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Site Development No Longer The Job Of Uk Homebuilders
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Homebuilders used to do all the work: Buy land, achieve a use change and build roads, then build and sell the homes. But now land investors do that -- here’s why.
The good news is that homebuilding in the UK in the first quarter of 2013 was at its highest in five years. The Chancellor of the Exchequer, George Osborne, is given partial credit for providing equity loans up to 20 per cent of the value of newly built homes. This “Help to Buy” program is available to purchase homes valued at or below £600,000, and can be accessed by both first-time buyers and people who have previously owned property.
It only makes sense, after all. With a growing population (up 7 per cent from 2001 through 2011, according to Census 2011 data) concurrent with the economic downturn, there has been a dearth of new home construction that has affected a generation of would-be homebuyers. Credit access for buyers has blocked many from buying, creating pent-up demand.
Another problem that has confronted homebuilders has been diminishing margins. The business has traditionally been capital intensive: they would need to acquire land sites that were appropriately zoned for housing (or slated to change, per the local planning authority), develop the streets and utilities infrastructure, then find buyers for homes they would build. The amount of upfront cash and the time frame over which all development took place forced significant carrying costs and risks on the homebuilder.
Now, however, the business model has shifted somewhat. Land investors are taking on the risks and rewards of site acquisition, zoning changes and site preparation, adding streets and public utility services, as needed. Once that is done, homebuilders buy the land, build houses and then sell them.
Why does this arrangement work? It’s about doing what one does best. Land investors and site development specialists bring a certain expertise and resources – knowledge on how to strategically acquire and prepare sites, which a homebuilder may lack. Subsequently homebuilders, who are expert in constructing the type of housing that the market needs and wants, then focus their skills there. Capital is invested in each phase, but the risks are better understood and the time frames shortened (which also mitigates risk).
Implicit in all of this of course is the complexity of each task. The business of site preparation isn’t for the dilettante. This is why land investors are increasingly turning to specialists who know the process and the pitfalls. Land investment groups are generally attuned to the government’s housing delivery initiatives and localism agendas. They are able to mitigate planning risk such that they can target per annum returns in the double digits.
In the end, all players in the equation should be able to thrive in the months and years ahead. The inexorable increase in population is creating ever-growing demand for housing, which is unlikely to be satiated anytime soon.
Individuals who consider alternative investments and who plan to invest in land for development into housing are encouraged to work with an independent financial advisor. Land investment comes with its own set of risks that specialists understand; how the risk fits individual portfolios needs to be evaluated one individual at a time.
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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