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How To Mitigate Risks In Uk Land Investments
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What are UK land investment risks and how are they mitigated?
Three factors improve land investments for housing: Funding for Lending, local planning authorities and splitting risk between investors and builders.
The rate of building new homes in the UK should be about 230,000 per annum, and yet the country’s homebuilders are constructing only about half that number. Naturally, that translates into very high housing demand – which to the alternative investor in any form of development (including those who acquire raw land to develop into residential property) should be indication of a pretty good financial bet.
But the housing market can be tricky. First, there are many who are quick to criticise the government for failing to provide programmes that can effectively restart the housing sector. Second, planning authorities answer to local political considerations more than investors’ needs to seek a return on their investment; they often cite greenbelt traditions and restrictions as reasons not to grant zoning changes that would allow development. Third, building structures on speculation there will be buyers may not be the land investor’s best talent.
These tend to be problems encountered by the unseasoned investor, however. Note that while inadequate, about 100,000 homes still are built every year. How do professional land investment fund managers do it? The answer largely lies in how each of those confounding factors are mitigated:
Government programmes – The Funding for Lending scheme, instituted in 2012, is beginning to show signs of having a positive effect. Unfortunately, it hasn’t unleashed a boom in homebuilding and home buying just yet and is criticised for its downward effect on returns to savers. That said the stakes are high in political circles to find solutions that will truly stimulate the economy. To the land investor, perhaps the best advice is to acknowledge the government might be able to help things along, but it would be unwise to depend on it.
Local planning authorities – It would be foolhardy for any investor to purchase land without some knowledge on how the local planning authorities would rule on a petition for a zoning change (note: generally speaking, a use re-designation can be a very fast way to add value to some properties). Professional land development specialists have relationships with the political structure and members of the LPA that allow fair knowledge on what might be granted.
Building on speculation – While in past eras the land investor covered the full range of development, from dirt to doorsteps, the process has been bifurcated to allow homebuilders to assume some risks and rewards. Investor groups, working with specialists, can acquire land and build infrastructure to support building (roads and utilities, primarily). But the actual home building and capital it requires can be handled by homebuilders. This not only mitigates risk, it brings in two sets of business analysts to assess the potential for the property at an early state.
What should be apparent is that land investments are like any other asset: there will always be some risk. Would-be investors are advised to speak with independent financial advisors to determine what degree and type of risk is tolerable in their portfolios.
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