What are the key issues in master planning of land-to-housing development in the UK?

Buying land, building then selling houses might seem like a simple idea, given the UK housing shortage. But even with cash, you are advised to work with professionals.

With the difficult housing shortage in the UK, it might seem that investment in housing development would be a “slam dunk” opportunity for strong real asset growth. Indeed it can be – but it is not a business for amateurs. Master planning of a land-to-housing scheme is the realm of experienced UK land investment specialists, and they must shepherd an investment through all stages of the process – which typically requires multiple years. Rare is the lone investor who works from his or her own experiences, knowledge, associations and cash.

The main questions that investor groups centre on include “where growth is strongest?,” “where the need is greatest?” and “where is appropriate land available for development?” – all within a time fame that satisfies investor expectations. To that end, the qualified land investment company will journey through the following tactical stages:

• Trends research – The leading numbers come from the broader economy, of course. Current key drivers include the housing shortage, the uncertainties of modest economic growth and stagnation, as well as stringent lending standards. The Cameron government is trying to drive the housing market with the multibillion-Pound program known as the Funding for Lending Scheme, which is reportedly driving a modest uptick in buying.

But drilling down from the macroeconomics one finds key opportunities in specific areas where local employment growth is robust. That is where housing needs are particularly acute and local planning authorities are most amenable to zoning changes that will allow housing development.

• Location analysis – Still, not every acre of land will accommodate housing or be available at a reasonable price. Using financial modelling as a guide, land investors will enlist site investigation teams, value appraisers and advisors on tax and legal issues. Their jobs are to collectively identify risks and returns within acceptable and optimal ranges.

While it may not be possible to establish with complete certainty that a zoning change can happen, the management team will have a fairly solid read on what the local authorities are amenable to do. If the investors’ business case is solid, all such location factors will encourage and not impede development.

• Strategic acquisition and assembly – Rarely is a property identified by accident. Seasoned land consultants maintain proactive relationships with statutory bodies, bankers, corporate finance and commercial agents who effectively scout such locations. With sufficient investment capital, a well-managed fund is able to avoid debt financing.

Once the optimal property is identified and acquired, site assembly commences. Riveted on an expected internal rate of return (IRR), the site is developed according to plan and a schedule that matches investor expectations with homebuilder needs.

• Exit plan – The forward sale works optimally with top-tier homebuilders. With established relationships between the investors and developers, most transactions are ideally made by private treaty (off-market transactions), with obvious cost savings in such arrangements. Many such sales are contracted long in advance, satisfying local planning permission bodies that the land will be developed relatively quickly.

The fact that the end-buyers exist long before construction commences is reassuring to land investors and those planning authorities. Under current housing shortage conditions, this could remain a driving factor for several years into the future.

Persons interested in land investment via joint investor groups should independently work with a personal financial advisor. It is important to consider the risks and timing of land development programmes in relation to one’s comprehensive portfolio.