Strategic Land: How the ROI Differs From Other Real Estate Investments

There are many ways to invest in UK property. As house building accelerates to meet demand, it helps to study the characteristics of various investment types.

With so much attention to the housing shortage in the UK, as well as the Government schemes that help working people find homes to buy, there is naturally great interest in the UK land investment community on how to profit from the construction and transactions that will occur in the coming months and years.

Real estate is a broad, deep and complex world. There are many opportunities and commensurate risks. Fortunately, it’s rich territory for anyone with the pounds to invest – and the degree of variety means that investors of various stripes can find opportunities that fit their specific life stage and risk tolerance. A very traditional approach to real estate investing in the UK is buy-to-let, where the investor takes on the responsibilities associated with being a landlord. Other investors gravitate toward joint venture land opportunities, where pooled resources and expertise focus on a residential or commercial (or combination) development; astute management of such project can yield profits in a two- to five-year timeframe. And since 2007, English investors have had real estate investment trusts (REITs), where shares in large buildings (typically commercial, but also some residential) can be bought and sold at will just as with any other market-traded security.

Of course, the question of return-on-investment is a fundamental consideration. The following is a snapshot of what might be expected from these three real estate investment classes:

Buy residential rental property – In September 2014, the website published a review of 192,672 rental properties in the UK. The report looked at where such properties provide a favourable yield, factoring the asking prices of homes relative to the average monthly rent. Separated by postal codes, the formula reveals that the best ROI for buy-to-let investors are in the north including Scotland (Aberdeen, Bradford and Sheffield in particular), with some of the lowest yields (but still in positive territory) in places that include Poole, Dartmouth, South Kensington and Worcester. The lone standout in England’s south was Southampton, where rental property returns are four times as much as Tonbridge.

What makes rental property so attractive is of course the rapid rise in rents that has occurred in recent years, largely due to the critical housing shortage. But as an investment columnist from warns, this formula becomes less attractive should there be an interest rate rise: “recent buy-to-let investors could see their costs outweigh their gains,” says Nicole Blackmore, adding that “campaigners have warned that rent rises are unsustainable, further dampening investment prospects.”

Invest via a property fund manager – This might seem like outsourcing, and in fact it can be approached that way. Property funds typically mean investing £10,000 or more in a pool managed by professionals, who focus the investment on a single, unbuilt property. The land is purchased at a low price because it does not yet have planning authority approvals. When the fund managers achieve those approvals, infrastructure (streets and utilities) are built, then the land is sold to homebuilders. The return on investment comes in as little as 18 to 24 months (or up to 60 months), with healthy double-digit gains in the most successful cases. This is subject to many factors, of course, not the least of which are the skills and proven competencies of those managers.

Invest via a REIT – While the introduction of REITs in the UK in 2007 proved to provide very poor timing as the 2008 financial crisis hit, provides some recent performance numbers to cheer investors who choose this instrument. While it’s theoretically possible to achieve a strong ROI within a single day of trading, similar losses are equally possible in the same time frame. FTSE NAREIT, designed to measure the performance of larger and more frequently traded REITs, shows dividend yields consistently within a range of 4 to 4.8 per cent (measured annually since 2009).

Not sure which is right for you? Speak with an independent financial advisor, who can assess your wealth portfolio and short-, medium- and long-range objectives as key considerations.

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