Does Investment Land Complement Property Market Investments in a Portfolio?

Mark Twain’s oft heard adage – ‘buy land, they’re not making it anymore’ has been indirectly taken to heart by investors in the UK scouring the markets for the best investment. That is to say that in relation to the boom in the buy-to-let property market it is not the bricks and mortar which rises in value, but the underlying UK land on which the development sits. Indeed, the value of bricks and mortar deteriorates over time, so in some senses a UK property market investment is actually a UK land investment more than anything else.

In this article we will look not at the relative merits of a land investment vis-à-vis a property market investment but at whether the two (ie direct land investment versus indirect land investment) complement each other in an investment portfolio. The former subject is too extensive to discuss here and, at any rate, since many people already have property market assets the pertinent question for them is this: ‘does investment land complement property market holdings or is each investment opportunity best pursued in isolation?’.

Of course much depends on what type of investment land is being considered. For instance, self-build land investment is a natural bed-fellow of buy-to-let property market investment since it is common for investors to develop small plots of UK land and then retain ownership in order to earn rent from the resulting property. However, if your idea of the best investment is not one which involves buying land with planning permission or buying land without planning permission and then developing it out, there are land investment alternatives.

One such is buying land on a professional property and development project. This is sometimes known as Site Assembly land investment and often appeals to the investor for whom self-build land investment is not suitable. The growing market for investment land is being in large part serviced by Site Assembly investment land because, relatively speaking, the number of people investing in land is growing but only a small proportion have the necessary skills and/or appetite for self-build land investment.

With this in mind, we can refine the original question thus: ‘does Site Assembly land investment complement buy-to-let property market investment or is each investment opportunity best pursued in isolation?’ (since Site Assembly land investment is becoming more common).

The key considerations in land investment, and in fact any investment, are threefold:

-Risk (what is the chance of gaining/losing)
-Term (how long is the investment for?)
-Liquidity (how easy is it to exit the investment?)

These criteria will help elucidate whether buy-to-let property market investments and investment land on a Site Assembly project are complementary. In investment terms (ie land investment and otherwise), ‘complementary assets’ are those that provide diversity, so the Risk, Term and Liquidity should be different in each case.

Let’s see:

Buy-to-let property market investment
-Risk: Low
-Term: Long
-Liquidity: High

Site Assembly land investment
-Risk: Medium
-Term: Medium
-Liquidity Low

Although these are generalisations, the above broadly reflect the true nature of buy-to-let property market investment and Site Assembly land investment. Naturally, some buy-to-let property market investments can be medium term just as some Site Assembly land investment projects offer moderate or even high liquidity but generally speaking the information above holds true.

It is therefore reasonable to conclude, working from the premise that complementary investment assets display different profiles (Risk, Term and Liquidity), that Site Assembly land investment and buy-to-let property market investment do complement one another in a portfolio.

This article has not attempted to assess the extent to which investment land is superior to property market investments (or vice-versa). What it has attempted is to consider the growing popularity of investing in land (especially on an existing development projects) and whether such a venture is compatible with a buy-to-let property market investment portfolio.

Rational analysis, as set-out above, suggests that Site Assembly land investment and buy-to-let property market investment are complementary.