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Land banking

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Land banking is the practice of purchasing raw land with the intent to hold on to it until such a time as it is profitable to sell it on to others for more than was initially paid. Land is popular as an investment as it is a tangible asset as opposed to shares or bonds.

The intended increase in value may come from inflation, conversion for use as housing, or potential for extraction of raw materials.

Typically parcels of land desirable for land banking are those that lie directly in the growth path of rapidly developing cities. The initial goal is to buy undeveloped land that will increase in value because it lies in the path of urban growth. The investment objective is to identify these parcels well in advance of the developers and wait for the value to be realised.

Land banking by country

United Kingdom

Land banking in the UK was previously the preserve of the landed gentry or real estate developers. Many reputable listed commercial building companies engage successfully in land banking for future building projects. This has changed in recent times due to the changes in the Land Registration Act 2002. This act enabled companies to purchase land sites and easily divide them into smaller plots. The company can then offer these plots for sale to individual investors. This relatively new practice in the UK does not fall under the control of the FSA Financial Services Authority. Many people are wary of this form of investment as many land banking companies have either failed or been closed down. There are currently no audited successes recorded for plot based land banking despite the UK having gone through a major property boom in the period 2002 - Jul 2007.

A landbanking scheme that is a collective investment scheme is a "regulated activity" for the purposes of the Financial Services and Markets Act 2000 and, according to section 19(1), may only be operated in the UK by a person who is either authorised or exempt. Section 26 provides that an agreement made by a person in contravention of this is unenforceable and any sums paid to him may be recovered together with compensation for any loss suffered. After recent FSA enforcement of this regulation many companies selling UK plots have moved outside of the European Union and only offer land plots to non UK residents who are not protected by FSA regulations.

Land banking companies in the UK

Since the changes in the land registration act, a number of companies offering land plots as an investment have been formed. Typically this land is greenbelt, nature conservation, flodd plain, agricultural or otherwise protected land unsuitable for development.

There have been considerable losses recorded by investors in UK land plot investment schemes. A large number of companies offering UK land plots have failed, been shut down by the FSA or other authorities, or moved offshore after FSA investigation. There are no recorded successful planning permission applications for plots sold under such collective investment schemes.

Sales methods

A company representative may contact an individual by telephone, in temporary shopping center booths, or at property shows in the UK Canada and Asia. Very often UK government or industry statistics, the proximity of the land to built up areas, or the recent history of UK house prices are quoted as a demonstration of why the land plot is a great investment. Verbal communication will often indicate that the land is fast tracked for building approval and has strong potential as building land. When pricing the land reference is typically made to approved building land prices at the market peak. No reference is ever made to the price of green belt or agricultural land, or the issues involved with maintaining and colectively selling tiny plots of land. Very often the land banking company will present detailed plans showing a housing development on the site. These plans are often referred to as "preapproved", "concept" or "predevelopment". Such plans have no validity in UK law and cannot be considered as any indication of progress in the planning process.

No contractual promise is given and planning permission typically has a tiny or no chance of success. Often the salesperson will glamourise the fact that the land is close to an already existing housing development. What the sales person will never mention is that the land is protected or greenbelt land and cannot be developed under current planning regulations.

The investor may end up having paid a considerable amount of money for a small area of low value land which has a very high risk of standing undeveloped.


Controversies

A 'You and Yours' documentary, first aired on BBC Radio 4 on the 14th December 2006, criticized the services offered by many of the UK land banking companies, suggesting that they are scamming their customers. This scam is based on the very low chance of any of the plots receiving planning permission, the misleading marketing tactics used by the companies and the very high profit margins taken on the land plots.

A key strategy used for selling UK land plots is to imply that because a customer owns the land plot they cannot lose their money. The land banking company typically suggests dramatic annual increases in the value of the land plots, and a very optimistic time frame for successful planning applications. These are never contractually committed. Typically the land banking company sells a land plot at a premium of 15 to a 100 times the current market value of undeveloped land. A purchaser might pay $15,000 for a land plot that only has a current market value of $500. On this basis the majority of the investment is not in land, and small percentage annual increases in the value of the land plot are meaningless. The actual investment is in a proposed service to deliver valuable approved building land in the future. If that service is never delivered or is not successful the remaining land asset is normally worthless. Should the selling company fail or disappear the plot owner cannot economically sell the plot as the administrative effort and cost of sale typically exceeds the value of the land plot.

Many land banking companies target victims outside of the UK, particularly Canada, Singapore, Thailand, Brunei and Malaysia as residents of these countries are naive of the UK property market and UK planning regulations such as green belt zoning.

UKLI in the UK was placed into administration [1] on the 22nd April 2008 because it is insolvent despite having taken £69m from 4,500 people for UK land plots.

UK MP David Heath[2] requested a debate in the house of commons saying that

"while Land Banking may not be illegal it is undoubtedly a scam"

following the offering of 209 UK plots in the village of Dean. HM Land Registry [3] issued a press release on the 15th January 2009 advising consumers that the Land Registry has published a guide warning against so-called land banking investment schemes which are often advertised as offering big returns on investments in land. Land Registry Head of Corporate Legal Services Mike Westcott Rudd said:

"Members of the public have been misled about the prospects of obtaining planning permission or that planning permission has already been granted. Sometimes they are told well known banks, lenders and established developers are partners in the schemes when this is not the case. In some extreme cases forged Land Registry letters have been produced to suggest that there is official Land Registry planning approval. However, Land Registry plays no part in the planning process."

Many UK authorities and newspapers are now speaking out openly against plot based Land Banking.

United States

Land banking as an investment, is nothing new to America. Several self-made billionaires started by purchasing large tracts in California where the development opportunities had not yet arisen. People such as Bob Hope and Donald Trump have reaped tremendous reward from buying large areas and holding the property until the market commanded a considerable return when sold. There have however, also been many land scams in the US. (Example: Huge tracts of worthless Florida swampland being sold as suitable for real estate.) Glengarry Glen Ross (film) demonstrates the unethical side of selling land.

Australia

Land banking or the speculative hoarding of government released land, is one of main obstacles laid in the path of housing affordability in Australia.

Excerpts below highlight that degree to which land release regulations and land banking have exacerbated the high cost of land.

1.Land Speculators Reign! - Preparing for the McHouses 03Dec08
http://www.prosper.org.au/tag/land-bank/

“Land banking is the problem. Speculative hoarding of prime locations is the advantage land speculators have over other small businessmen."

2.Restoring First Home Buyer Affordability 07apr09
http://www.onlineopinion.com.au/view.asp?article=8764

"A March 26, speech by Anthony Richards, head of the Economic Analysis Division of the Reserve Bank of Australia (RBA) brings home the extent to which land use regulations, under the guise of “urban consolidation” have increased the price of new starter houses in Australia. . . . land on the urban fringe for housing development costs from $2,000,000 to nearly $4,000,000 per hectare. This is obviously well above the agricultural value that would be the starting point of negotiation if urban consolidation were not acting to create a scarcity of land in the nation with perhaps the smallest urban footprint in the world (only 0.3 per cent of the nation is in urban areas). Suffice to say that land use policies appear to be adding between $100,000 to $190,000 to the price of new starter housing on the fringe of capital cities. No conceivable first homebuyer grant could ever compensate for such excessive costs."

3.Open Convection 24apr09
http://www.abc.net.au/unleashed/stories/s2551064.htm

"Based on the costs of developing land in readiness for house construction, no suburban block anywhere on the urban fringe in Australia should sell for greater than $70,000.

The underlying value of undeveloped land is reflected in the prices of farmland, . . .
Based on a maximum of $10,000 per hectare that agricultural land sells for, the underlying value of a housing block is only around $1000.

But the restrictions placed on development by State Governments creates a scarcity value that raises this value at least 50 fold. There is no physical scarcity causing this price rise. The area on the periphery of all our cities is massively adequate to accommodate any conceivable housing needs.

It follows that the price for developed land for a standard 500 square metre block should be about $70,000. Actual land prices range from $130,000 (Melbourne) to $230,000 (Sydney), which means a regulatory induced price premium of $60,000 to $160,000 for an average new house."

Land banking by developers is achieved by sourcing capital via property trusts that are highly subsidized by an investor friendly tax system. One solution suggested was to place all land banks under government monopoly and only sell to developers when they have a definite plan for development.

4. Private Land Banking with Hot Money from China.

In December 2008, at the depths of the Global Financial Crisis, the Foreign Investment Review Board (FIRB) relaxed laws regarding foreign investment in Australian real estate. Under previous legislation temporary residents were only allowed to purchase a property for Principal Place of Residence purposes valued at up to $300,000AUD. Under new laws active since Feb 2009, this monetary limit has been removed. Since the law change; Australia, in particular the inner eastern suburbs of Melbourne there is evidence to suggest significant amounts of purchases by Chinese nationals. Wealthy Chinese parents are buying multi-million dollar properties with large land content for their child to reside in whilst studying in Australia. It is the intention of the foreign investor to buy and hold and never sell. They are banking 'the land' as a capital gains investment vehicle. As these properties are unable to be rented they will sit vacant, even once the child completes study and returns back home to overseas. In March 2010 Reserve Bank of Australia governor announced that they are monitoring the effect of the rule change on the housing market.[4]

On 24 April 2010, Assistant Treasurer Senator Nick Sherry announced the tightening of foreign investment laws as a result of a public backlash to the changes made a year earlier. Whilst they are still entitled to purchase a property of any value, temporary Residents must now sell their residence upon leaving the country, and must report all purchases to the FIRB. Effectively eliminating the land banking loophole. [5]

5. Land Audit of Underutilised land

April 20 2010, the COAG has agreed the Housing Supply and Affordability Reform Working Party will extend the land audit work to examine ‘underutilised’ land and to examine private holdings of large parcels of land by mid-2010. [6]

Agricultural land banking

While most land banking is based on the prospect of urban areas expanding at the expense of rural areas, in various parts of the world agricultural land is expanding at the expense of virgin land. The purchase of virgin land, that has been identified as suitable for agriculture, due to its climate, topography and soil properties, and where the buyer has no intention to work the land himself, or to lease it out, would be agricultural land banking.

advancing agriculture in the Paraguay Chaco

Such lands are often rather far away from existing infrastructure when purchased by the land banking investor, therefore prices being low. The investor anticipates that, due to the area’s natural productive potential, an agricultural infrastructure (sufficient roads, specialised contractors, grain storages) will develop, with more land put under cultivation and land values multiplying.

Agricultural land banking is found where large tracts of fertile virgin land still exist, where valuations are low and where legislation allows large land holdings (free hold) by domestic and foreign investors. Typical countries for such investments during recent years have been Argentina, Brazil, Paraguay [7]. Though the perception that the world’s fertile land is a limited and valuable asset is by no means new, it received renewed public and media attention with the Global food crisis, when phrases like “peak wheat” or “peak soil” [8]. were coined.

See also

References

  1. ^ http://www.thisismoney.co.uk/news/article.html?in_article_id=442527&in_page_id=2
  2. ^ http://www.theyworkforyou.com/debate/?id=2008-10-30b.1046.1
  3. ^ http://www.landreg.gov.uk/about_us/pressoffice/notices/default.asp?article_id=19829
  4. ^ http://www.businessweek.com/news/2010-03-25/australia-s-stevens-monitors-foreign-home-buyers-as-prices-jump.html
  5. ^ http://assistant.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/2010/074.htm&pageID=003&min=njsa&Year=&DocType=
  6. ^ http://www.coag.gov.au/coag_meeting_outcomes/2010-04-19/docs/Communique_20_April_2010.pdf
  7. ^ "Paraguay farmland". Peer Voss, a farm realtor. Retrieved 2008-12-29.
  8. ^ "peak soil". newscientist.com. 2008-06-25.
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