Alternative Investment: Land (6 of 8)
Land has been a directly held alternative store of wealth for the rich for centuries. There are now more opportunities for retail investors to purchase land, but investments need careful assessment.
'Land' is Risk Level 6 of 8 in Alternative Investments.
Tangible Store Of Wealth
Land represents the oldest store of wealth in society. Whatever else happens in the wider economy or markets, land will always be needed and have an intrinsic value. Furthermore, land values tend to keep pace with inflation, helping to retain the purchasing power of the investment.
Depending on the intended use of the land, it can offer the prospect of returns not correlated to stock markets and the wider economy, thus fulfilling the role of a useful diversifier and reducing overall portfolio volatility.
Speculation And Other Considerations
Achieving strong performance and having a low correlation to other investments is highly dependent upon selecting the right project. Land is typically either fairly valued and represents a sound store of wealth, or is a more speculative investment - perhaps with unrealised utility and undervalued potential, that means the value could rise significantly in the future.
In the developed markets retail investors are up against commercial developers who require large land banks and can afford to own undeveloped land for long periods and wait for the correct planning permissions or the right time to build. Investors must be wary of some speculative land banking schemes, promoted by ‘boiler room’ operations, which offer unsuitable land at overinflated prices on the basis of obtaining planning permission for a change in use - but the planning permission is very unlikely to ever be obtained.
Note that this section is not looking at land used for agriculture or forestry – these have their own sections within the report – but is focused on the concept of land as an alternative store of wealth and as a speculative investment aimed at achieving capital growth.
There was a spike in the number of products offered in the sector during 2009 and 2010 as investors exiting equities after the financial crisis sought out other opportunities where they might put their money.
Few of the projects offer a genuine defined exit or fixed returns, making the investment seem more speculative.
The products typically have a minimum investment level of £12,000, with the lowest being £1,000, and the majority are placed in a UCIS structure – reflecting the high costs of acquiring quality plots. Be suspicious of land investments with very low minimums and no pooling of funds as these may fall into the ‘too good to be true’ category.
Locations vary widely across the globe – from Spain, Luxembourg and the UK to Brazil, Canada and the Cayman Islands – as land is an asset in all countries across the world. The premise behind projects is varied. In some cases the investment is based around the land having commercial utility while for others it is the residential potential that attracts attention. Investment opportunities can be more advanced than the pure ‘land banking’ options that rely upon securing a change in land use and permission to build. However, it is the land banking opportunities that make up the majority of the sector.
Transaction costs are typically high as purchases of land have legal fees and taxes, such as stamp duty, corporation tax or their foreign equivalents. However, offshore purchasing schemes may be able to mitigate some costs, but significant investigation is needed in this area. Those selling land may also take commission and it is important to establish that investors are paying a fair value for land and not having a large chunk of wealth absorbed in commission earnings.
The rise in value is usually linked to a change in the planning permissions attached to the land, or because the location is likely to become more attractive to buyers in the future - perhaps because it is in a rapidly developing city where there is a need for more housing, or a location where it is anticipated there will be an increase in tourism and more hotels might be needed.
If a well informed operator is putting together a wealthy consortium to purchase land that they have a strong feeling will rise in value - this feels like a genuine investment opportunity. Unfortunately it can only really ever be structured as a UCIS and therefore only be promoted to sophisticated or high net worth investors. Investors who do not fall into this category should be wary if they come across these schemes and ensure that they are not being encouraged to invest in highly overpriced land - with the introducer pocketing the difference in the form of a scandalously high commission.
Land always appeals as an investment concept as it is easily understood and if investors are able to acquire the right land at the right price they can enjoy a strong return. However, it is a crowded market and investors are up against many other players with more money and resources. It requires experience and expertise to assess investment opportunities, so caution is required.
- Speculative Investment
- Majority are not directly held assets
- High transaction costs
- Open-ended nature
- Potential for high retuns
The most famous quote supporting investment in land comes from author Mark Twain: “‘Buy land – they’re not making any more of it’”. It may be true but the investment market is not quite so simple. In areas where land is in strong demand the value can rise steeply. The key is ensuring the right land is purchased for the right price. Investors are in competition with large developers and Real Estate Investment Trusts (REITs) and must be wary of companies using unsubstantiated claims to sell land at highly inflated prices.
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