Strategic Land & Property Advice

Investment in 'Strategic' land, and land as part of your balanced investment or retirement portfolio

Land and strategic land as an investment
Land is a finite and tangible resource and has a capital value at all times which though this vary considerably. However it is rarely completely worthless as it has considerable flexibility of use though this is severely curtailed by Town & Country planning legislation. Due to the capital gains that can be made as a result of the grant of planning consent and the scope to derive some use, enjoyment or income from this asset, it makes sense to consider it as a part of any investment portfolio.


Liquidity issues
In comparison with various other forms of investment, property and property interests are noticeably illiquid. With quoted shares it is possible to sell quickly and be certain of the price at the point of sale and the likelihood of receiving the consideration.The stock market is well established and regulated and stock values are transparent with sales being capable of execution electronically in seconds.

There is a market for land and property but because it is a capital intensive asset it is very heavily reliant for the most part on the availability of finance. The availability of debt from lenders to purchase property is a major factor in the property market, both it terms of price and the number of prospective vendors and purchasers. When the market is buoyant and rising lenders seem happy to lend and finance is widely available which brings both more vendors and purchasers into the market, attracted by rising values. The reverse is true so that when debt is in short supply, there are fewer buyers and the only sellers are reluctant or forced vendors, who may have no choice.

When it comes to fractional or diminishing property interests, such as options, the market for these is reduced. They are rarely traded on the open market as most transactions are done off market in the interests of discretion. There are often many fewer buyers for interests such as these and most of them are from parties already operating in this specialised market. The liquidity is even more reduced than in the general property market and values are even harder to establish as they are fewer trades to provide any evidence and comparables.

The sale and purchase of property takes much longer to undertake than most other forms of investment, and this has been true for decades. To purchase and to sell requires a legal conveyancing process which is still complicated and slow, despite may efforts to speed it up. The process of transferring land often involves many diffent parties and the involvement of each offers the scope for delay. Even in simple tranactions there are often 6 parties, being the vendor, it's agent and solicitor.This is replicated on the purchasers side. Attempts have been made to try to speed up the process by making the conveyancing work more electronic but this has been counterbalanced by the ever increasing complexities of modern legal documents. Relatively simple option agreements often extend to 20-30 pages and complicated versions can run up to 60 pages.

When the market is falling protracted deals may stall because purchasers wish to renegotiate the price downwards to reflect the market. It is also possible that lenders may wish to renegotiate their arrangements which can stall or stop deals. In a rising market prospective purchasers may be faced with gazumping when the vendor receives a higher bid from a third party and has to decide whether to change horses and take the higher bid or ask the original buyer to match the figure and renegotiate.

Until a contract is exchanged, the position in England & Wales is that either party can withdraw from a deal. If a deal is protracted, say because the conveyancing takes a long time to be executed, then this allows both parties time to reflect on their postion and the deal. Further time to contemplate a transaction can often have an adverse impact on the succes of a deal, particularly in a falling market. On exchange the purchaser very often pays 10% of the overall purchase price as a deposit in straightforward deals. If the deal is conditional on say, obtaining planning consent, the deposit could be 5% or as low as 2.5%. If the condition is not satisfied it is down to negotiation how much of the deposit and interest is retained by the vendor.

Even when a contract is exchanged it is not unknown for the transaction to fail because the purchaser either does not or cannot proceed and complete the purchase and pay the remaining money over.

Whilst there are a range of methods to buy and sell land and property, none can match the speed of the stock market. Even public auctions where the fall of the gavel is the moment of exchange are still subject to the uncertainty or otherwise of the purchaser completing the purchase or reaching the reserve price or not receiving any bids.

All the above demonstrate why the property market and the interests within it are illiquid and difffer from many other forms of investment.


Value and valuation
Valuation is the art of preparing a reasoned assesment of the capital value or monetary worth of an asset at a particular point in time. Valuations are a 'snapshot' of value at a point in time and are generally held to be out of date within 3 months of their issue. They are often carried out by trained valuers but it is simply an opinion of value by an individual and in theory anyone can give this. How much weight is attached to this opinion varies depedent on the person giving the opinion his exerience and the purpose of the valuation.
Even between experienced trained valuers a difference of plus or minus 10% in capital values is regarded as within 'valuation tolerances'. Also the accuracy decreases and the volatility of values increases as the subject of the valuation is more unusual and complex and the general market varies.


Property cycles
A property cycle is a term generally used to explain a period in time when values of both land and property in general rise without anything actively being done to a property interest to generate that increase in value. If a property is improved by say the addition of an small building extension or a garage or some other physical work then the value should rise by the same amount or more. However if values rise without any physical activities to substantiate that rise, it is due to general property value inflation which is one of the stages of a property cycle.

In the last 20-25 years property cycles were around 6-8 years in duration from their low point to their high point in value terms.

The period 1980/81 was a low point in capital house values which seemed to peak around late 1988 when MIRAS rules were changed and house prices surged. By 1991 house values were falling and probably hit a low in 1994.

By 1996 values were starting to settle and very slowly rise. There appears to have been a consistent rise in house values from mid 1997 to a point probably in Spring 2007 which was the high water mark.

Since mid 2007 house values appear to have stopped rising then slowly and consistently fell.

It appears that there are a number of clear conclusions from studying property cycles which I would characterise as follows:

It is difficult to predict with any certainty how long a property cycle will last, they vary considerably.

You can rarely be certain at what point in the cycle you are at any given time.

The volatility of property cycles can create both equity and negative equity.

Despite the duration and highs and lows in values during property cycles, the trend of both property and land values has been steadily upwards for more than 100 years.

This tends to support the theory that purchasing a finite asset, i.e. land, will over time more or less guarrantee an increase in value due to the increasing demand for it to build houses and other forms of building.

Whilst house prices in general settled in Summer 2007 and started to fall from early 2008 it seems inevitable that this fall will not be continual and eventually the bottom of the cycle will be reached. As house prices fall within the next property cycle so will land values to a point at which vendors will not be prepared to sell unless complelled to do so. Because land is at the front end of the development process there is a time lag between house prices falling and the need for land being reduced and land prices falling. This is due to the relatively long lead in process of acquiring land and obtaining the detailed planning consent neccesary to start physical construction.

For example it could take a year for a parcel of land to be purchased and the relevant detailed consent obtained. Another 6 months to have the first home ready for sale and occupation and another 12 months before all the units are built and sold and the developer receiving his profit. In that period house prices could have risen for 30 months but depending on the stage of the property cycle could have risen for 6 months stabilised for 12 months and then fallen for a year.

However the land was required at the start of the process when land values were rising and tracking house prices and any loss made by the developer was immaterial to the landowner. The landowner takes only one risk, the risk that he is not selling at the top of the market. The developer takes all the other risks and has to juggle many variables in a complicated process where he generally only receives his financial reward at the end of the scheme.

By understanding the nature of property cycles and trying to predict the point in the cycle at the time of disposal the landowner or promoter can try to optimise his return in promoting land for development.


Risk & reward
The concept of risk and reward is central in considering strategic land and investing in it for profit. If a distant prospect of the grant of planning permission for a more valuable use is unimportant one can invest in property and simply enjoy it's current use and any income derived from it. Land and property has many uses and one of this can simply be amenity.

However if one is concerned as to increases in capital value and gains derived from improving the planning position of a property then one has to look at the issue of risk and reward from the perspective of the landowner and the promoter. The balance between the two reflects where the land deal is eventually done.

A landowner can promote land himself and obtain an allocation and a consent and procure for himself all the capital gain by them selling on to a developer. However this relies on him taking all the speculative risk and expense of getting an allocation and then converting it into a permission. The cost of promoting land through the Local Plan system can be enormous and clearly varies with size. The expense also increases proportionately because as schemes become larger they inevitably become more complicated and sophisticated involving more disciplines and consultants.

For example a scheme of 5 acres for residential developement will mainly consist of housing, access roads, site infrastructure, some landscaping and amenity areas and provisions to deliver an amount of affordable housing.

If the scheme was to be 500 acres it would probably be a mixed use scheme including housing but many other uses such as the following; commercial or industrial space, a primary school, a village centre with shops, a pub or other A3 use,public open space, a library or public building, a series of amenity and public open spaces, recycling facilities, a doctor's surgery, public and private infrastructure, roads, utilities,etc etc. In fact everything to support a population of possibly several thousand people.

The simple fact is that as the scheme increases in size, its complexity and the costs of both promoting it and getting planning consent rise exponentially. The planning promotion stage tends to be the cheaper part but entails the most speculative risk and takes the longer period of time. The conversion of an allocation into a planning consent is less risky but almost always costs more. It might cost £25-50,000 to promote a site for 200 homes but £100,000 plus to prepare and negotiate the consent.

Planning costs have risen steeply over the last 10 years and unless the planning system gets any simpler it is difficult to see how costs can fall. In my experience landowners tend to underestimate both the difficulty, complexity, costs and time involved in the planning process and understandably seek to minimise the returns land promoters can make. However if it is too risky and costly to promote land without the prospect of an attractive reward for the speculative time and effort involved, the developer is unlikely to proceed with the deal.

A lot of risk requires a considerable amount of reward; the difficulty the parties have is assessing both the risk and reward. In essence a lot of land promotion is an act of faith and a gamble. I would argue that it is informed gambling but it is often a calaculated risk. Equally in the stock exchange, at the betting shop and in promoting land, sometimes this risk pays off. The key is that this is not a blind game of chance because careful research and experience can inform any decision and improve the odds of success.

To put this in the context of stategic land, if a parcel of land is a green field, Green Belt site with very little prospect of becoming allocated and the Green Belt designation being reviewed, anyone promoting this would be looking for a massive inducement to promote it. If taking an option they would want to pay a very small option premium, have a long period of time to promote the land and buy the land at a large discount to it's open market value.

Discounts of 15,20,30 or even up to 40% are not unknown in these situations.

Conversely if the land is strongly tipped to be allocated as it is in a good location on the edge of a sustainable settlement with few competing sites and there is a pressing need for new land for housing the risks are very different. In this instance there might be a number of potential land promotion companies, housebuilders or developers looking to secure an interest. This might result in a shorter option term of a few years, and a discount of perhaps 10%. The landowner is now receiving 90% of open market value but the chances that the developer's exenditure in achieving a planning consent will be abortive have reduced considerably.