PropertyInvesting.net: Property Investment Special Reports

72: Land Acquisition Strategies - investing, trading and speculating

06-03-2006

PropertyInvesting.net

See the end of this article for listing of Land websites and resources, if you wish to purchase land or wish to invest or develop land in the UK, USA or NW Europe.

There is no shortage of Land in the UK, only 15% of the UK is urban – however, there is a very definite shortage of land for building and development - vast tracts of land are designated as "Greenbelt" with restricted development options.

Considerable "Brownfield" land exists, mainly in urban areas, but most of the easier sites that were made available after the decline of heavy and manufacturing industries have already been developed, particularly in the south of the England. Some of this land has severe problems such as pollution, heavy metals, asbestos liabilities, subsidence, proximity to unattractive industry, poor communications and amenities (e.g. sewage, drainage) or lack of demand for commercial, retail or residential property in the area.

Many people have become multi-millionaires by investing, trading and speculating on land. It’s a high risk, high reward business – time consuming, often expensive and with no reliable positive outcome. Land can be categorised into the following:

• National Park – land with severe restriction on any type of development
• Greenfield – land with considerable restrictions on development
• Brownfield – land with more limited restrictions on development, development on some sites actively encouraged, particularly in areas of regional or local regeneration

District councils have what is called a Local Plan which provides further details of zones for further residential development, zones for commercial development, zones set aside for recreation / leisure and zones for farming / agriculture. The Housing Strategy will describe the policy and direction the council would like development to take, and sometimes target levels of development in specific area.

Speculating on Land

If the planning zones change, then the person who owns the land can make a fortune as the zone moves from Greenfield agriculture to a designated site for development – either retail, commercial or residential. In SE England, agricultural land might sell for say 3,000 pounds an acre, but land with planning permission for residential development in a good location might fetch 1,000,000 an acre. That said, the land-owner may lose significant amounts of value if, during clarification of land in a “grey area”, the category is confirmed as Greenfield with no to development options.

Some investors speculate that an area close to a town will be re-zoned – they may buy land at low cost from farmers and then sell as soon as the land is rezoned to a developer. This high risk, high reward strategy has made many people extremely wealthy from one or two deals in a lifetime. Others who have speculated but the area has not been rezoned have made a loss and ended up with a piece of agricultural land with little or no income and a lot of hassle. Dealing in land is not for the inexperienced or non-knowledgeable investor. The more local knowledge, wider network and more local insights and contacts you have the higher your chance for succeeding in increasing the value of a land investment.

For details of the normal planning process for development, click here.

Future Trends in Land Supply and Demand

The future for building land availability is uncertain – the Barker Report of March 2004 recommended an increase in the number of houses being built in the UK by some 115,000 per year, and streamlining of the planning process along with more regional control over planning decision. However, PropertyInvesting.net does not expect to see anything concrete coming from the report for some time and to counterbalance this potential increase in land supply are the forces of Nimbyism (not-in-my-back-yard).

Recent surveys suggest about two thirds of people would not object or mind much about a development a few streets from theirs, but two thirds would object to a development in their street. Even with these statistics, it only takes 1% of highly vocal local and coordinated opposition to disrupt or put a stop to a development. We would not expect a change to this status quo in the near future, even if the planning process is streamlined. This will continue to put upward pressure on land prices for property development in the most sought after and environmentally sensitive areas e.g.

• Coastal areas – particularly in south and south-west England
• National Parks
• National Forests
• Areas of Outstanding Natural Beauty
• National Trust areas
• Greenbelt areas surrounding towns, not designated development areas
• Heritage sites
• Conservation Areas

Plots will be extremely difficult to find and very expensive. It will increasingly be as economically efficient to demolish old homes and build bigger new homes. The prices for land in development areas, if these are rezoned from agricultural will always sky-rocket. Most of these areas are in the south of England – this is where the population is expanding the most, in part because of increasing service sector, retail and technology jobs in this area. This is forecast to continue – increasing numbers of retirees wanting to live in the south will also put pressure on land prices.

Development Areas

Areas of particular interest for development at the moment are:

Stanstead Corridor (greenfield)

St Neots - Cambridge – Ely – Stanstead – corridor

New Town Expansion (greenfield)

Ashford
Milton Keynes (westwards)

Thames Gateway (green and brownfield)

Swanscombe - Northfleet - Gravesend
Thamesmead – Dartford – Swanley
Tilbury and westwards

Regeneration (brownfield)

Stratford, Lower Lea Valley, Kings Cross
Liverpool (areas close to city centre and Duke Street)
Salford

Stratford, London from the air 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Docklands (brownfield)

Woolwich, Beckton, Silvertown – emerging
Isle of Dogs - Canary Warf - Limehouse – mature expansion
Liverpool - emerging north docks
Portsmouth
Plymouth
Bristol

Docklands - on the horizon (undeveloped)

Barry
Hayle
Newport
Tilbury
Bootle
Birkenhead
Thames Haven
Hull
Grimsby

“Land Banks”

Building companies and developers tend to keep “Land Banks” for about 5-8 years to secure housing supply needs. The reason for such a large amount of land being held in reserve is for a mix of the following reasons:

• It helps raising money from Banks, Investment Institutions and Stock Markets as security – it is an indicator of a sustainable long-term business.
• The planning process can be slow, with long lead times required to overcome hurdles (e.g. opposition groups) and many risks.
• Some hedging and possibly some pre-investment or potential for capital value increases can be realised by holding land.
• Family ownership of large land tracts with associated difficulty in transfer of land ownership because consensus is required for a transaction to proceed
• Some land is held with the hope that zone restrictions will be eased for development in future years.
• Some land is not developed because of complexities, high affordable housing cost/percentage provision or high cost of upgrading amenities and infra-structure before planning consent is given.
• Opposition groups have stalled development indefinitely.
• A developer cannot face running out of land – this reactive measure would drive prices up if they were to purchase from another company, as it would be known the company was ‘short of land” and getting rather desperate – “running out of land is akin to going out of business”.

Luxembourg - a country with expanding population, shortage of land and rising prices

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trends in Land Use

Some trends to consider for one's land acquisition strategy are the following:

• Schools selling off playing fields for residential development to provide funding for school repairs and developments – this will likely slow or stop as social pressure mounts for increased provision of sports ground for children to exercise / prevent childhood obesity
• Closing down of smaller retail shops in city and town centres and increasing number of drive-to out-of-town retail parks with large supermarkets and superstores
• Consolidation of working farms into larger farms, with many farm houses and buildings being sold off with small parcels of land – this land frequently being leased back to farmers, used for horse or fallow, wilderness or woodland
• Closing of small village schools, village school grounds, village halls (and chapels) because of the reduction in the number of rural school children and families, people that live in the villages permanently and increasing numbers of second homes or non-permanent resident retirees
• Increasing size of some new town areas such as Ashford and Milton Keynes and building on Greenfield sites in the Cambridge-Stanstead corridor and Thames Gateway area.
• City centre football grounds re-developed as residential apartment complexes (e.g. Arsenal - Highbury) – the football club then moves out of town to a cheap land area and builds a mixed football/commercial/retail and possibly residential complex.
• Increasing numbers of non-working farms – with mixed paddock for horses, wilderness/ woods and barns/outbuildings converted to holiday lets.

Land Acquisition Strategies

These trends will lead to opportunities for land acquirers – you may consider the following opportunities for value creation from land acquisition:

• Purchase of land close to Ashford and Milton Keynes and in the Stanstead-Cambridge corridor.
• Purchase of unwanted school buildings, chapels and village halls in rural villages for conversion to homes and apartments.
• Purchase of land on the periphery of towns and cities with good communication that are likely to be zoned for retail/commercial use, or achieve planning consent for retail/commercial or residential development because of their proximity to infra-structure / amenities and acceptable environmental assessment.
• Purchase of equity in well-run football clubs (e.g. neutral or positive cash-flow) that have development potential for retail/residential/commercial.
• Purchase of closed down smaller retail stores in town centre location for conversion to retirement and/or city centre apartments and houses.
• Purchase of farms at the appropriate good price to maximise the value of the land (sell, lease, alternative use) and farm buildings (conversion, upgrade, holiday lets, key worker and rural “live-work” units).

Some specific examples of land value creating ideas:

• Make proposal to owner of land for an exclusive option for purchase, on condition that planning permission is granted – you agree to pay for all fees, do the hard work to get designs and planning permission granted – in return, you give 50% of the capital value increase (after capital gains tax) to the owner (using independent / objective land valuing agent).
• Search for polluted or land with liabilities (via council offices, land registry and/or council planning/surveyor department) – approach the owner for a non binding option to purchase, commission survey, consult with planning and councils regarding liability risk and assurances that planning permission might be granted, then commit or not to the purchase. You reduce risks and liabilities by getting verbal assurances from responsible parties and hope the seller does not decline the verbal agreement late on after you have sunk costs for fees – you may consider a binding option for a short period to avoid this happening.

For a further details on land acquisition strategies, ideas and concepts, plus guidance on some opportunities within the UK, please contact us. PropertyInvesting.net can also offer steer on how best to go about acquiring land and seeking planning consent and give recommendations on Land Brokers that may be able to help you.

Land Purchase

The purchase of land is normally done using the following processes:

• Auction – advertised
• Estate Agents – advertised on websites and land brokers
• Word of mouth, local - not advertised, within a local network
• Word of mouth, professional - not advertised, within commercial, residential, building, estate agent communities
• Approach – by direct contact with the owner by a buyer though cold-call telephoning, networking, visiting land owner, sending letters or fliers describing you wish to purchase land
• Advertising – placing an advert in a newspaper, on website or other land brokering website, and joining plot-share groups
• Offset deal – by selling property and swapping land
• Professional services – by offering professional services (e.g. architect, developer, builder) or goods in return for an option to purchase land

As a general rule, the more competition there is for the land, the higher the price compared to normal market value – these higher prices increase the risk of losing money. The best land deals are normally those that are done outside the normal market place, using local contacts and professional networks. Vendors selling land will look for a person or company with high reputation, integrity and ability to pay as well as consider any ethical / values concerns such as what the land will be used for in future. You might find it easy to acquire a 2-acre piece of farmland if you commit to turning the land into a wildlife reserve or natural forest. If you are looking to develop land, and the site is not brownfield, it will be far less easy to acquire in the first instance, and to get planning permission in the second.

Criteria for Purchase

Enclosed is a check-list of criteria you should consider for land purchase for residential, commercial or retail development.

Check list for land acquisition (residential, commercial, retail development)

• Road network
• Rail links
• Pollution
• Heavy metals
• Asbestos liability
• Mining, min shafts or quarry/mining subsidence
• Flood risk
• Residential demand
• Commercial demand
• Retail demand
• Access to site for building
• Access to site for residential (or retail or commercial)
• Electricity connection and capacity
• Mains water connection and capacity
• Sewage connection and capacity
• Gas connection and capacity
• Proximity to high risk premises (e.g. gas bottling plant)
• Proximity to other zone (e.g. commercial for residential site)
• Views
• Proximity to eyesores
• Proximity to high power overhead lines
• Pipeline and cable restrictions
• Local opposition group – organisation, size – how vocal
• Wildlife – potential disruption or improvement
• Environmental impact assessment
• Legal or tax liabilities
• Drying subsidence and landslip potential
• Global warming – coastal flooding potential
• Coastal erosion or river erosion potential
• Landfill issues (shallow gas, subsidence, pollution)
• Soil survey – rock mechanics suitability for building

If the above criteria are positive, then the land should be suitable for residential, commercial or retail. If the criteria are generally negative, then the land is most suitable for either farm land, wildlife reserve, wilderness, forest, open ground or wasteland (e.g. for heavily polluted land, with gas leak risks).

Tax on Land Acquisition

Tax on capital gains from land acquisition in the UK has a standard rate of 40% - this needs to be considered up-front in economics and evaluation of risks, risked value and net profits. If you live outside the UK, you will most likely not have to pay this tax if you meet certain criteria – though you might have to pay capital gains tax in your country of residence instead. In March 2004, after publication of the Barker Report, the Chancellor announced the Treasury was looking into possible tax on land banks held by developers over long periods, with the objective of freeing up suitable land for building – more will be known in the next year or so on this potential tax. For detailed advice on land tax, we suggest you contact a Tax Manager specialising in UK tax – with good knowledge of land/property a preference.

Land next to or overlooking beaches will command ever increasing premiums as baby-boomers retire and desire to live next to the sea - examples: Gower, S Wales (below), Dorset, Cornwall.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land Maintenance

Some wealthy people who have made substantial sums have decided to move to the countryside and buy a farm. Many of these people lease the land back to local working farmers, and/or convert the land to paddock for horses and wilderness/wood. Leasing the land means the maintenance of hedges and the land is done by a professional farmer. It is important to realise that land maintenance is both expensive and time consuming, requiring constant attention. Some examples of issues that might arise, requiring cost, time and effort:

• Flooding – requiring remedial actions
• Hedges – overgrown need cutting back
• Trees – overgrown or blown down, need cutting down and transporting away
• Stray animals – move into your field because of a breach in a hedge
• Fencing – needs replacing
• Trees – are diseased and need treating and/or felling
• Conservation – land conservation officer is not happy with what you are doing with the land
• Intruders – start stealing wood, crops, animals
• Wild animals – such as foxes and dogs kill livestock
• Livestock – are diseased and need culling or treating
• Crops – are diseased and need burning or tilling
• River/sea erosion – remedial actions required to reduce erosion
• Subsidence/land-slip – part of your land slips damaging neighbouring property and/or roads

So even owning a single one acre field can have most of these issues cropping up from time to time – so if you are absent from the land for long periods, it’s best to lease the land to a professional farmer and make sure the lease stipulates that these duties are their responsibility, or alternatively employ a farm labourer to tend your land.

Summary

Land acquisition and value creation is high risk, high reward, often time consuming, sometimes complex and very uncertain. Local and professional networks are key. You need to have due regard for all stakeholders and high integrity, plus be shrewd, have good deal making skills, have creative insights and a good land lawyer at your side. Successful land deals can make a person very rich very quick, but equally leave that person with a load of fallow land with a lower value requiring high maintenance costs if things don’t go according to plan. If things go wrong you might have big liabilities – from pollution, subsidence and legacy issues. If you can manage these risks, find suitable opportunities and have risk money to play with, land might provide an investor good value creating opportunities, particularly as part of an overall property investment portfolio.

Wren Homes Group transform unwanted land into luxury homes

 

Strategic Land Options  Land options company dealing in development of land in UK.

 

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Land-Projects.co.uk  Property and development land company that finds commercial buyers such as building developers for unwanted or unused land or buildings in UK.

 

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