How Advisable is UK Land as an Alternative Investment?

There are many ways to invest outside of the FTSE and real estate investment trusts. Land for future housing development is an enticing example.

 

Oh, for the Wisdom of Solomon, right? The legendary, judicious king of the Old Testament is believed to have advised in Ecclesiastes to diversify one’s investments. As it reads in Chapter 11, verse 2: “Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.”

 

Thus we’ve seen investment gurus ever since advise on why portfolio diversification is a smart strategy. It bears noting that historians place King Solomon as the richest human to have lived prior to the Industrial Revolution, with wealth the equivalent of £1.37 trillion, adjusted for inflation.

 

Nobel Prize winner Harry Markowitz (Economic Sciences, 1990) put alternative investments into a modern, post-War context by devising the optimal models for investing that overcome the problems of cyclical, market-traded securities. For the investor, choosing land and other alternative investments avoids the risk of a portfolio that is vulnerable to the deep troughs where most other investments dip in correlation to each other.

 

These non-market securities can range from fine wines to art, gold, antiques, built property (housing, commercial and manufacturing), airport parking (this is relatively new) and land. Within the Markowitz model, it’s easy to see that when the stock market is down very often the gold or art markets are up.

 

A Solomonic –level disaster visited England and the rest of the world in 2008; this time, the financial crisis pulled down many alternative investments with it (Markowitz says that can happen in extreme circumstances). But the recovery since has seen land and housing values in the UK rise back much more quickly than other parts of the economy. Real asset funds that are in land that is converting to residential development are a good example.

 

What makes land so special? It’s because land has several characteristics that make it “non-correlative,” that is, out of sync with market securities.  Some of those characteristics include:

 

Land is a “wealth battery” – The finite nature of land, particularly in the British Isles under conditions of an expanding population, engenders it with value that generally correlates with, or exceeds inflation. Think of it as a place to store money, similar to a bank or a fuel cell, where it is safe and will actually build in “power” (asset value).

 

Land investments are tied to larger geographic/economic strengths – Investing in land in the UK is smart for different reasons than investing in land in Latin America, for example. But in both cases the investor can assess the intrinsic nature of what will make the land increase in value (the very strong demand for housing in the UK is a key driver there).

 

Land use can change – Some land derives its value from agriculture or forestry and the conversion of one to the other. In other cases, land that is not developed can achieve local planning approvals that greatly increase its value. UK Property fund managers understand this scenario very well: they focus investors’ money on tracts that would serve a market and council need for smart development that meets national goals for home building (as required by the UK Government’s National Planning Policy Framework, administered by the Department for Communities and Local Government).

 

One does not need the wisdom of Solomon nor Markowitz to invest in market securities or real assets if they work with a qualified independent financial advisor. The balancing of risk as well as life-stage planning enables advisors to devise a smart individual strategy.