If you can’t afford a buy to let property, what about land investment? It’s the new Eldorado but there are pitfalls and you need to have a strategy if you are going to part with your money.
THE story of the three little pigs and their houses built of straw, wood and brick is apocryphal. You can’t build a house without the materials nor can you build a house without land.
In the West Indies they get round it but it is some system. There they have chattel houses, homes built so that they can be easily moved. If the land rent rises too high, you pick up your home and move to a cheaper plot. See there is something we can learn from snails!
That is, of course an extreme solution and doesn’t really happen these days. In Britain it certainly isn’t possible. Instead the battle is on to find land that can be used for building. Every conceivable spot seems to be snapped up these days and land investment is the new big thing.
Fuel has been added to the fire by the government’s pledge to build tens of thousands of new homes in the south east to tackle the housing crisis, but vowed that there is "no question of concreting over the greenbelt".
That means someone, somewhere is sitting on land that is going to be worth a fortune. It could be, as the slogan for a very long shot get rich scheme goes, be you.
Think more practically and think how often have you heard about substantial profits from buying land cheaply and obtaining residential planning consent? How often have you thought that the market is only available to developers and professional speculators? Buying land for sale is seen as a solid investment.
There are, however, a number of must-know facts for the investor. It is easy to be seduced by the figures that show the value of land has risen dramatically in recent years – almost 24 per cent last year – and with the current shortage of affordable housing, the value of self-build land development looks to be on an upward curve. Land cannot be conjured out of thin air and its supply is finite.
Even so people buy land for different reasons. Some are motivated by the wish to have a green field to themselves, others take a long-term investment perspective and hold on to their land looking to build in the future. Many use their plot as self-build land to build their own "dream" home.
The market has changed, as a trawl through the Internet will show. Land agents can market plots of self-build land for sale to the general public rather than just public bodies, farmers and the landed gentry as previously.
Yet it is not a market that is as simple as it seems. The first time land buyer needs to be aware that because you are entering an unknown, a land agent can provide invaluable help with the buying process.
For the man in the street buying your own home gives you a flavour of what is involved and there is some overlap between the two purchases – but there are subtle differences between the deals and, as with any investment, there is an element of risk with investment land.
Land speculation is about having an eye on the long game. The government has already said that to cope with the demand for housing in London green belt areas will need to be developed. That, in turn, has meant large tracts have been bought from struggling farmers by developers, parcelled up into plots and sold for up to 10 times their original price to people who wrongly believe they will soon be able to build there.
In one case land was sold at £2,500 an acre by the farmer and the plots sold on and sold out fast at £35,000-a-time – even though the prospective purchasers were clearly told the plots are in the greenbelt and there is no planning permission in prospect at the moment. The profit made was £5m.
The gamble here for those spending £35,000 is speculative. The hope is that in the long term planning permission, in areas of high housing need, will be granted for land that at the moment is considered out of bounds.
A rational approach is vital if you are to be a success when it comes to investing in land. The cases of fortunes being made overnight are rare and are usually attributed to "a friend of a friend".
There is a lot of activity from land agents, particularly across the south east of England. They specialise in land for sale close to existing housing that has been identified as having a good medium to long-term chance of gaining planning permission for residential housing.
Residential-sized plots of land for sale are offered to the public, allowing them to share in possible future development gains. With the dot com crash, failing pension schemes and recent accounting scandals, the simplicity and transparency of investment in building plots for sale has gained many devotees.
There are no complicated concepts that investors need to understand with land, just that there is an ever-increasing demand for building land for sale and a restricted supply of plots for sale. The other plus is that land is real. You can visit your plot and walk on it.
Buying land is free of accounting scandals and it is clear when property prices are going up (or down) and the reason for this movement. It is a cheaper investment than buy to let – for example a semi-detached house in the south east of England can easily cost £250,000. A residential sized plot of land in the south east of England, close to existing residential homes, can be bought from around £15,000 – if you’re lucky.
So how does it all work? Land increases in value in two ways. By increasing property values (due to demand outstripping supply) and by being granted planning permission to build on it.
Taking our £15,000 parcel of land as an example. If you were to be granted planning permission to erect a four-bedroomed detached house on it, the value would increase accordingly. The builder might be prepared to pay £200,000 for your land and he would be set on recouping around £600,000 for the finished house.
There are risks in buying plots in the hope that planning permission will eventually be granted – it is not guaranteed on some of those greenbelt sites – and in buying land where the cost of supplying utilities is so high that it makes the development a non-starter.
That said, the Internet is full of stories of people making sudden fortunes from the business. Land speculation is a bona fida investment so long as you treat it sensibly and are not seduced by illogical claims when it comes to profit potential.
There’s no such thing as a free lunch or a millionaire businessman who did it all from the golf course. This might be the land of the free but it ain’t a place of free land.