The rising value of the UK’s housing stock has priced many investors out of the property market. But investing in land can offer the same levels of return.
In fact, the growth in demand for residential land from housebuilders and developers explains why values have increased by 2% in the first six months of the year overall, according to research. And in prime central London development land values are up by 18.9% on an annual basis, compared with 15.9% in the first quarter.
Best performing investment
Rising global food demand, climate change and foreign investment attracted by liberal British land ownership laws have helped to make a hectare of British farmland bought in 2002 one of the best performing investments in the country, according to recent research.
Up to 2012, good agricultural land in the UK had grown 270% in value from 10 years earlier to £15,415, outstripping gains in prime central London, which rose by 135% over the same period, according to research. And those values are continuing to rise, albeit at a slower pace.
The advantage of investing in land is the opportunity to increase the value of your asset much more than developing a residential or commercial unit already in existence.
Supply and demand
Be it agricultural land or urban building plots, getting a good return from your land investment comes down to supply and demand. Generally, there are relatively few development land opportunities available on the open market at any one time, and therefore a single developer wanting to acquire a good plot can push up the price for such sites.
So how can you increase the chances of the land you invest in being a sought-after plot? First, remember that land is a tangible fixed asset. Its value may vary but it rarely reaches zero, so it always has a base value.
The most important factor in deciding land value is whether it has planning permission or not. A plot of land for sale with planning permission, on average, is worth around eight to ten times the value of land for sale without approved planning. If the land is residential, an approximate rule of thumb is that land is accountable for one third to one half of your property value.
Location, size and development potential
Other factors that will determine the value of land are location, size and development potential.
Building land can cost up to 40% of the price of a new home, which means it is vastly more expensive than land without planning permission. Speculators are currently snapping up relatively cheap land without such consent but close to existing building boundaries in the hope that the pressures on the relevant authorities to identify suitable sites for the provision of more affordable homes will mean that development boundaries may have to be relaxed.
Also attractive to the green-thinking private investor is Planning Policy Statement 7, which is encouraging progressive individual builders to provide eco-friendly and carbon-neutral homes where boundaries are beginning to relax.
The first step of increasing the value of a building plot is getting the local authority to allocate it for development. While this move falls way short of gaining planning permission, it will increase the value of the plot.
Not only that, once a plot has been allocated for development the owner of that land can decide the timetable for turning it into a consent to optimise their position in the property value cycle. But with the demand for homes remaining strong, they has never been a better time to invest in plots of land that homes will be built on.
Thanks to Paramount Investments, a commercial estate agents for this article.