All about investing in Land

By Kosta Kioleoglou

In most countries, land is a very desirable commodity. Sprawling cities and expanding commercial developments bare witness to this assertion. Land is a limited non-renewable resource that plays a vital role in a country’s economy. Land resources and its management are of fundamental importance for sustainable, environmental, social and economic development.

Open land is often consumed at a rapid rate by cities and developers hungry for space to build more housing, retail, industrial, and office space.

In anticipation for future development, investors, as well as municipal or provincial governments, may purchase and hold land that is vacant, rural or underutilized at an attractive price before its value rises once it falls in the path of development. This practice is called “SLIM” (Strategic Land Investment Model). The key to successful Strategic Land Investment Projects is to acquire land in areas with a shortage of land relative to the demand.

Intensification polices will continue to propel land values in the gateway cities: available sites look like gold. Land may seem expensive today, but it may look like a bargain tomorrow.

Facts about Land…

The world has a total surface area of 510 million square kilometers of exposed land and water:

361 million sq km (70.9%) of the surface is water

149 million sq km (29.1%) of the surface is land

Out of the 149 million sq km of land, approximately 70 million sq km (slightly less than 50%) is habitable. The world’s population has now reached 7 billion. This represents an average of 100 people per square kilometer. In addition to people, we also need to account for such amenities as:

dwelling units (homes)

schools and hospitals

parks and recreation properties

rivers, lakes and reservoirs

retail, commercial and industrial properties

railway, airports, roads and other transportation

utilities, waste management, and treatment plants

agricultural land and livestock

resources and mining properties

shopping malls and retail space

all of the earth’s wildlife and forests

Now… one square kilometer of land for 100 people really doesn’t seem so big any more, does it?

Is it 100% safe?

Real estate is a commodity subject to cycles in terms of its underlying supply and market demand. An investment in land is also price sensitive relative to other available financial assets.

The importance of a disciplined disposition strategy dictates where to search for acquisition opportunities. A good strategy is to acquire well-located quality properties within desirable markets with good future development potential. Re-zoning of a property will also add value. It is also necessary to bring services to the land in preparation for development. Sites that will benefit from infrastructure development and public transportation improvement plans are also considered as good options.

Real estate is the world’s largest asset class and comprises over 50% of global financial wealth. Regardless of location, language, work, or culture, every human being on this planet needs real estate.

Unique characteristics of real estate include:

  Increases in value as it ages – it is a real asset

  Demand for land increases over time as supply shrinks

  Remains developable, as it is a non expendable commodity

  It is strategic and secure for both local and foreign investments

Real estate, for the most part, is illiquid and difficult to monetize when needed. Real estate assets are not typically added to investment portfolios due to their relative lack of liquidity. Generally, investors acquire real estate with a longer term holding strategy, as real estate does not trade as efficiently as equities and bonds. In addition, transaction costs associated with the acquisition and disposition of real estate are much higher than other investments e.g. stocks and bonds.

Before investing in land, someone must realize that land investments are considered to be safe (under terms and conditions) but definitely not 100% risk-free.

How to invest in Land?

There are different types of land investments depending on the use of the land. We can identify 10 general categories of potential land investments:

  Residential development land

  Commercial development land

  Row crop land

  Livestock raising land

  Timberland

  Mineral production land

  Vegetable farm land

  Vineyards

  Orchards

  Recreational land

Nowadays, there are several ways to invest in land. Apart from the traditional way of individually buying a piece of land, other available options, such as a REIT (Real Estate Investment Trust), and ETFs (Exchange Traded Funds), provide diversified exposure to industrial, office, retail, health care, public storage and residential property. For most small investors, REIT and ETFs are an ideal choice because they do not require direct management, they are broadly diversified by property type, they are geographically diversified, they can be purchased or sold on a real-time basis and they are very inexpensive.

Issues to Consider Before Purchasing Land

Once the decision has been made to purchase raw land as an investment or for development, investors need to understand many issues about the legalities associated with the use of specific parcels of property. For example, land-use restrictions may curtail the manner in which the owner can use the land.

In addition, riparian and littoral rights may stipulate the access that the landowner has to adjacent waterways. The lay of the land may dictate if it lies in a flood plane, which would greatly impact the manner in which the land could be utilized. Small investors should consider the land’s access to basic utilities such as accessibility, electricity or telecommunications. Investors should also review the land’s annual property-tax obligation, assess the potential for trespassing violations and analyze the remoteness of the land from the land owner, as well as from the nearest community.

All of these issues are important because the lack of utilities may greatly hinder the ability to utilize the land. The land’s remoteness may impact the amount of time a landowner has to enjoy the property and property taxes may impact the landowner’s finances. It is important to know if the land is freehold or lease hold, as the type of ownership affects the value of the land.

With these issues in mind, prospective landowners should undertake a comprehensive due-diligence assessment before deciding to purchase land.

Is it Risk free?

Investors considering a raw-land purchase need to realize that they are engaging in a purely speculative investment. This is because undeveloped land does not generate any income (or generates a very low income in case of renting it out) therefore, any return on investment will have to come from the potential capital gain that may be received once the land is sold.

We have to remember; any market that looks solid and secure has the same chances to fluctuate as any other market (It is not if, but when this will happen). Timing is one of the most important parameters when it comes to taking investment decisions and we must be ready to get in as well as to get out of the market before it is too late.

Usually, when property prices rise due to people gorging themselves on debt, the ensuing recession tends to be particularly deep and long. Over-leveraged households cut their consumption drastically. Output and employment collapse and that could lead to an economic collapse, which is essentially a severe version of an economic depression. This could lead an economy to be in complete distress for months, years or even decades. In this case, land value will not only rise but could even fall!

So when we are involved with real estate investments (or any other investment), we must always be under alert. Nothing is 100% risk free. As long as we are ready to make an investment in Land or any other property, we must be aware of the risks involved and be ready to take the losses if any.

Although we cannot predict the future, in order to see ASAP the signs of the market, we can always learn from the past. In order to minimize our risk and have a successful investment, we always need to remember that markets fluctuate and try to read the signs.

Writer REValuer (Tegova).

Director of Engineering and Property Appraisal

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