The full range of developing raw land into residential construction is becoming too much a risk for companies that build homes. The task is now split, with good results.
Homebuilders in the UK have traditionally functioned as developers. This means they took on everything from buying land to developing streets and utility infrastructure to building the homes. If the homes are priced right for the market – and meet market expectations for what a home should be – they made a good profit.
But the housing crisis in the UK suggests that this formula is no longer working effectively as it once did. Despite a robust increase in the population (2011 Census found that, overall, the country grew by 7% in the previous decade) and a historically underbuilt environment, homebuilders were unable to undertake the traditional risks of building. While the population grew by about 4 million people between 2001 and 2011, only 1.4 million homes were built in the same time period. The average home has slightly more (by statistical averages) than two people, suggesting that this rising population is underserved. Consequently, the price of homes has risen even while lending standards have reduced the numbers of qualified buyers. About 270,000 new homes built per year would satisfy population growth, according to the (now defunct) National Housing and Planning Advice unit.
That said, growth and demand are not uniform across all regions of the country. London and the South East have high demand, while the Midlands and elsewhere (including Wales) have lower economic growth and therefore lesser demand and wherewithal for housing. And in surprising niches here and there, there is an absolute demand for new homes.
This is where the creativity has come into play. Instead of taking on the full sequence of development – buy, plan, build infrastructure, build homes, then sell – home builders increasingly rely on strategic land specialists and their investment partners to bear some of the risk, do part of the work and share the reward. The land specialists and investors therefore do the following:
1. Identify local housing needs – Land specialists study economic, business development and other data to learn where new housing is most critically needed.
2. Identify appropriate sites – Within an identified market, land investment groups search multiple locations to determine where the best opportunities lie for optimal return on investment.
3. Understand local planning authority preferences – Land is not acquired without knowing the local predisposition to make zoning changes that would allow residences to be built where another use, such as agriculture, is the status quo.
4. Negotiate a purchase – One or several landowners need to be approached with an offer. Needless to say, this needs to be done within clear financial parameters.
5. Work with local planning authorities to achieve use designation changes – Once the land is purchased, a strategic rezoning must be pursued. This is more possible under the new National Planning Policy Framework (NPPF), which grants local authorities more discretion than in the past. Local authorities are now encouraged to free up between 5% and 20% of land for housing.
6. Construct development site infrastructure – With that land-use change, the land investors will fund construction of streets and utilities that provide homebuilders with a ready-made place for residences.
7. Sell to homebuilders – This is where the homebuilders pick up the programme. They buy single or multiple lots, build the homes then sell them. Of course, their capital investment in structures is significant, but it’s less money carried over a shorter period of time than if the six previous steps had been their responsibility.
Individuals who are interested in the land investment phase – up to and including step 6 above – should do so in partnership with experienced land investment specialists. And at that, they should consult with a personal financial advisor to determine if such an investment fits their overall investment goals and objectives.