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Are Housing Prices Inflated By "middle Men" Land Investors?

By Expert Author: Kelly Leary

Residential developers formerly bought land, built homes and then sold them. But now many hand only zoning and infrastructure, handing off building to builders.

With so much attention on Britain’s critical shortage of housing, much thought and discussion is given to the processes and regulations around home building and real estate development. Among the players who are so affected by the debate and who ultimately build homes are developers.

That said, “developers” are quite often two distinct players, one the one hand there are those involved in land investment and, on the other, there are those who build the homes. The former identify sites, obtain zoning designations necessary to align them with market needs, and then sell the property to builders. One question that arises is this: by having two stages and players in development, does it add to the overall cost of housing?

How this two-step process affects pricing is difficult to ascertain on a broad basis. One argument is that it theoretically could, while another posits that land investors and homebuilders share a natural division of risk and responsibility.

Land investors buy raw, undeveloped properties or brownfields with uncertainties around land use designation changes (zoning). They also need to project forward two or more years before the market value of the property reveals itself. The investor or investment group spends money on infrastructure: they build roads, sewers, water utility lines and sometimes electrical and broadband cable installations. The homebuilder, in contrast, will often construct houses on the speculation that a buyer will be willing to pay the price that fits their business model. These are very different equations that require very different sets of skills.

Some of the factors called for in the National Planning Policy Framework (NPPF), released in 2012 by the Department for Communities and Local Government, place certain responsibilities on those investors whose business is modeled around the creation of new housing. Those responsibilities largely fall on the investor side of development:

Be sensitive and innovative around greenbelt land, where development may nonetheless be necessary. The developer should fashion land use to ultimately reduce resource use, enhance natural habitat and increase production of energy from renewable sources.

Provide plans in advance that a development will be financially viable. No town wants a project to be approved and then derailed by cost overruns that are unmanageable or where construction standards are then compromised as a cost-savings method.

Engage voluntarily with local planning authorities in the pre-application stage and sometimes with the local community. This would include developers availing themselves to any pre-application services that might be available.

So without question, the homebuilder needs to construct good homes for the markets to which they want to sell. But the land investor deals with an important part of the whole process that most homebuilders do not want to manage.

Individuals who are looking for alternative investments and who consider becoming part of the investor portion of the process generally work with groups of financiers who hire specialists with a good understanding of land and land economics. Those investors are urged to contract with an independent financial advisor to set their level of involvement in relation to their portfolio risk standards.

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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