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216: Land


08-09-2008

PropertyInvesting.net team

Land Acquisition Strategies - investing, trading and speculating

There is no shortage of Land in the UK, only 15% of the UK is urban – however, there has been until very recently a very definite shortage of land for building and development - vast tracts of land are designated as "Greenbelt" with restricted development options.

Considerable "Brownfield" land exists, mainly in urban areas, but most of the easier sites that were made available after the decline of heavy and manufacturing industries have already been developed, particularly in the south of the England. Some of this land has severe problems such as pollution, heavy metals, asbestos liabilities, subsidence, proximity to unattractive industry, poor communications and amenities (e.g. sewage, drainage) or lack of demand for commercial, retail or residential property in the area.

Many people have become multi-millionaires by investing, trading and speculating on land. It’s a high risk, high reward business – time consuming, often expensive and with no reliable positive outcome. Land can be categorised into the following:

District councils have what is called a Local Plan which provides further details of zones for further residential development, zones for commercial development, zones set aside for recreation / leisure and zones for farming / agriculture. The Housing Strategy will describe the policy and direction the council would like development to take, and sometimes target levels of development in specific area.

Speculating on Land

If the planning zones change, then the person who owns the land can make a fortune as the zone moves from Greenfield agriculture to a designated site for development – either retail, commercial or residential. In SE England, agricultural land might sell for say £3,000 an acre, but land with planning permission for residential development in a good location might fetch £1,000,000 an acre. That said, the land-owner may lose significant amounts of value if, during clarification of land in a “grey area”, the category is confirmed as Greenfield with no to development options.

Some investors speculate that an area close to a town will be re-zoned – they may buy land at low cost from farmers and then sell as soon as the land is rezoned to a developer. This high risk, high reward strategy has made many people extremely wealthy from one or two deals in a lifetime. Others who have speculated but the area has not been rezoned have made a loss and ended up with a piece of agricultural land with little or no income and a lot of hassle. Dealing in land is not for the inexperienced or non-knowledgeable investor. The more local knowledge, wider network and more local insights and contacts you have the higher your chance for succeeding in increasing the value of a land investment.

Small Land Parcel Between Two Bigger Ones

If you can purchase a small parcel of land between two large pieces of land that you think will one day be joined into a major development, you can then find you have some control or strong influence over the overall development. The price of your parcel of land will sky-rocket - the only way a combined development can go ahead is if a developer purchase your parcel. Land speculators will spend days rying to locate such plots - buy the cheaply then try and get a combines development deal done. Even if their plot is the smallest, if it's in the middle, they can often get a huge mark-up and sell on to aa major developer. The land price can easily rise tenfold in such a case. You'd only need to spot of few of these and lead to a transaction to become very wealthy. Make sure you have a good land lawyer - not cheap but worth every penny if you want to make sure you're title is watertight and you don't get ripped off.   

For details of the normal planning process for development, click here.

Future Trends in Land Supply and Demand

The future for building land availability is uncertain – the Barker Report of March 2004 recommended an increase in the number of houses being built in the UK by some 115,000 per year, and streamlining of the planning process along with more regional control over planning decision. However, PropertyInvesting.net at the time did not expect to see anything concrete coming from the report for some time and to counterbalance this potential increase in land supply are the forces of Nimbyism (not-in-my-back-yard). Indeed, until 2007 supply was lagging demand until the property slowdown started mid 2007.

Recent surveys suggest about two thirds of people would not object or mind much about a development a few streets from theirs, but two thirds would object to a development in their street. Even with these statistics, it only takes 1% of highly vocal local and coordinated opposition to disrupt or put a stop to a development. We would not expect a change to this status quo in the near future, even if the planning process is streamlined. This will continue to put upward pressure on land prices for property development in the most sought after and environmentally sensitive areas e.g.

Plots will be extremely difficult to find and very expensive. It will increasingly be as economically efficient to demolish old homes and build bigger new homes. The prices for land in development areas, if these are rezoned from agricultural will always sky-rocket. Most of these areas are in the south of England – this is where the population is expanding the most, in part because of increasing service sector, retail and technology jobs in this area. This is forecast to continue – increasing numbers of retirees wanting to live in the south will also put pressure on land prices.

Development Areas

Areas of particular interest for development at the moment are:

1. Stanstead Corridor (greenfield)

St Neots - Cambridge – Ely – Stanstead – corridor

2. New Town Expansion (greenfield)

Ashford
Milton Keynes (westwards)

3. Thames Gateway (green and brownfield)

Swanscombe - Northfleet - Gravesend
Thamesmead – Dartford – Swanley
Tilbury and westwards

4. Regeneration (brownfield)

Stratford, Lower Lea Valley, Kings Cross

London White City
Liverpool (areas close to city centre and Duke Street)
Salford

5. Docklands (brownfield)

Woolwich, Beckton, Silvertown – emerging
Isle of Dogs - Canary Warf - Limehouse – mature expansion
Liverpool - emerging north docks
Portsmouth
Plymouth
Bristol

6. Docklands - on the horizon (undeveloped)

Barry
Hayle
Newport
Tilbury
Bootle
Birkenhead
Thames Haven
Hull
Grimsby

“Land Banks”

Building companies and developers tend to keep “Land Banks” for about 5-8 years to secure housing supply needs. The reason for such a large amount of land being held in reserve is for a mix of the following reasons:

Trends in Land Use

Some trends to consider for one's land acquisition strategy are the following:

Land Acquisition Strategies

These trends will lead to opportunities for land acquirers – you may consider the following opportunities for value creation from land acquisition:

Some specific examples of land value creating ideas:

For a further details on land acquisition strategies, ideas and concepts, plus guidance on some opportunities within the UK, please contact us. PropertyInvesting.net can also offer steer on how best to go about acquiring land and seeking planning consent and give recommendations on Land Brokers that may be able to help you.

Land Purchase

The purchase of land is normally done using the following processes:

As a general rule, the more competition there is for the land, the higher the price compared to normal market value – these higher prices increase the risk of losing money. The best land deals are normally those that are done outside the normal market place, using local contacts and professional networks. Vendors selling land will look for a person or company with high reputation, integrity and ability to pay as well as consider any ethical / values concerns such as what the land will be used for in future. You might find it easy to acquire a 2-acre piece of farmland if you commit to turning the land into a wildlife reserve or natural forest. If you are looking to develop land, and the site is not brownfield, it will be far less easy to acquire in the first instance, and to get planning permission in the second.

Criteria for Purchase

Enclosed is a check-list of criteria you should consider for land purchase for residential, commercial or retail development.

Check list for land acquisition (residential, commercial, retail development)

If the above criteria are positive, then the land should be suitable for residential, commercial or retail. If the criteria are generally negative, then the land is most suitable for either farm land, wildlife reserve, wilderness, forest, open ground or wasteland (e.g. for heavily polluted land, with gas leak risks).

Tax on Land Acquisition

Tax on capital gains from land acquisition in the UK was 40% until April 2008 – it has now dropped to 18% - this needs to be considered up-front in economics and evaluation of risks, risked value and net profits. If you live outside the UK, you will most likely not have to pay this tax if you meet certain criteria – though you might have to pay capital gains tax in your country of residence instead. In March 2004, after publication of the Barker Report, the Chancellor announced the Treasury was looking into possible tax on land banks held by developers over long periods, with the objective of freeing up suitable land for building – more will be known in the next year or so on this potential tax. For detailed advice on land tax, we suggest you contact a Tax Manager specialising in UK tax – with good knowledge of land/property a preference.

Land Maintenance

Some wealthy people who have made substantial sums have decided to move to the countryside and buy a farm. Many of these people lease the land back to local working farmers, and/or convert the land to paddock for horses and wilderness/wood. Leasing the land means the maintenance of hedges and the land is done by a professional farmer. It is important to realise that land maintenance is both expensive and time consuming, requiring constant attention. Some examples of issues that might arise, requiring cost, time and effort:

So even owning a single one acre field can have most of these issues cropping up from time to time – so if you are absent from the land for long periods, it’s best to lease the land to a professional farmer and make sure the lease stipulates that these duties are their responsibility, or alternatively employ a farm labourer to tend your land.

Outlook for building land and prices

In 2008, the property price drops have cause building levels to dramatically drop. In 2007, new properties being built reached around 200,000, but we expect building levels to halve to 100,000. Because 25,000 properties are demolished each year, this would imply a net increase of only 75,000 properties. Meanwhile, government reports suggest a net increase in home building of 200,000 to 250,000 a year is needed to keep pace with the rising population, reducing sizes of families and more single people as the population ages. Clearly, there seems to be a bust. We expect after 2010 a housing shortage to occur again and building land prices to rise to because of this. But in the meantime, as the economy slows and builders become distress and build less properties, expect building land prices to drop dramatically in the next 1-2 years. 

The biggest rises in building land prices are likely to be where zonation changes are slow to occur, big business is doing well, populations is increasing and jobs growth is occurring. London is probably the clearest example in the next 5-10 years with many towns and citied close by that have severe environmental restrictions also seeing building land prices rising – examples: Oxford, Winchester, Newbury, Canterbury, Tunbridge Wells, Truro. 

Technology

Finally, for all those budding land acquirers - GoogleEarth is an excellent tool to use - to locate and monitor land parcels. Try it and see! BuildStore.co.uk is another good site where land can be purchased in the UK. The Land Registry is where you will find who owns what plot of land - an invaluable source of information. If you cannot find out who owns the land from the Land Registry, you'll have to go around on the ground and ask - mak sure you don't get anyone else interested in your prospective plot of land though. It's amaising how a good idea can fly away - and someone else can make the profit after you gave them the idea!  

Summary

Land acquisition and value creation is high risk, high reward, often time consuming, sometimes complex and very uncertain. Local and professional networks are key. You need to have due regard for all stakeholders and high integrity, plus be shrewd, have good deal making skills, have creative insights and a good land lawyer at your side. Successful land deals can make a person very rich very quickly, but equally leave that person with a load of fallow land with a lower value requiring high maintenance costs if things don’t go according to plan. Most land leads never progress to deals – the owner normally pulls out or sells to someone else for a higher amount. Give someone a good idea about their land – but don’t expect them to go with you. Land owners are control freaks and it’s a tough business resting control of land from them.  If things go wrong you might have big liabilities – from pollution, subsidence and legacy issues. Or a useless piece of land that you cannot get planning permission to build on. If you can manage these risks, find suitable opportunities and have risk money to play with, land might provide an investor good value creating opportunities, particularly as part of an overall property investment portfolio.

We hope this special report has given you some good ideas - and stimulated your thinking on how to make serious money from land investments. 

 

 

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