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Go, grab that pie of British realty
Pankaj Anup Toppo, OutlookMoney.com | June 01, 2006
The English village," wrote P.G. Wodehouse, "combines the comforts of civilisation with the restfulness of solitude in a manner equalled by no other spot except the New York Public Library." But alas, you aren't going to be able to buy a slice of the New York Public Library - at least not yet. But you can buy a piece of Old Blighty - and no, you don't have to be a Lakshmi Mittal or a Prince of the Blood to be able to afford it.
If it's not the restfulness of solitude that you crave but a solid business opportunity, buying land in the UK is still a great idea. And now, thanks to the UK Land Investments Group, who have introduced UKLI Real Estate Pvt. Ltd. as their official referral agents in New Delhi, buyers in India can now invest in British realty. Interested? Read on.
Ground reality. There's a huge demand for residential units in the UK, thanks to a burgeoning population. An increase in the birth rate as well as the influx of people from other parts of the globe has meant that the island nation is hard-pressed for space to house all its inhabitants.
The problem is particularly acute in the cities, where lack of housing is a severe problem. In 2004, Kate Barker, member of the Bank of England's Monetary Policy Committee, reviewed the housing situation in the UK, and found a crisis situation. Her study found that construction of houses in the UK had fallen to its lowest level since World War II - only 175,000 houses had been built in 2001.
Barker also found that over the last 30 years, prices of residential units in the UK went up by 2.4 per cent a year in real terms compared to the European average of 1.1 per cent - it was zero per cent in Germany and 0.8 per cent in France.
As a result of the rise in prices, home buyers in 2001 paid on average �32,000 more for their homes. In 2002, only 37 per cent of new households in UK could afford to buy a house, compared to 46 per cent in the late 1980s. To reduce the rising prices of residential units to 1.8 per cent, it was estimated that an additional 70,000 private sector houses would be required per year.
On a more ambitious note, to reduce the trend in rising prices of residential units to 1.1 per cent, an additional 120,000 private sector houses per year would be required.
This means demand for land is bound to increase. Based on Barker's recommendations, the planning process was changed to the point where local councils were given targets (and penalised if they failed to meet these targets). The government is also trying to relieve pressure on the county councils by developing land around the big cities like London.
Yes, the demand for land will only go up. Over the past decade, land values have gone up 370 per cent, and over five years by 226 per cent. And capital values of land are expected to move up even further.
Strategic building. But what kind of land can you buy? There are three broad categories of land in the UK�Brownfield, Greenfield and Greenbelt land. Brownfield land includes land that has a fixed structure on it, either commercial or residential, while Greenfield land is vacant land that may possibly be used for agriculture or is just left undeveloped.
The local council decides upon how this land can be used or developed. Greenbelt land is land surrounding existing developed land and has a specific purpose. If you buy land in the UK through UKLI, what kind of land will you get? "Most of it is Greenfield and Greenbelt land," says Gurdeep Walia, director, UKLIREPL.
The government's thrust on housing has seen land values go up, and has also seen renewed interest in suburban tracts. The UKLI consciously buys land at or close to locations that have been targeted for considerable housing development. For instance, the company owns land in Borehamwood, where an additional 210 homes needs to be added every year.
"Traditionally clients have been interested in buying land but did not have the resources to buy the full site. Even if they managed to do that, there was not much appreciation in capital values unless the necessary planning permission has been sought. So, we saw an obvious fit for ourselves," says Walia.
Further, with only 60 per cent of the government's housing targets to be built on Brownfield sites, there is a huge pressure to review the obsolete and dated policy, to ensure that ordinary citizens in the south-east of London have a fair chance at owning decent and affordable housing.
How it works. UKLI has a specialised land-buying department that identifies potential sites and those that are most likely to get planning permission subject to UK authorities. UKLI also takes care to only buy sites that are close to London, and close to major transport links such as railways, underground networks and airports. The company's aim is to ensure that investors get the highest possible returns in the medium to long term.
After locating and buying the land, UKLI divides it into small plots, which are then sold to investors. This land is freehold, which means that once you buy it, the title is in your name and you can develop it or sell it, as you please.
The bad news is that the land is sold without planning permission, so you will have to wait till that comes in before you start building. Depending on the location, each plot measures 200-400 sq mt; UKLI retains 25-30 per cent of the total site area for roads, parks and the like. This is in accordance with Section 106 of the Town and Country Planning Act 1990, which states that developers must set aside a certain percentage of their land for the provision of social or key worker housing.
How to buy. Yes, there's land available and yes, the RBI allows you to invest in real estate abroad. But how do you go about it? The best way is to go through UKLI where you can take advantage of the company's expert group of consultants. Going all alone would mean you will be required to do the homework yourself.
The UKLIREPL investment relationship managers will tell you where the site is located and will give you a brief idea of the demographics. "They (potential investors) can also meet the directors of the company. Further, we can also take them to the actual site where the plot is located," says Walia.
To own a plot in the UK through UKLI, you will need to spend at least Rs 10 lakh, which will translate into about �12,500 or $22,222. Under the current RBI restrictions, you can invest a maximum of $25,000 in immovable assets abroad. "This is one of the reasons the plots that we will be offering to prospective investors in India will not cost more than $25,000," says Walia.
Once you decide on a plot, you will have to pay 10 per cent of the price to UKLI as a reservation fee. Apart from this, you will have to pay the company 0.5 per cent of the purchase price, which is taken to cover exchange rate fluctuations and bank charges. Any amount remaining is returned to you.
After the UKLI has received the money, it will send you the legal papers, which you must read, sign and return in 21 days. The rest of the plot price should be sent along with the legal documents. On receipt of the payment and the documents, UKLI will countersign a contract and send it to you. The land will be registered in your name. Once this is done, the Land Registry Department will send the final title and deeds to you. Voila, you become a landowner in the UK.
Waiting to build. But owning land does not automatically mean you can start building on it. The land comes to you sans planning permission. And it takes around five years to get this permission. UKLI REPL makes it very clear to all investors that the planning permission is never guaranteed. But UKLI helps out with its strong team of planners. "We also use a lot of external support for relationship advice and submission of plans for different sites that we have," says Walia. To avoid any hiccups, UKLI surveys the site for any potential problems that may arise and runs them through a stringent criteria checklist.
Also, government will often demand that property developers and landowners fulfil certain responsibilities before planning is granted on a site. It's also worth knowing that 162 planning applications in the greenbelt areas went unchallenged between 1997 and 2005.
The good news is that capital values will continue to go up even in the interim period; you can typically look forward to a 10-15 per cent increase in values (See graph. On Higher Ground). "Once the planning permission is granted, is when the returns are greatest. It could be anywhere up to 10-fold depending on how the planning permission was achieved," says Walia.
The government is also taking steps to speed up the planning process. It has increased the amount paid under the PDG or planning delivery grant to 170 million pounds. The grant rewards local authorities for progress in online planning, speed in determining applications, improving housing stock provision and developing plans for communities. The grant has contributed to a 6 per cent increase in the number of planning applications made in 2005 over the previous year.
Should you buy? You may, with reason, ask why you should go through the process of buying land in another country, when your life is in India. After all, property prices here are rising fast, and have gone up 30-40 per cent over the last couple of years. So, why not buy land in India? No reason, other than that it's becoming increasingly difficult to find any good property for Rs 10 lakh (Rs 1 million) here.
Also, from an investment point of view, it makes sense to buy land abroad, as this will diversify your portfolio. Also, depending on when you get planning permission, your land could be worth 10 times what you paid for it. Most important, the returns from this investment will be safe from any fluctuation in the value of the rupee. And, if you decide to sell, UKLI offers to find a suitable buyer (for a predetermined fee of �500).
Since the land that will be sold will be freehold, it is up to you to decide how long you want to stay invested. "Ideally, an investor should hold on to the land till the planning permission is achieved. However, if the person wants to hold on to the land even after the planning permission is achieved then she should allow the developers to develop the land as per the permission granted," says Walia.
Over the past two years, UKLI has bought and sold 14 different sites. Presently two sites (one at Borehamwood close to London, and the other at Paddock Wood in Kent) are open for prospective investors. The company is scouting for new sites.
It's a given that land values in the UK are going up. If you have the money and the appetite for a certain amount of risk (inherent in any property investment), go ahead. Let nothing stop you from buying a piece of England.