Infrastructure Based Real Estate Investing
Capital Investment in Infrastructure is always an interesting component of Real Estate investing. In my experience it can be one of the most positive influencing factors in property appreciation, however, it can never be taken for granted. During the examination period of a potential investment an investor discovers that sewer and water is going in or that a new road is being constructed, and without a great deal of consideration the investor jumps and secures as much of the surrounding property as possible regardless of the timing.
It is this investment timing that I am most interested in here today. To help determine the best timing of an investment I find it helpful to differentiate the type of infrastructure change. First, separate the target properties into Direct and Indirect Impact Investments. A direct impact investment is one that is immediately impacted by the announcement of an infrastructure project. An Indirect Impact Investment is one that is not immediately affected by the announcement or the early stages of the infrastructure but its value will be significantly improved by the completion of the project.
Lets compare two properties located outside Raleigh, NC, home of North Carolinas Research Triangle Park. The first property is a direct impact property located contiguous Interstate 85. The second property is approximately one-half mile away from the first and has frontage on a secondary road leading to the Interstate 85 intersection.
This area is considered a bedroom community for the Raleigh metropolitian area. The are is growing at a faster rate than either Durham or Raleigh. The Interstate 85 corridor had been experiencing sustainable growth substantially prior to the NC Department of Transportation announcing highway re-construction of from Raleigh north to the Virginia State Line (approximately, 40 miles of construction). The project would ultimately take eight years to complete, create major delays, re-route traffic and have a substantial impact on the local economy and expansion of the entire corridor.
The first response of most investors was to move out of the area and invest in other locations. However, for those who analyzed the potential and adjusted the price, timing and selection of properties in this area turned out to be a very profitable investment. Let me explain.
Direct Impact Sample Analysis
The first property is contiguous to I-85, was in a very active market and priced at about $100,000 per acre prior to the highway re-construction announcement. The value of the property was tied directly to the commerce generated by its access to I-85. The property value was evaluated as a Direct Impact Investment over the 8 year life of the infrastructure project determined by the duration from the project announcement until its completion.
Upon announcement of the project the value of the property dropped from $100,000 per acre to about $70,000 per acre and remained at that level for the first three years of the investment.. In the fourth year of the project life the property began to gain in value at about the same rate as other properties not aligned with the highway, still there was no positive influence caused by the highway project. The primary growth in value came toward the end of the highway project, eighteen to twenty-four months from its completion.
Indirect Impact Sample Analysis
The second property is well off the Interstate and has little or no value related to the interstate driven commerce. Its initial value was $12,000 per acre and continued to grow at a rate consistent with value driven by non-interstate factors. However during the last two years of the highway project the value grew substantially and was in fact pulled by the Interstates commerce generating capability. The transition from no impact to high impact was created by the general maturing of the area and the much increased commerce generating capacity of the improved infrastructure.
It is important to note that the investment quality is substantially higher for the land investor if the investment is made in the Indirect Impact Parcel. Furthermore, timing of the investment can make a massive difference in the rate of return. Comparing indirect impact to direct impact properties, the compounded rate of value growth with respect to the year invested through to the end of the project provides significantly higher returns for the indirect impact property.
Perhaps the most intriguing aspect of these results is that for the indirect impact property, years four and five were outstanding; however, yer six fell to the lowest level of the project life. This is primarily due to finite limits of Interstate 85 to continue to drive value. Most of the growth in value was related to the investment in the highway capital improvement. The investment in Interstate 85 over the long haul created a gain in revenue generating capability which forced the property value upward. It is to be noted that growth in the interstate traffic after the completion of the project is slow and its ability to create additional value would accordingly be slow.
These properties will not see really strong growth until a commerce center is established at this intersection. With capital investment in a commerce center there will be value growth similar to the growth we saw with the highway, but it will occur in a shorter cycle time. I would therefore argue that the risk component would be higher and the timing would be more crucial.
Summary
In summary, for an investor to successfully select a high yielding land investment with changing infrastructure certain conditions are in play:
1. The announcement of the change must not directly impact the target property in a negative way. .
2. The investment property will increase in value at the local, not project, driven rate in the early years of the project.
3. The project must have more than twenty-four months of remaining life.
4. Due to its higher yield, the Indirect Impact Investment will create less risk for the life of the project.
5. Timing is of utmost importance for the investment.
6. Direct Impact Investments offer a lower yield and higher risk during the project life.
We have been able to employ this thinking over the last five years and have found that the concept applies to any long term capital project.
Wayne Machon presents an investment model to identify the difference between direct and indirect impact of capital investment in infrastructure to take advantage of market timing in land investments.
Wayne Machon is a graduate of Rollins College in Management and Economics. He is responsible for developing investment grade opportunities for the clients of Hallmark Real Estate, in the central North Carolina real estate marketplace.