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 2. examines the performance of land vs. other assets, including gold, and why development land is becoming the investment of choice for many big pension and hedge funds…
Investment in land for commercial development, agricultural uses and fuel production has been rising over recent years, with increasing numbers of hedge funds and pension funds including land assets in their portfolios. The increasing demand for investment land – combined with the ever growing need for more housing – has led to significant growth in land values across the globe.
Data released by the Lincoln Institute of Land Policy in the United States, shows that in 1975 the average cost of a piece of land upon which to build a home was $4,489. By 2015 that had risen to $97,138 – an increase of 2064%
The price of US farmland has also soared, rising on average 4.6% annually since 1990, according to an index from the National Council of Real Estate Investment Fiduciaries.
It’s a similar story in the UK, where farmland values have grown by 207% in the past ten years, to an average of £6,307 per acre, reports property agent Knight Frank. And as agricultural commodities rise in price, land values are predicted to grow a further 8% in 2015.
It figures then, why institutional investors are snapping up land – over 550,000 acres of UK land are now owned as assets within pension funds. Huge figures are being invested, demonstrating great faith in land as an asset class.
One such deal will see financial-services giant TIAA-CREF invest $3 billion of client funds in arable land in North and South America and Australia. Clients include the New Mexico State Investment Council and the UK’s Greater Manchester Pension Fund.
The increased popularity of land is part of a trend towards investing in “real” assets – physical property – as opposed to traditional stocks and bonds.
Real estate investment trusts (REITs), which invest in commercial land development projects, have far outperformed the broader stock market in recent times.
The FTSE NAREIT All REITs Index had a total return of 27.2% for 2014, compared to a return of 13.7% for the S&P 500 Index.
On a historical basis, REITs have provided better returns than the broader market. Average returns for REITs during the last 40 years have been nearly 13% per year.
According to The National Association of Real Estate Investment Trusts (NAREIT), a key difference is the cyclical nature of the stock market. The stock market cycle tends to last just a few years, whereas the real estate cycle can run for an average of 17 to 18 years. The current real estate cycle has lasted less than 8 years and the outlook for REITs is regarded as strong.
Gold, on the other hand, is losing its lustre. Gold is often thought of as a “safe haven” during times of economic uncertainty. However, this opinion has been proven more or less wrong according to a recently published five-year chart, which show gold’s price has experienced quite high volatility.
According to the World Gold Council, global demand for gold plummeted 12% to a six-year low in the second quarter of 2015. Falling below $1,100 an ounce in July, the price of gold is now down more than 40% from its 2011 peak.
It is expected to continue to fall, as investors increasingly choose to sell their holdings. Morgan Stanley said that under its worst-case scenario (if US policy makers start raising interest rates, and central banks commence a selldown of reserves) bullion could tumble to $800 an ounce – a level not seen since 2008.
The problem with investment options such as gold is that their performance is often subject to external forces such as political and international events, and subject to speculation that cause prices to fluctuate.
The same can be said of oil and most other correlative assets. Investors have generally become more short-term focused and as such, trends, peaks and troughs have become more frequent – Europe’s stock markets have experienced a nightmare ride over Greece, whilst Chinese stocks have suffered dramatically and shed billions. Many experts believe that investors are loss-shy and lack confidence to hold, which in itself creates further problems.
Given this climate, it becomes more obvious as to why wealthy individuals and large pension and hedge funds have increased their exposure to land. Between them, GIC and Temasek (two of the largest Sovereign funds in the world) have increased their real estate exposure to nearly $130 billion over the last three years, reports the Financial Times.
Why Development Land Outperforms Other Assets
As supply becomes scarcer and populations continue to grow, the law of supply and demand dictates that land will continue to steadily rise in value. However, for the investor seeking attractive returns in the short to medium term, investing in land that has been zoned for development, and has a clear development plan in place, offers one of the most reliable choices.
Land increases in value at all stages of the development process – when planning permission is granted, when initial infrastructure is put in place, when land is divided into individual plots and sold to the retail market (in the case of residential developments), and when property is built on the land and sold to the end consumer.
Equally, there are numerous additional levels of value that can be added to development land in the way of amenities. In the case of Forest Lakes Country Club, a premium residential development in Canada that Landcorp International is marketing, exclusive facilities include an 18-hole Nicklaus Design golf course.
Because it will be the only Nicklaus Design golf course in the province of Nova Scotia, the facility will be a significant value-add.
Land values at the Forest Lakes Country Club are estimated to have risen nearly 50% (from CAD$19.20 per sqm to CAD$28.64) since planning permission was granted in 2011. By the time all infrastructure is in place, in 2018, the total appreciation in value is forecasted to be as much as 700%.
The potential for development land to continue increasing in value is high, with its performance less susceptible to external forces that will halt or slow growth, unlike gold, stocks and shares. The rationale, therefore, to include or increase the share of development land in any investment portfolio is solid. If investors are looking to the future, development land will certainly bring lucrative returns on investment.
Don’t miss our next post, where we will explain the land development process, including the importance of zoning, rezoning and planning permission.
