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Is The Opportunity To Buy Raw Uk Land For Development Past?
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There is unquestionably a recovery in residential and real estate values in England. But that doesn’t mean that opportunities for investors have passed.
It would be wrong to describe the land and housing market in the U.K. since 2007 as a “rollercoaster.” The physics of a rapid drop followed by a flat line and now, finally, a slow but steady climb would not be likely in an amusement venue such as Thorpe Park in Surrey, Blackpool Pleasure Beach or Alton Towers in Staffordshire.
In fact, the ride that investors, homebuilders and would-be homebuyers have been on the past several years has been far from amusing and certainly not fast moving. The precipitous drop from the housing bubble peak of 2007 has meant that builders were reluctant to construct new homes because buyers were having a difficult time coming up with the necessary deposits required for purchase while banks concurrently imposed stringent limits on who qualified for a mortgage. Not only did homes fail to maintain value, but raw land that is ripe for development went undeveloped.
Note this all occurred while the British population registered a 7% growth rate over the century’s first decade.
So while development remained stuck in place, demand was building. The mistake many make, say analysts, is to consider the entire UK as a single market. In fact, it varies considerably from city to city and region to region. The rapidly increasing housing prices in London and the South East are driven in part by well-off foreign investors seeking refuge from unstable economies in their home countries (in the Eurozone, in particular), in the Middle East and China. But the slow increase or non-increase in land and housing values in other parts of the country presents a very different story.
According to PropertyWire.com, a global property news service, homebuilders in the UK saw sufficient sales activity in 2013 such that they are now seeking serviced land elsewhere, outside the “hot” markets of London and the South East. The publisher notes that UK Greenfield land values rose by 1.4% in the first quarter of 2013, an annualised growth rate of 3%. But still, this varies greatly from location to location.
Savills, the real estate firm, cautions that distinctions should be made between values driven by market rate housing and social housing. With less government support for the latter, the averages actually represent greater demand in the market price sector. They point out three factors that were in play in 2013:
Private house building starts up 7% – The first quarter of 2013 saw 22,200 new homes under construction, a marked rise over the last quarter of 2012. “There are clear signs of more positive industry sentiment and activity,” says a Savills research director.
Look to the outer zones of London – The undersupplied middle market is creating a need for homes outside of central London. Government lending schemes are largely targeting the homes valued at under £600,000.
Larger homebuilders have the cash – While a shortage of cash has caused many homebuilders to scale back the size of projects, the UK’s eight largest builders reported net profit growth of 33% in 2012. This means they have the capitalisation to increase the volume of their work.
In summary, the opportunities to invest in the housing market, particularly in buying UK land, are quite mixed. It depends on local economies and the scale of development being targeted.
In shifting economies such as this, the tendency is to find creative solutions. One is that real estate development risk is now often shared between investors who purchase and prepare land and homebuilders who deliver the final product. Investors are assembled by specialists who read where UK land development is (or can be) supported by local infrastructure. Those investors and their advisors also try to identify where a use designation (zoning) can be achieved, say, to convert Greenfields to residential property. With that accomplished, and site-specific infrastructure built (streets, utilities, etc.), a homebuilder can then buy lots and build, investing capital only in this late stage. Regardless of whether raw land prices are at historic lows or are climbing, this split risk enables all participants in development to better predict returns on their investment.
Individuals who consider participating in land investment should speak with a personal financial advisor. Along with other types of alternative investments, the opportunity should be weighed against overall wealth portfolio considerations.
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