Why is investment in land not more popular?

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The worldwide property market is dominated by the value of buildings as opposed to land. However, sit back and consider the situation in more detail, land is obviously a very important part of any property development. So, this then prompts the question, why is investment in land not more popular when you consider the potential financial benefits?

Dead money

Perhaps the main reason why traditional investors with an interest in the property market do not look more towards the purchase of land is simply the time gap between acquiring land and building a development. Over this period, which could run into a number of years, effectively the investment is dead money although this could change dramatically as and when planning permission is granted and property developments are completed.

There is perhaps more interest in land nearing development than the mass media would indicate. This is because if land is acquired just prior to planning permission being granted (or after planning permission has been granted) then a potential development may not be too far away. It is also worth noting that there will be a perceived carrying cost of the investment which is effectively lost interest/investment return had you left the money in the bank or invested elsewhere.

Early investment risk

While there are obvious costs on top of land investment when looking to build a new property development, the initial investment in the land may not be enormous. In many ways this reflects the fact that the earlier you join the property development ladder the greater the risk which impacts the risk/reward ratio and the price of land.

If for example you acquired land with the idea of building a property in just a couple of years, but the development was delayed by five or six years, then this would in theory increase the cost of building the development and other associated investment required. You would have hoped the perceived value of the finished property development and the value of land itself would have risen in the meantime but this is not guaranteed. In simple terms, the earlier down the food chain you invest in a property development the greater the risk with so many different factors.

Demand for property

One obvious risk if you are looking to build a particular type of development and you acquire the land prior to the property development stage is that trends change. The local economy could change, demand for that type of property could fall and all of this would impact the perceived value of the development. In theory land should hold its value for many years, bearing in mind it is a constant commodity, but again this will depend upon local demand for land and for property developments.

There may also be issues with regards to your target market if for example you are looking towards the first-time buyer market. The longer your development is delayed the greater the chances you will have to increase prices to breakeven/make a return which will impact the size of your potential market.

Conclusion

In theory land is not a growing commodity so if you choose carefully, in the correct areas and the right type of land, it should in theory hold its value. However, while there are potentially greater rewards investing in the early stages of a property development, perhaps even before planning permission has been granted, there are also greater risks going forward. You need to balance up the perceived risk/reward ratio and also recognise that an investment in land could end up being “dead money” until your property development project begins to take shape.

You could compare this type of investment to that of a fledgling stock market share with the potential for great rewards in the future but nothing is guaranteed. The earlier down the development chain you invest the greater the risk but potentially the greater the rewards.

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