How Real Asset Managers Approach Land Investments
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Real assets of all kinds, including land, have performed well, years after the financial crisis. But managers of these assets need to know their category.
Real asset managers are different from financial brokers in many regards. Chief among them are how they understand the assets themselves, beyond performance metrics. Rare antiques and art require people who are versed in art history, for example. For people who trade in gold, an understanding of the market and global geopolitics is a requirement. A real asset manager who works in land investments is perhaps the best example of this distinction.
Investment in UK land is a very complex and detailed area of expertise for asset managers. For investors, this might be reassuring because of the heightened degree of interest in land and property. Particularly now - more than a half-decade since the global financial crisis - land investments retain an attraction to investors for several reasons:
• Land assets outperformed securities - In the first 13 years of the 21st century, the world equity index (performance adjusted for inflation) generated an annualised return of only 0.1 per cent. Bonds did better, with an annualised return of 6.1 per cent, benefiting from a low-interest rate environment that could change soon. Real assets including land can and often do perform much higher.
• Land assets are hedges against inflation - Real assets, including land, tend to rise in value with inflation. Fund managers value such things as farmland and forestry holdings because their products rise with inflation and increased yields (food and wood) over time as well. Considering strategic land investments, which prepares and converts raw land adding into housing-ready developments, the demand for housing and price increases that outpace inflation drive home this point.
• Land assets are non-correlative to financial markets - Land itself lost little value in the financial crisis while the financial markets were in a tailspin.
But to be clear, working in land investments comes with requirements:
• Illiquid, for better or worse - Almost all real assets cannot be disposed of easily. Investment in a joint venture land opportunity, for example, will come with contractual time parameters. It may be that the investor can exit after 18 months or after several years. Real estate investment trusts (REITs) are the exception, traded as market securities (and as such are subject to price volatility).
• Requires specialised skills - Managers of UK real asset funds understand local economies, the suitability of some land over others for building, the predispositions of local planning authorities, home site design and infrastructure. It’s far from a market security buy-sell scenario – and just as importantly, it rewards strategic and creative thinking.
Investing in any form comes with a balance of risks and rewards. But those risks can be mitigated with a balanced portfolio - involving land and more traditional equities, bonds and such. The input of an independent financial advisor can help identify the right balance.
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