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.

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.

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 greater Raleigh area and is in itself growing at a rate faster than Raleigh and Durham. The I-85 corridor had been developing well prior to the announcement by the North Carolina DOT regarding the re-construction of the highway from Raleigh north to the Virginia State Line, (40 miles of construction). This project would eventually take eight years, cause major delays, re-route traffic and have a major impact on the 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 Interstate 85 and has virtually no value associated with the interstate related commerce. When the project was first announced, its value was $12,000 per acre. This value continued to grow at approximately the same rate as the value other properties where the value was driven by non-interstate related factors. However, during the last two years of the highway project the property value grew substantially. The rapid escalation in value was attributed to the highways increased commerce generating capability. The transition from no impact to high impact was the much increased commerce generating capacity of the enhanced infrastructure improvement combined with the overall maturing of the area.

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.

Until a commerce center is established at this intersection neither property will see really strong growth . With capital investment in a commerce center there will be value growth similar to the level growth we saw with the highway; however, it will occur in a shorter cycle time. Hence, I would argue that the risk component would be higher and the timing would be even more crucial.

Summary

In summary, a high yielding land investments with changing infrastructure must be selected by an investor using differing criteria:

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 locally, not project, driven rate in the early life of the project.

3. The project must have more than twenty-four months of remaining life.

4. The Indirect Impact Investment will yield higher creating less risk for the life of the project.

5. Investment timing is of utmost importance.

6. Direct Impact Investments offer both a higher risk and a lower yield 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.

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