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A Diversified Investment Portfolio Might Include Raw Land
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In a world of complicated and often obfuscated investments, raw land is relatively simple and answers a strong market need: we need more houses in the UK.
Achieving the proper balance in an investment portfolio is perhaps the second most important objective to the investor – the first being maximized returns in all components of that portfolio, quarter upon quarter, year after year.
Investment advisors who deal in traditional market-traded securities will speak of an ideal 40-60 mix of stocks and bonds, respectively, with subdivisions for higher-risk/higher-returns and lower-risk/lower-returns asset allocations. But since disappointment and volatility have characterized the markets in the wake of the global financial crisis of 2008, millions of investors have ventured into alternative investments that include real estate (real estate investment trusts, REITs, plus the actual ownership of built property and raw land), rarities (art, antiques, coins, wine, vintage cars), hedge funds, and the like.
With this new awareness and preference for alternative investments has been a migration away from that 60-40 stocks-bonds mix. But what is the neat new formula to serve as one’s guide?
The answer is as varied as perhaps the number of different investors. Age and family situations will always be factors that can alter the mix, of course. But what many investment advisors are saying is that the investor might fare best when they understand the intrinsic nature of the investment, perhaps even get involved with it on some level. The vintage car buyer should not only think of those four wheels as an asset but rather as an irreplaceable prize of meaningful provenance, for example.
The same might be said for investors in land. The more one knows about the variables surrounding land, the more confidence he or she might have in the investment. Now to be clear, the individual who is new to land investing is strongly advised to work with professionals. Strategic land professionals know how to take raw acreage through planning authority approvals to construction and to the ultimate (and profitable) sale of the property. And on its merits, land investing has much to offer:
Land is transparent. As compared to such exotic and opaque investments as derivatives, the value of land in its current condition is fairly easy to determine. A bit harder to project is value growth, the dynamics of which vary from location to location. But even with that, there are solid models for projecting how those dynamics can affect future value.
Finite supply and pronounced demand. The shortage of housing in the UK is well reported and grows every day, as the population continues its increase while only half as much building is completed relative to the need. While the dearth of lower-income and social housing is often discussed, the affluent are also battling to find homes as well (check the pricing of London housing, which have more than recovered to pre-2007 levels).
Buy-to-let vs. buy-to-build? The investor class is finding at least two options in real estate. One is to purchase housing flat by flat or building by building, which involves active management of properties with all the risks inherent in human occupation; a variation on this of course are REITs, the returns on which since becoming part of the UK investment landscape have been disappointing. That said, rental properties are doing well as the housing crisis is characterized by the supply-demand equation and, consequently, rapidly rising rental rates. But land purchased for the purpose of building new housing and commercial structures can deliver high yields but with fewer of the hassles of rental property.
Growth. While it may be investment malpractice to predict exceptionally high returns on land investments (raw properties, including greenfield and brownfield tracts), there are many examples of that happening. And note the current scenario fits a historical pattern: some of the greatest wealth of individuals has been achieved by way of land ownership and investment.
Of course, the only advisable means by which one allocates their investments in anything is through the counsel of a personal financial advisor.
Advisory: None of the information contained on these pages constitutes personal recommendations or advice. If you are unsure about the meaning of any information provided on this website, then please consult your financial or other professional advisor.
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