What Are The Short And Long Term Risks Of Investing In Land As A Real Asset Investment?

Land assets are quite capable of yielding strong investment returns. But risks are everywhere – know what they are, and work with professionals if you can.

Without risk there is no reward, correct?

Investors understand the equation well, and financial planners help guide them to achieving the right balance of risk. Not only should the rewards be worth the worry, but favourable returns on investment should be well-timed to the investor’s needs. What’s clear today is that investing in real assets such as land – at a time of exceptionally high demand for residential real estate – seems like a good risk.

Alas, it is still quite possible to get it wrong. While some of history’s greatest wealth has been built from buying, owning and selling land and developed real estate, there are all kinds of circumstances – and bad ideas – that create unnecessary risk. In addition, there is the dynamic of time, whether the investor expects gains in the short, medium or long run. Consider the following that could occur to the land investor:

Landowners unwilling to sell at a reasonable price – Land that is designated for agricultural use is worth much less than when approved for residential or commercial purposes. An existing landowner may be aware of that valuation difference, and get greedy when pricing the land for sale. Seasoned property fund managers would know the level of price tolerance to make asset growth feasible – and be willing to seek land investment opportunities elsewhere.

Real estate is very reactive to economic downturns – The drop off in home sales and homebuilding in the UK after the 2008 financial crisis is a recent and clear lesson on how broader economics play a large role in real estate investments. Property investors who sold in 2007 saw great asset growth during the last of the bubble years, while those who were forced to sell in 2009 probably lost quite a bit. This is why shorter-term investments, such as those focused on strategic land development, at least enable the investors to have a clearer picture of market conditions when the development is complete.

REITs – The liquidity of real estate investment trusts make it attractive for the investor who is worried about the aforementioned economic downturns. But because it is traded on the exchanges, a REIT is also subject to even momentary fluctuations of the markets due to unrelated events. Also, due to a regulatory set-up that renders real estate investment trusts unsupervised by the Financial Conduct Authority (FCA), no complaints to this agency can be made, nor can compensation claims can be made with the Financial Services Compensation Scheme.

Ill-advised schemes such as “land banking” – While authorisations by the FCA provide due warning against this, there remain investments in what’s called land banking. This is where plots of land are purchased where planning permission is unlikely due to greenbelt status, remediation expenses on brownfield land, or simply being too small for development at scale.

It makes sense for would-be land investors to engage an independent financial advisor for guidance. A holistic review of an investor’s risk profile can help identify when real estate makes sense – be it through either a REIT, alternative investments in land or buying rental property.