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What form of hands-off investment has on average returned over three times the profit of real estate investment (and completely shattered stock market returns) over the last two decades?
The answer is land investment. And despite the fact that returns on land investments have consistently been nothing short of spectacular, the future looks even brighter.
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It’s a fact that land investment has returned (on average) over 900% for investors over a 20 year period and with a serious shortage of this natural commodity in several global spots such as the United Kingdom, the capital gains for shrewd investors are likely to get even bigger.
In this article we’ll look at the exact factors you should consider before purchasing land as an investment.
Land shares some interesting similarities with real estate when it comes to evaluating its potential for capital growth. In this segment we’ll look at how to assess land locations so that you choose the best plots of land that are likely to explode in value quickly.
Here are the two main factors that you must consider when evaluating potential land plots for investment:
1. Location, Location, Location (And Did I Mention Location?)
When you purchase a real estate investment, before taking on the property you will of course investigate its location thoroughly. Why? Because the location of real estate will have a large say in its capital appreciation as well as the rental yields it commands. It’s much the same with Land investment – while there are no yield considerations, the location of a plot of land will largely determine it’s appreciation in value. The location of land will determine its likelihood for planning permissions as well as the chances of it being bid on by a major developer. Location is key.
Here are some key considerations when determining the location value of a plot of land:
– Is the land close to major rail/road networks and does it connect two or more established communities? If the answer is yes then it’s more likely to receive the nod for planning permission and also has a far better chance of being tagged as a potential site for developers.
– Does the land have easy access to gas, electricity, water & other utilities? A developer is far more likely to build in a plot that has ready access to these utility networks. Additional utilities may include easy access to sewers.
– Is the land in a green-belt area? This is an area that’s government protected and green belt areas can have far greater problems in getting planning permission for development than non-green belt locations. Having said that, many green belt locations are increasingly being allowed to have land developed (due to the land shortage crisis) – if you’re planning to purchase green belt land then you can see if other green belt land in the area has been given planning permission for development. While there is no guarantee, this can be a good indicator that your proposed land investment could also get the green light for planning permission.
– Identify Town Growth Patterns – The potential land investor must have a skill for identifying in which direction a town or city is heading. Investing in land that’s not in the path of this growth could mean that the land will remain baron for a lot longer before the capital gains can be realised by way of a bid.
– Physical Characteristics Of Your Land – While this may not strictly be a location issue, there are several physical characteristics that your proposed land site will have that may affect it’s potential for development – the type of soil that your proposed land investment has may affect how it may be used for example. The surrounding views and whether it is on flat land or hills is a further consideration.
– Identify Towns That Have Been Tagged For By The Government For Housing Development – We already know that the government is committed to injecting billions of pounds into affordable housing. Purchasing land plots in specific areas that have been ear-marked for house-building is a further way of ensuring that you purchase land in an area that has an excellent chance of gaining planning permission, and ultimately attracting a developer who will purchase it from you.
– Make Use Of Government Departments – Call up councils where you are planning on purchasing land and ask them what their plans are for growth. Ask about new highways and infrastructure that may be on the agenda and if any greenbelt areas are likely to be developed in the near future.
– Affluence Of The Surrounding Area – Obviously, the more wealthy the area (and surrounding areas) of the location of your land, the more valuable it will be. In real estate, one effective strategy to identify properties with fantastic potential for capital growth is by identifying “spill-over” locations – these are areas that are relatively cheap to buy into but that neighbour property hot-spots. What tends to happen is that the value of these spill over areas tend to increase as people who cannot buy into the hotspot location are forced into the spill over regions. The same tactic can be applied with land investment.
– Is Your Land Close To Existing Developments? Land that is within close proximity to existing developments are more likely to get noticed by developers (and the green light for planning permission) than land that is slap bang in the middle of undeveloped green belt areas with sensational picture perfect views.
– How Well & At What Price Do The Houses/ Accommodation Near The Land Sell? If there are houses near the site of your potential land purchase then you should make enquiries as to how well the land in that locality sells. Research the most recent sales to determine the average prices. This should give you a fair indication of how well land in this area might perform as an investment.
2. Likelihood Of The Land Achieving Planning Permission
If the land you’re purchasing currently does not have planning permission, you must make an assessment of the likelihood of the chances of it receiving planning permission for development. Choosing land that is likely to receive planning permission is not an exact science (you need to have deduction skills to identify the land most likely to get permission). Here are some of the issues you must consider:
– Is The Land In A Greenbelt Area? Obviously, if the land is currently in the green-belt then there will be greater difficulty in getting planning permission. However, because of recent government intentions to develop (UK) land in the greenbelt, a lot of land categorised as green belt will still receive planning permission if certain conditions are met. A lot of these are discussed below.
– Proximity Of Land To Areas & Developments That Have Already Received Planning Permission – Land that is close to other land in the area that has already received planning permission may be more likely to receive the go ahead for development itself. In contrast, land that is not near any developed land or slap-bang in the middle of an area that is “prize countryside” is less likely to receive that elusive green light.
– Proximity Of Land In Areas Of High Development – Certain areas within the country have been tagged for development. These are areas that the government intends to develop – land in these areas are far more likely to get planning permission – if you inquire what the current areas are and focus on land purchase in these areas then you’re less likely to end up with land that is denied permission for development.
– Proximity To Land That Is Close To Motorways & Vital Utilities – In the last section we looked at how proximity to utilities and motorways are important RE the location of the land. Well these factors are also crucial in the land obtaining planning permission for development. A council is far more likely to grant permission to land that has immediate access to electricity, water, gas and transport links than land that does not have ready access to these utilities.
– The Requirement For Housing In The Area – This is linked, at least in part, to the proximity of land to areas of high development factor. Land investment in areas that urgently require new housing is far more likely to give a timely positive return than land investment in areas where no such need is identified (particularly if it is in the green belt).
– Proximity Of Land To Existing Towns & Villages – Land that is very close to existing communities stands a far better chance of gaining planning permission. There are many economies of scale for the council to allow land like this to be developed – for instance, required social services such as police, fire and medical facilities will already be in place.
It’s worth remembering that the value of land can increase spectacularly once planning permission is granted. Hence when you’re investing in land (either individually or as part of a group), your ability to identify land that’s ripe for planning permission is key.
Remember – Land is a commodity which is no longer made. There is no “competition” for it (it’s an effective monopoly) and those investors who invest in land today may well achieve some truly outstanding returns tomorrow and long into the future.