The nature of investing in land differs between individuals and institutions. But the reasons that real estate development is attractive to both are quite similar.
The Financial Times reported in the second quarter of 2014 that banks continue to limit their lending to property companies even now, several years out from the financial crisis of 2008. Does this mean that other investors – institutional and non-institutional financiers alike – are afraid of land and homebuilding as an asset class?
Hardly. Land is an investment well subscribed to by the wealthy and those who are steadily gaining wealth. This has been the case since the earliest days of civilisation and is no less true today than in the past. A combination of exceptional pent-up demand in combination with Government schemes to help homebuyers has triggered a strong market. Consequently, homebuilding has increased since early 2013 and more investors have increasingly set their sights on UK land.
While the acquisition of land in centuries past more likely came through conquest or inheritance, today’s investors – such as those working through property fund partners – can start small and build big over time (no deaths required!). With a plethora of financial instruments, individuals as well as institutional investors (such as insurance and pension funds) can take short-, medium- or long-term positions to generate asset appreciation.
But institutional and non-institutional investors have some differences:
Institutional investors only recently re-entered housing -And for the most part, pension funds and insurance companies are looking for income from rental properties. This differs from the individual investor who more likely is looking for value increase and a relatively short (18 months to 5 years) return on investment.
Institutional investors often operate on different timelines – While the anticipated ROI for larger institutionals may be established according to sophisticated calculations, land development is driven by factors that include how local planning authorities decide on land use, plus dynamics from the demand side. Individual investors who are properly informed of these variables, before and during the process, can make decisions that create optimal outcomes.
Institutional investors can themselves be REITs – Due to a rule change in 2012, the diverse ownership rule, institutional investors can form small clubs that function as real estate investment trusts. They still need to be listed on recognized stock exchanges, but the lines between closed fund investments in land and market-traded investment have become a bit blurrier.
So while banks may be skittish about land and property development, institutional investors and private investors (working in partnership with land fund managers) are largely responsible for funding land development into built housing. They are also reaping the rewards.
While institutions employ their own teams of analysts and economists, individuals are smart to consult with an independent financial advisor. The risk profiles of investors and their families need to be factored into decisions on all forms of investments