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Like All Investments, Land Development Has Inherent Challenges
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Yes, there are things that can go wrong for land investors. But experienced land specialists understand risks and mitigate them as best they can.
In the years following the financial meltdown of 2008, many traditionally attractive investments have failed to perform for the financial community. Market-traded securities have recovered somewhat, but the volatility has left many investors instead turning to real asset alternatives, such as hedge funds, commodities, precious metals, art and antiques, and real estate, either in real estate investment trusts (REITs) or raw land.
Each type of investment has its pros and cons, of course. But with alternatives to market-traded securities (which most consider to include REITs), there is at least some control that the investor can assume or approximate. The art lover, for example, can work with a schooled buyer who understands that market and where it may be headed. The same might be said for vintage car collectors, or those who invest in built properties such as office or retail real estate.
Investors in raw land – those involved in development – take on their own set of risks and rewards. For the most part, strategic land investing has historically performed well for some of the richest individuals of modern history. But there remain challenges that seasoned land investment specialists know to at least look for. These include the following:
New regulations – The Community Investment Levy (CIL) was made effective in 2010, a tariff scheme on developers to draw funds to improve local infrastructure that is presumably stressed by the introduction of new residences or businesses built by the developer. Funds are used for schools, hospitals, parks, leisure centres, transport and flood defence. While local planning authorities historically would try to draw this money from developers on a case-by-case basis, the national CIL rules at least make this a much more predictable expense.
Planning authority and community resistance – Not every person in every community favours development. A land developer should have a general sense of this going into an investment (before an acquisition is made), but there always is the possibility that a charismatic and influential community member can mount a campaign against development.
Physical, historic or toxic barriers – Sometimes, problematic geologic features of a property might turn up in construction. If archaeological findings are uncovered, it may delay or prohibit development altogether (depending on its importance and non-transportability). With brownfield sites, the presence of industrial toxins is always a worry. On occasion, war ordinance or illegally-dumped chemicals might be found in dangerous quantities and consequently require expensive soil remediation.
Lack of transport or other necessary infrastructure – If a land development adds 100 or more homes to an area, it is essential that existing roads, sewers and school systems be able to support it. It is up to the local planning authority to make this determination – and impose the CIL to the extent necessary to cover infrastructure improvement costs – however much of this should be determined in advance of acquiring land for development.
All this considered, a very important factor looms over the UK and drives a greater sense of urgency at overcoming these and other development barriers. That factor is population. From 2001 to 2011, the UK grew by 7%, an astounding number given the declines in population elsewhere in the Eurozone. This comes after three decades of underdevelopment – where more than 200,000 new homes should be built every year, yet less than half of that in fact are. The crush of population needing homes speaks to a serious degree of pent-up demand, one that will drive development for decades to come.
Individuals who wish to invest in development can do so by working with experienced land developers. But given the risk profile of land, such investors would be wise to speak first with a financial advisor who can objectively evaluate that risk and factor it in with the risk-reward equation elsewhere in one’s personal financial profile.
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