Property is falling like a stone every where around the world, investors are running for the exits and it seems as though the end of the world is not far away. Well that is what it might look to someone who had landed from another planet as the worldwide property market is yet to receive a much need boost from the ongoing rescue of the financial markets. So is it time to look at another approach? Is it time to look at land rather than property?
While it may seem a little strange to be suggesting a purchase of land as oppose to property itself, these are not normal markets and we actually need to look at different approaches to take advantage of the down turn.
What are the advantages of a land purchase?
There are many factors to consider when buying land although the main reason at the moment is the fact that there is a massive glut of property waiting to be developed by many building firms in places such as the UK, the US, Europe and basically everywhere around the world. Land values may not have fallen as far as property itself but there has been a definite softening of prices and undeveloped land goes at a fraction of the cost of a developed property, i.e. a home.
The main reason for the glut of land is the fact that in the boom times, when nobody could see an end to the rise and rise of property prices, many of the larger building firms thought that they would quite literally run out of land in the very near future. We saw a great many UK house builders taken over by larger competitors as a way to access their growing land banks, land banks which would keep the combined group in business for many years to come.
However, now that we have seen the property market literally fall off the edge of a cliff these massive land banks will not be earning income for some time to come. The glut of houses on the worldwide market, many of which have been taken on by various national governments, will ensure that there is a constant drip feed of properties back onto the market when the time is right. This in turn will reduce the demand for new homes which are traditionally more expensive than re-sales.
As money becomes ever tighter for these large house building companies and their need to raise cash to survive increases we could see a large number of distressed land sales at rock bottom prices. Those who can afford to take the plunge on a long term basis could easily end up with massive land banks for the future. There would be limited maintenance required and they could also consider leasing the land out for alternative uses in the meantime to create a small income flow, ready for the days when the property market comes back to life!
What are the disadvantages of a land purchase?
For those who have money to lock away for ten maybe even twenty years for the better returns, there is massive potential to not only resell the land at a large profit but they could also partner with someone in the industry to build the properties and market them when the time is right. However, for those looking for a short term investment to try and ‘flip’ there are substantial risks.
The worldwide property market is on its knees and even when the giant returns to its former standing there will still be a reduced need for new housing. This is why it could take some time to liquidate the investment for a gain and because it is non-income producing there may be financing costs if debt was involved.
Planning permission in the future could be an issue as there are deadlines from the time historic planning permission was requested to the time the development begins. If this timescale is exceeded then there is every chance that you may have to reapply under a whole new planning regime. While it would be unlikely that you would not be granted permission this is always a risk.
One possible risk which many people may not consider is the fact that fashions change, what may be a popular area today might have totally changed in ten years time. Businesses come and go, people move and working trends will likely be very different in a decades time.
While any market which has the slightest connection to property has shown a marked fall over the last 12 months there are good opportunities out there if investors have the time, the money and the patience to look. It will not be a quick buy now and sell in six months deal as this subdued property market could quite literally go on for ten years or more if you are looking for markets to return to former levels.
Distressed sales have been increasing of late and while the housing market did take some short term comfort from the worldwide financial rescue package this has not followed through as yet. We may actually be seeing the bottom of this stage of the investment cycle on the stock market as shares have been in free fall for many days now.
As with property, many people are selling shares at any price just to reduce their exposure and grab some income. Stock markets are said to look around 9 months ahead so we may actually see the property market start to settle down over the next 12 months or so – but recovery is still some way off.
Land investments could well be the way forward in the short term for those who look a little longer term for their investment returns. There is also the fact that undeveloped land is much cheaper than developed land, therefore the potential returns are larger in the right hands and the right economic environment.