Key Variables in Real Assets That Create Volatility

Real assets such as land are less vulnerable to price/value volatility.

Real assets including real estate are popular alternative investments. Raw land stands out among them because it is characterized by low price volatility.

The shortage of housing in the UK is the most obvious factor in discussion of land assets and the growth potential for land investments. With a solid 7 per cent (over the past ten years) growth rate of the population, the country stands above most other European countries in its need for new home construction.

Compounding this has been the reluctance of builders in the financial crisis since 2008 to construct new homes (due to stringent financing), which strongly suggests pent up demand. Even if people cannot afford to buy, they have to live somewhere, right? In fact, the construction of rental housing is on the rise and may be where real asset investing shifts.

But looking five to ten years hence, will there be a housing bubble – a rash of building followed by an oversupplied market? Not likely – the build up in demand is that critical and unlikely to be fully satisfied for a long time to come. But even without this extraordinary set of circumstances, land investing is generally less subject to price and value swings, vis-à-vis other real assets, for a number of reasons:

• Raw land appreciates in value on a linear path – Due to the finite nature of land coupled with a growing population, demand is always on the upswing. Inflation naturally pushes prices upward, and with a positive decision by planning commissions the asset can grow dramatically.

• Raw land allows diversification – While most land investment requires a minimum of £10,000 to participate, it is possible therefore for many investors to participate in multiple sites. Built properties carry a considerably higher price, effectively forcing the investor to be concentrated in fewer property investments.

• Land investment specialists know how to optimize value – The many variables of strategic land investing are best left to the professionals – because they know what they’re doing. They are able to negotiate optimal purchase and sales prices, how to time an investment and achieve local planning commission permission to convert raw land into something more productive.

• Land investing is not like an REIT – Real estate investment trusts are market-traded securities, subject to market dynamics that may have little or nothing to do with the intrinsic value of the properties in the trust. Raw land is a real asset that is much more controllable.

Real assets overall have proven to be attractive during the years of the 21st century financial crisis, albeit with variable performance from one to the next. Investors are encouraged to seek the counsel of an independent financial advisor before committing to a specific investment.

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