19 August 2019/ sale_land_guide

What you need to know before investing in land

Investing in land? Here’s what you need to know

Buying land can be profitable for savvy investors who do their research on the risks and rewards

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When most people think about investment property, they usually visualise commercial buildings or multi-unit rental properties – an investment that's already built. However, buying land can be an attractive investment, especially where there’s the possibility to develop property on the site or otherwise improve it to increase its value. But it’s a decision that must be well-informed and made wisely – and there are several questions you need to ask before plumping for purchasing land as an investment.

What type of land are you buying?

There are two main types of land you can normally buy in the UK – Greenfield land and Brownfield land. Greenfield sites are previously undeveloped land, such as fields, while a Brownfield site is land that already has, or had, buildings on it. It’s possible to develop on both types of land, but it may be easier to get planning permission on Brownfield sites.

Is it in a good location?

The well-worn saying ‘location, location, location’ applies to land as much as to properties. Keep an eye out for areas due to benefit from improved infrastructure such as transport links. If you’re not familiar with the area, spend time getting to know it. Are values likely to increase in that location? The primary value of land is the potential of what could be developed there. Different locations will appeal to certain investors, depending on their comfort level with risk. Investors who seek minimal risk would likely want to focus on areas that have already been tested and proven, with successful developments nearby. However, there can be significant profit potential for savvy investors who are adept at spotting up-and-coming areas on the brink of rapid growth.

What's the best potential future use?

This will depend on the land's location and trends that indicate what will happen there in the near future. If many new businesses are looking to set up nearby, this could indicate there will soon be strong demand for residential property, meaning a large, multi-unit apartment complex could provide a high return on investment as the area develops.

Will you need planning permission?

If you aim to develop property on the land you are buying, you’ll need planning permission. Some sites come with planning permission already attached, but this usually makes them much more expensive. Often this is only ‘outline’ planning permission and you’ll need to clear the final details with the planning authorities. Be wary of restrictive covenants, other legal restrictions or claw-back clauses, also known as overage. These are where the landlord gets to share in any dramatic increase in the value of the land. For example, a claw-back/overage clause could require the new owner to pay the old owner 50% of the uplift in the value of the land because it got sold for development. However, any claw-back/overage clause should be reflected in the price paid for the site. It’s wise to appoint a solicitor with expertise in this area.

If you’re looking at buying land to develop that doesn’t already have suitable planning permission in place, you’ll need to consider the time and cost involved, as well as the possibility that planning could be denied.

Are you clear about the site boundaries?

An issue that’s easy to overlook when buying land is making sure that the property’s boundaries are clearly defined – a fence or other boundary marker may not run along the legal boundary of the property.

Having a land survey carried out is essential to clearly establish the boundaries of the plot, so you know exactly what you’re buying. This can also potentially save you time and money further down the line if someone disputes your site’s boundaries.

Access to land can sometimes be problematic. You need to be wary of land which is separated from a public highway by a so-called ransom strip – a small parcel of land retained by the previous owner with the intention of restricting development unless the ‘ransom’ is paid.

Are there issues that could affect your plans?

Ask your conveyancing solicitor to carry out relevant searches to make sure there are no issues – from rights of way to flood risks and overhead power lines – that could affect your investment later on. These checks are likely to include local authority searches to look for any other planned developments in the local area, water and drainage searches to uncover issues such as any public sewers beneath your property and environmental searches, which will look at things such as possible land contamination on your site.

How much is it going to cost you?

To find out the sort of price you should be paying for land, instruct a surveyor to produce a valuation report. Look for a member of the RICS (Royal Institute of Chartered Surveyors) with experience in valuing land.

As well as the price of the land, you’ll need to budget for one-off costs including:

  • Solicitors’ fees
  • Valuation/survey cost
  • Stamp Duty Land Tax
  • Searches
  • Land registry fee
  • Re-connection charges for water etc
  • Legal and arrangement costs of your finance

The overall price will include the conveyance of the landholding and transferring the money, registering your title, completing the Stamp Duty Land Tax return and undertaking any required searches, such as the local authority search and the coal authority search.

Ongoing costs include Public Liability Insurance and service costs if applicable – utility bills and council rates. To make the land useable, you’re also likely to incur maintenance costs such as fencing, drainage, and repair of tracks.

What exactly will you get for your money?

As a landowner, all the land and the earth below is yours. However, if certain minerals are uncovered during digging, such as gold or oil, these belong to the Crown, not you. Also be aware that the seller may have reserved rights to your land, such as the mineral rights or a right of access – which means they can come onto your land to drive to their house.

When you buy land, if it’s freehold, it’s yours forever. A leasehold arrangement means it’s yours for a fixed period, running concurrently to the freehold. This can be for a very long time – for example, 99 to 999 years – after which it will revert back to the freeholder. Leases can be bought and sold, but the amount of time remaining on the lease is critical and will impact the sale price.

Are you comfortable with a long-term investment?

You’re not likely to make a quick profit on a field, so it’s sensible to plan to play the long game and try to judge the optimum time to develop on the land or to sell it. If you plan to develop the land yourself, factors that impact your ability to build or start construction immediately will be of high importance. This could be as simple as needing to plan for vehicle access or providing water, sewage, and other utilities. Even if you plan to resell the land without building, these issues will still matter because they will affect the resale value.

Looking for commercial land to buy? Check out Realla and find your next commercial land for sale!