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Beware of Land as an investment

There is no denying that land like property land has been a fantastic investment over the last 10 years. The simple reason for this is that it is treated as a residual cost by developers when doing their development sums. This means that a developer will work out how much it costs to build a development, together with other associated expenses such as finance and profit. They then calculate the total value of the project.

The difference between the two is the amount they can afford to pay for the land. Therefore, as residential values have continued to soar and despite build costs also rising; it has meant that land values have largely continued to rise in line with house prices. In many cases they have actually outstripped house prices as eager developers compete with each other to get ‘there hands on’ more and more scarce plots of land. This scarcity factor is reflected in the varying proportion that land makes up of total costs in different parts of the country. In the north land costs will typically contribute 40% of the price of a new property. In London and the South-East where land is scarcer, this figure would typically be nearer 60%.

Value reflects use
The value of land however largely reflects what you can do or build on it. This is controlled by the planning system and means that there is effectively a dual pricing structure. Most land is without planning permission and is in agricultural use. The value of this land reflects the economic outputs of its use. In the case of agriculture this is not a high value economic use as only relatively modest profits can be generated from large areas. This is reflected in the current value of agricultural land of between £2-3k per acre.

However, where planning permission is granted for a change of its use for say housing development, its value is transformed in an instant to reflect its development value. Residential building land can be worth millions of pounds per acre, often over a hundred times its agricultural value.

Dual pricing
This dual pricing structure represents ‘on the face of it’ a great opportunity for speculators to make vast profits by buying land cheap and then waiting to receive planning permission. It sounds simple. It’s not; as a town planner I have been involved in the whole tortuous process of land becoming zoned as development land.

The process can take 5 or more years to be included in the Development Plan for the area. Even areas of land on the edge of an urban area have no certainty of being included for development and political manoeuvrings means that land which is initially included can be removed as potential development right at the end of the allocation process.

Option agreement
All this uncertainty together with the amounts of time and money that is involved in promoting potential development sites through the process means that many sites are bought or optioned by house builders or specialist development companies with access to the necessary expertise and finance. An option agreement incidentally, is where a landowner agrees with a developer to give them the right to buy the land for a set period of time and sometimes at a pre-determined price. This gives the developer the potential to buy development land without tying up all their capital and also gives the landowner a capital sum irrespective of them being successful in their land being designated for development.

Land investment scams
This all brings me back to the reason for this article, which is two fold. Firstly, it is to educate you a little in the ‘mysterious’ ways of the UK planning and development system. Secondly, it is to warn you of the many land investment scams that are doing the rounds. I was recently alerted by an e-mail from another landlord site, that has sent out a marketing e-mail of a land investment scheme being promoted by Leaders in Land. This scheme is not alone.

All you need to do is enter ‘land investment’ in Google to be bombarded by companies pertaining to offer irresistible opportunities for investment. The scheme in question is typical in that it offers to sell investors a plot of land for tens of thousands of pounds with the promise of large uplifts when it receives planning permission. The reality is that these schemes offer little or no chance of receiving planning permission and will stay in their existing or agricultural use for many life time if not for ever.

My advice – don’t touch them with a ‘barge poll’. If you want to buy land, why pay semi development value for sites which will never be granted planning permission when you can purchase the same type of land at a fraction of the cost at agricultural prices. Remember, a fool and their money is soon parted – so hang on to yours for a worthwhile property investment.

Chris Horne BA (Hons) MRTPIEditor

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