To satisfy the crush of housing needs in the UK, local planning authorities are all but required to increase the inventory of homes in their jurisdictions. About half of towns and cities lag in setting forth plans to indicate how they will do that – indication of both how much is left to be dedicated to development as well as the fact that many planners can yet be influenced on where building should take place.
The opportunity for landowners to make money is strong. But in most cases they should not assume they can go it alone – nor can they net profits from development in a clean, simple deal. The Town and Country Planning Association – noting that since the 1947 Town and Country Planning Act that landowners cannot develop land without planning permission – says that while agricultural-use property might sell for £3,000 to £10,000 per hectare, the value can increase to as much as £2 million per hectare in “areas of highest demand.”
Sounds like winning the lottery, doesn’t it? Well, not anytime soon. A planning gain supplement, referred to as a Section 106 Agreement, is essentially a tax on those who experience a significant gain in value from a land sale. The obligation this imposes, negotiated between the developer and the local planning council, is intended to cover costs from increased infrastructure (schools, roads, hospitals, sewers, etc.) driven by new residents or commercial development. Another form of this is the Community Infrastructure Levy, which is used in some jurisdictions. In any event, the large profit to be made will be diminished significantly by this obligation.
And the negotiation of these charges is merely one aspect of the development process, one that requires a skilled sense of economics and local politics. But the reason investor-developers such as property fund partners, not original landowners, more typically orchestrate the conversion of raw land to homes is due to the broad range of skills and experiences required to complete the process. Those include:
- Viability assessments, to determine the suitability of the land for development as well as the cost-return evaluations (referred to as the threshold value).
- Site assembly (plans for how it will be developed, to appease planning authorities)
- Access works (costs in road building, for example)
- Remediation (more typical of brownfield development, where toxins need to be removed)
- Abnormal groundwork (managing geological problems, such as bedrock outcroppings or floodplain remediation)
- Relocation costs and buyout of existing residents (if any)
Some developers might work with their own construction firm to build roads and utilities, as well as the homes themselves. But many now contract or sell parcels outright to homebuilders, engaging in road and utility construction only. This may diminish their profits, but also turn the land over to parties who can focus their efforts on their skill set, designing and building homes that are right for the likely buyer.
Individual investors who themselves do not have real estate experience very often make up a portion of the investment group. They can work with as little as £10,000 to participate in a fund; such investors are strongly urged to work with an independent financial advisor to chose the investments that are appropriate for their personal wealth risk profile.