Infrastructure Based Real Estate Investing

By: Temp

Capital Investment in Infrastructure is an interesting component affecting Real Estate investment. It can be one of the most positive influencing factors in property appreciation. Hence, it can never be taken for granted. Frequently, an investor will discover during the examination period of a poential investment that infrastructure improvements are planned. These improvements may be water and sewer expansion adjacent the property or new road to be constructed. In many of these instances, and without a great deal of consideration, the investor aquires as much of the surrounding property without regard to the timing of the purchase.

The focus of this article is how best to determine the timing of the acquisition of an investment property impacted by infrastructure improvement. To do this, I have found it beneficial to first differentiate the type of infrastructure change. Begin by separating the properties under consideration into Direct and Indirect Impact Investments. Properties that are immediately impacted by the announcement of an infrastructure project are considered a Direct Impact Investment. Indirect impact investments are those not immediately affected by the or the early stages of the improvement, however, its value wwill be improved significantly by the project completion.

Take the example of two properties located outside of Raleigh, North Carolina, the home of North Carolinas Research Triangle Park. The first property (direct impact property) is located contiguous I-85 at an intersection with a secondary road. The second property is approximately one-half mile away from the intersection and has frontage on the secondary road leading to the I-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 adjacent Interstate 85, in a very active market and priced around $100,000 per acre prior to the highway re-construction announcement. Property value was tied directly to business activity generated by its access to Interstate 85. Property value was evaluated as a Direct Impact Investment over the 8 year life of the infrastructure project. The duration was determined based on project length from announcement through 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 key to notice that the quality of the investment is higher for the land investor if the investment is made in the Indirect Impact Parcel and the timing of the investment can make a massive difference in the rate of return. In 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 showed substantially higher returns for the indirect impact property.

The really interesting thing about these results is that for the indirect impact property, years four and five were outstanding however year six fell off to the lowest level during the project life. This is primarily due to the limits of I-85 to continue to drive value. As a rule most of the growth in value was related to the investment in the highway capital improvement. The investment in I-85 over the long haul created a gain in revenue generating capability which forced the property value upward. It is important to note that the growth in the interstate traffic after the completion of the project is slow and its ability to create additional value would also 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. There must be more than twenty-four months remaining life in the project.

4. Due to its higher yield, the Indirect Impact Investment will create less risk for the life of the project.

5. Investment timing is of utmost importance.

6. Direct Impact Investments offer a lower yield and higher risk during the project life.

I have been able to employ this thinking over the last five years and have found the concept applies to any long term capital project.

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