Strategic Land & Property Advice

Strategic Land as an investment

Why invest in 'Strategic' land and property ?
As part of a balanced investment portfolio it can be worthwhile to consider investing in strategic land.

Investment methods

Investing can take place through one of several formats:

(A) Purchasing direct a land interest.
(B) Buying a share within a Limited Liability Partnership (LLP) or consortium
owning a land interest.
(C) Owning a share within a Special Purpose Vehicle (SPV) Limited liability
Company investing in one or more land interests.

Each of the above forms of investment has it's pro's and cons with the possibility of 'pooling' risk and reward by buying a share in an SPV owning a series of interests.

By buying a share in a strategic land scheme an investor now able to access a sophisticated form of investment from which they are normally excluded.

Investment profile

Irrespective of the eventual form of investment, the starting point should be a personal judgement on the following:

(i) How much risk do you want to take with your capital?,
(whilst always bearing in mind that the riskier your investment the greater should be the reward).

(ii) How much do you wish, and can afford, to invest?

(iii)The timescale for investment? This will be in a period of years where short term is 2-5 years; medium term is 6-10 years and long term is anything beyond.


The rationale for investing in land
Despite this, there are many sound and rational reasons for considering this as an attractive investment opportunity at the moment. These include the following 13 reasons.

Land is a tangible fixed asset.

The value of land and property may vary but it rarely reaches zero, so it always has a base value.

It is a finite resource.

The value of property can be realised.

It's value can be enhanced by planning promotion, obtaining consents or acquiring complimentary land interests.

Housebuilders will always require land with consent as their primary raw material to continue in business.

The amount of land being promoted within the planning system is reducing as the large housebuilders cut back on investment in forward land due to losses and the reduction in housebuilding.

There are a limited number of companies actively promoting land for development due to the credit crunch.

There is the possibility of making considerable capital gains.

The disposal of an interest can be timed to react to market conditions and the position in the property cycle.

Base rate is at an all time low so returns from savings are extremely poor.

Inflation is dropping but is still at 3% so real returns are still low and falling. The leading cash ISA is yielding 3.51% at the moment so with inflation at 2% the real return is just 1.5% net!

Cash is king at present. Having lent prodigiously to the sector for many years, the banks are now reluctant to lend futher on property. In view of this gap in access to debt, there are some great buying opportunities opening up in the land market.

As the property market is in such a poor state, why invest in strategic land now ?

Whilst the both the residential and commercial property market is experiencing a major downturn, now could be a really great time to invest in strategic land.

I would suggest now is an excellent time to take the plunge for the following reasons.

Greenfield land needs to be promoted and allocated for development before it can be granted planning consent. This takes time, generally a period of years The amount of land being promoted by the large housebuilders and promotion companies is reducing leaving a gap in the market in the future.

Land allocated for development or with consent is the primary resource for housebulders. Housebuilders need large amounts of land for their business every year. The UK's very largest housebuilders have been building up to 15-16,000 homes per annum and so need to acquire over 15,000 plots of land every year just to stand still!

Even now in these days of reduced housebuilding, Persimmon PLC completed 10,202 homes in 2008 and had a landbank of 69,279 plots either owned or under control. However the company has had a very cautious approach on land buying for more than 18 months and expects to reduce its land bank by using land under its control rather than new purchases. This strategy has a finite life as eventually any landbank will become exhausted. So if Persimmon continued to build at the same rate in the future as it did in 2008 it's land reserve would be gone in 6.79 years. If the company increased it's housebuilding rate or any of its consent's lapsed then this duration would be reduced.

Whilst the housebuilders are now building many fewer homes, eventually they will be forced of necessity back into the market to purchase land with an allocation or preferably with a consent.

The major housebuilders have built up stocks of land which they hold to cushion them against the time it takes to buy land and obtain detailed planning consent. At the moment the major housebuilders are not buying land and are using up their landbanks. I would suggest that this cannot continue for more than 2-3 years before the land reserves are critically low and it impacts on their business plan. What they are trying to avoid is ending up in the position of living from hand to mouth and being unable to build anything until they own land ready to build on. This causes operational problems, costs and inefficiencies and is a situation housebuilders always try to avoid.

The residential land market is affected by the demand from housebuilders which in turn reacts to the housing market. Whilst there are time lags between the 3 markets, the land market can be extremely sensitive (and volatile) because there are relatively few land interests on the open market at any one time and a single housebuilding company desperate to acquire land in an area at any one time can push the price much higher than normal very quickly. Getting the timing right to maximise value is essential but one needs to have got the groundwork right and have a consent ready. This means starting the process years earlier when the market is low and the best deals can be done, which is the current position.

Once land has been allocated for development an owner can decide the timetable for turning this into a consent to favour the position in the property cycle. As it takes time for land to be allocated and consented it seems logical to start this process at, or approaching the bottom of a property cycle, which is where I believe we are now.


The strategic land market
The strategic land market is fragmented and complicated with detailed information difficult to come by. In view of this detailed advice and experience is essential as the phrase 'development potential' can be applied to most properties.

I can bring forward investment opportunities from a variety of sources including new greenfield and brownfield properties, assignments from housebuilders and promotion companies and the purchase of portfolios. The assessment of each takes careful and thorough thought.