Turning land into valuable property is neither magic nor easy. The people who manage development on behalf of investors must have several skills to achieve asset growth.
The nature of property funds – particularly how investors expect less volatility than in the financial exchanges, plus tax advantages and a good return on the investment – places certain requirements on the managers of those funds. After all, there are several other ways to invest in real estate. Property fund managers are key to making this work for the type of investor who finds developing what is typically raw land into housing or commercial property attractive.
The alternative of course is either a very short or very long-term investment. Specifically, those include real estate investment trusts (REITs), which can be traded minute by minute on the public exchanges, or owning a piece of land that appreciates over years and even decades. This latter category is how many a Briton builds personal assets with their homes or property that is purchased to-let. Each offers advantages and disadvantages.
In between – the proverbial Goldilocks’ “just right” venture for people with £10,000 or more to invest – is when a group of investors buys land that can be granted a planning authority change from a lesser-return use such as agriculture to a residential or commercial property. The value increase can be as high as a multiple of ten per hectare. Of course that involves several steps that the fund managers perform for the investor, which include:
Identification of a useful site – It’s both a science and an art to find unused land that is situated appropriately for establishing new homes. Fund managers understand the variables (relative proximity of employers, the existing infrastructure, community approval, etc.) as well as the physical characteristics of the land itself.
Negotiation of the site purchase – One or several owners may hold the tract that looks ripe for development. They or their agents or estates may present a challenging negotiation on price, which a skilled set of fund managers are able to accomplish.
Achieving planning authority approval – This is one of the most critical components of the process. UK policies favour local decision-making, such that the needs of businesses and the existing community take greater precedence over distant regional planners. National mandates to encourage housing growth generically compel local authorities to find ways to add to house inventories.
Development of infrastructure – Streets and utilities generally have to be installed into a development to make it sellable. A home building development may also place a greater burden on municipal services (government, schools, hospitals, etc.) such that a community infrastructure levy could well be incorporated into the cost structure. All of this involves fund manager negotiations.
Building, or sale to homebuilders – The biggest asset growth comes when the property is constructed, of course. A fund may oversee this process as well, however a quicker, lesser return on investment can be realised by selling lots to homebuilders. (This bifurcation of responsibilities between original investors and homeowners has become the norm in recent years.)
The smart investor should quiz a joint venture investment partnership about how they approach each of these tasks. What the firm can demonstrate from returns on past projects is of course a key consideration. But the investor should engage a neutral third party, an independent financial advisor, to examine the specific investment and its appropriateness to the investor’s own wealth development portfolio.
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