancelled-out by a drop in property market prices. This is because there is significant value created in the acquiring of land planning permission. In other words, the rise in the value of the investment land owing to it carrying residential development land status will usually provide those investing in land with substantial UK land investment returns, even if there is a fall in property market prices.
However given these more challenging property market conditions, in order to profit from investing in land, it is essential to ‘do your homework’ on the various UK land investment projects which are available. The best investment land is not necessarily that which quotes the highest returns: as mentioned above most development land rises very substantially in value when it is successfully taken through the UK land planning framework and awarded residential land planning permission.
Therefore, the most pertinent issue when buying land is choosing an investment land project which has the strongest chances of being awarded UK land planning permission, rather than one which quotes the highest potential investment land gains. The difference between your achieving 600% or 520% returns from a land investment is of course important, but not as important as whether the investment land actually achieves residential land use planning permission. It is thus more sensible to choose investment land with genuine medium term development prospects which has lower quoted returns, than it is to buy land for sale with vast ‘potential’ gains but which has only a modest chance of being awarded residential land planning permission. To that end, when investing in land it is advisable to buy land from a land investment provider which has a successful track record in achieving UK land planning permission on development land, as well as selecting an investment land site which is in an area of significant housing need. Finally, when buying land as a land investment you should ensure that the site has road access, a public transport network serving the locality, local services and access to utilities (water, gas, electricity).