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 1. busts some of the most common myths about investing in land, such as it’s only for the rich…
As Mark Twain once famously said; “Buy land, they’re not making it anymore”. More than 100 years later, modern investors are seeing the wisdom in his words and choosing to diversify their investment portfolios with land. With the underperformance of investments such as stocks and shares, and traditional property markets undergoing certain corrections, land is proving to be a popular alternative.
Historically, land investment has been limited to large development companies, farmers and wealthy individuals, but as new options come to the market for smaller investors to participate in, the market for development land investment is widening.
As an investment option, land is simple, transparent and tangible. The principle of investing in land is not rocket science: demand is ever increasing whilst land is a finite resource. That prices go up when demand outpaces supply is a basic economic principle. In addition, it is possible to add value to land by developing it. Providing demand is there for the end development use, land values can be significantly increased this way.
Myths about Investing in Land
Despite the growing popularity of investing in development land, there still exist a number of assumptions that appear to deter potential investors. Here we address the most common assumptions so investors have a better understanding of development land investment.
Myth 1: Investing in land requires a high cash entry level
There are a number of different options when looking to invest in development land and with that a number of different entry level price brackets. The size, location and planning stage are all important factors that will determine the land’s value. Obviously the larger the size of the land the higher the price, equally land in areas that are highly sought after with limited development land available will also command higher values.
The principle of investing in land, as with investment property, is to buy at a low price point and sell at a higher one. Land values that already have planning permission can be up to 10 times the value of land without the relevant planning approvals. Therefore, the timing of when you purchase land is of great importance and will ultimately determine your investment returns.
The ideal scenario is to buy land just prior to planning permission which will see the land’s value soar following approval. This also enables investors to purchase at a lower price point with the potential to earn greater returns from the increase in value after planning is approved.
Investors with smaller budgets can purchase individual plots from developers who have bought a large tract of land and put together a solid development proposal in conjunction with the planning regulators. Investors are then able to invest in an amount of land or land plots according to their individual budget.
Myth 2: All land investments are ‘land banking’ schemes
Land banking is an investment method that involves the purchase of low-value, raw land and holding on to it in the hope of being able to sell it for a profit at a future date. More often than not, the land purchased in these schemes is not classified for either development or agricultural use (it is un-zoned) and is likely never to be developed. The probability is it will never receive any form of planning permission and its value will only increase marginally with inflation.
In contrast to the low-value land offered in land banking schemes, land investment concerns prime land with a clear path to real estate development. The site offered under this type of investment is zoned (classified) by the local government to allow development for a specific purpose, or already has planning permission in place. The site is owned by a development company that has a vested interest in its development and has a specific development plan. Once planning permission is granted or development has begun, the land’s value rises significantly.
Myth 3: Land values rise slowly
Land price growth will vary depending upon the land’s location and development purpose. Land in areas that have a shortage of development land or residential property and therefore could be used for residential development will see prices rise more quickly. Land prices in more rural areas with few communication links will see prices rise more slowly.
Overall, prices of all types of zoned land have been rising, as land increasingly becomes a commodity in shortage. The need for arable farmland for food and fuel production and development land to meet residential property shortages is ever increasing. The faster demand increases, the faster prices will rise.
Myth 4: Investing in land is complex and requires specialist knowledge and expertise
As with any investment, investing in development land carries some risk. One way to mitigate this risk is by investing with a reliable developer. The developer carries all the responsibility of developing the land and has the required experience and knowledge of the planning process to expedite the development.
The developer will have already carried out all the necessary due diligence to ensure the development is feasible and profitable. Investors are then able to purchase development land with peace of mind that their investment will earn a return.
Myth 5: If all land prices are rising, it makes sense to go for the cheapest option
Land, as with property, will vary in price as will its rate of growth depending on a variety of factors. The type of land; residential, farmland, greenbelt, land with and without planning permission all of which command different price brackets.
The balance between the demand and scarcity of a particular type of land will also influence the price of that land. Premium land in areas with little development land available will carry premium prices. Location, type and quality of land are all important considerations as to the ultimate price and potential price growth of land. Being able to understand these factors will enable investors to make more accurate investment decisions.
Stay tuned, in Part 2. of this guide we will look at the performance of land in comparison to other popular investments asset classes, including the stock market and gold.
Photo by Ryan McGuire
