A lesson in real assets has played out in the prices of silver and gold bullion in the past several years. Silver was priced at under £3.43 per troy ounce in 2003, climbing to £9.20 by 2009 and £14.74 by 2012. In 2013 the price began to drop, falling 36 per cent that year with an approximately 7 per cent recovery by mid-2014. Gold, trading as high as £1150 per ounce in 2011 dropped to £1027 by the end of 2013 and £709 by mid-2014.
The rise and fall of precious metals markets helps illustrate a few points about real assets. One is that a savvy – or lucky – investor in real assets can experience large growth in a relatively short period of time. Second, some asset classes can experience precipitous declines in an equally short period of time. And, the investor does not have very much control over these price swings.
An exception might be with land, particularly in raw land found in some parts of the United Kingdom. For example, property funds provide a means for investors to participate in real estate.
Notice the key difference in land versus precious metals: land is a real asset that can be improved upon. And in that improvement comes a remarkable value increase. Metals (and other commodities) are subject to global events, the rise and fall of market-traded securities, and even rumours and emotions.
The external factors affecting land, which should be foremost in the minds of investors, include what is happening in the UK that would lead to a rise in prices. Those factors are:
• Burgeoning population – From 2001 to 2011, the net population in the UK grew by 7 per cent, far outpacing almost all of Europe. Young families need homes, but we are woefully short of what’s needed to accommodate these many people.
• Historic underbuilding – For many and complex reasons, the numbers of homes needed to house our growing population increases by about 200,000 per year and yet we’ve been building fewer than 100,000 dwellings. This shortage was made worse in the recession that began in 2008 and has only begun to catch up since 2013. Still, demand is expected to outstrip supply at least through 2020.
• Rise of the rental class – The portion of working adults who rent instead of owning has increased by more than 40 per cent in just ten years. This signals a shift in the types of homes being built.
• Government schemes to support building and buying – The Help to Buy programme from the Government has indeed stimulated more home buying since being introduced in 2013. Contrary to the scheme’s detractors, most transactions that resulted are modestly priced homes and first purchases.
Strategic land developers are most successful when they purchase well-situated land – near areas where the local economy supports growth – that require a use change designation from the local planning authorities. With that, as well as through the development of infrastructure and home building, the increase in price per hectare is as much as a factor of ten.
Individuals considering any real asset class, land or others, should discuss their ideas and plans with an independent financial advisor.