October is Landcorp International’s ‘Learn to Invest Month’. We will be sharing a 5-part expert guide to investing safely and profitably in development land.
Part 4. gives you the low down on the most important things to look for when choosing a piece of land to make you a profit…
There are a number of factors to consider when looking to invest in development land that will indicate the potential profitability of the investment and the level of risk involved. Many considerations are similar to those analysed when investing in property, whilst others are specific to the future profitability of the development land in question.
- Land Location
As with buying property, location is a key indicator of how well a piece of land will increase in value. Land located in areas where there is a shortage of development land and a need for new property to house the local population will see the highest growth in land values. Land within close proximity to major road networks, in particular those that connect large neighbouring communities, are also likely to see higher value rises. Land situated within short distances to major towns and cities where the overall and working population is growing is a good indicator that the land’s potential future value will rise steeply. As cities expand and inner city property becomes more scarce, people will look to the outskirts for quality homes.
When planning permissions are approved, significant value is added to the land, which increases at each development milestone. Land in rural areas is likely to see much slower growth rates in comparison. Land values are also directly proportion to the housing market in the same area. For example, land in an area that has a property market characterised by high priced property will also command a higher land value.
- Legal Searches and Due Diligence
It is important to carry out careful due diligence to ensure your land investment is sound. There are a number of factors that may affect the future profitability of your land investment. Searches may include examining the possibility of future development close to or around your land. Such development will have a direct impact on your land’s value and could be either positive or negative. Finding out what the land surrounding your plot is zoned for and if its status is likely to change can help predict future developments.
- Timing
As with any investment, the investor aims to buy at a low price and sell at a higher one thereby making a profit. The timing of when to enter an investment can be a key influencer in the likely returns any investor could earn.
Development land, as with property in general, is a long-term investment and the key is to buy at the right price so that the land appreciates enough over time to reap a reward. Early entrants to an investment opportunity will earn higher returns on their investment. Large institutional investors often look to investment opportunities where they are the first in so that they can earn the highest returns over the longest periods.
- Future Profitability
When assessing the future profitability of a development project there are a number of factors that can be analysed. Firstly, similar development projects in the same or neighbouring areas that have similar characteristics can be used as a comparison. Although they might not be an exact like for like, a comparison can give some indication adjusted to the local area’s demographics.
Secondly, by analysing the potential future demand by looking at statistics such as population growth, migrating workers and employment centres can provide some indication of the future demand for the development. It is also prudent to consider the developer’s financing model; whilst bank finance can accelerate a project’s development time, it can also place extreme and unsupportable cash flow demands on a project which in turn can lead to bankruptcy – as was so dramatically seen throughout European real estate projects during the recession.
- Land Suitability
The land’s suitability for the anticipated end use is an important consideration. Land on a steep incline for example may not be suitable for farming yet for quality residential property that offers attractive views it may be ideal. When looking at residential development in particular, assessing road networks and public transportation access are important factors that will influence the potential value of the land. Well-connected developments will command higher values than those that are not connected with neighbouring towns and cities.
- Zoning
The zoning of any given piece of land is a very important factor in the potential growth and value of the land. Land without classification, or zoned as protected land, will have limited growth. In contrast, land designated for development will have a faster and higher growth in value.
- Planning Permission
Planning permission is also key to the land’s price potential. When land zoned for development goes from being without planning permission to gaining planning approval, the land’s value jumps in price. Maximum gains are made by purchasing development land without permissions and securing planning approval.
Such opportunities for individuals are rare as large developers often have teams of specialists scouring for exactly these opportunities. Going through the planning process does take some expertise and skill. Using specialists in local planning is key to obtaining planning approval swiftly and in the correct manner.
Up next, don’t miss the fifth and final post in our series. If you’re not already convinced of the exciting opportunities of investing in development land, let us tell you the 8 reasons you should be!
