Typically Land Parcels Lie Directly Path of Rapidly Developing Cities.
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
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 UK residents are now unable to engage in this form of investment as many UK based land banking companies have relocated outside the EU because of new FSA regulations(see below). Because of the time frame involved in long term investment of this type there are currently only a few 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 investment 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 UK FSA regulations.
Land banking companies in the UK
Since the changes in the land registration act, a number of companies offering land as an investment have been formed. This has led to speculation as to which areas are feasible and likely to be taken forward through planning stages and which may be purchased by a developer at a later date. A number of companies offering land plots have been closed down by the FSA because they did not meet new FSA regulations, or moved offshore.
Typically, a company representative will contact an individual (normally via telephone) and inform them of the 'best' way to make money: to invest ('bank') in land. The reason behind this is that the demand for housing outstrips the supply, i.e. there is a housing crisis (such as was the case in post-war Britain, resulting in vast housing developments and 'new towns' being built in the 1960s and 1970s). Land Index figures are used, and the value of the land will appreciate by several hundred per cent, thus giving the buyer an very generous return in the event of planning permission being granted.
The granting of planning permission cannot be contractual because planning permission falls under the authority of the local government planning department therefore planning permission is not guaranteed. The large area of land initially purchased by the company will have been split into a few hundred smaller 'plots' that would each suffice for a modern box detached house and garden, hence be able to sustain a housing development. Often the salesman will sell the fact that it is close to an already existing housing development. As mentioned above, planning permission is not guaranteed, and an individual will own a small area of land which if remains without planning permission will not attain the high returns hoped for, although still appreciating at market levels of undeveloped land.
Alternatively, a company representative may contact an individual by telephone, in temporary shopping center booths, or at property shows. Very often 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 good investment. There are no guarantees or indications that the land is fast tracked for building approval even though the land has strong potential as building land. When pricing the land reference is typically made to approved building land prices at the market peak. The land banking company will present detailed plans showing a proposed housing development on the site. These plans are often referred to as "preapproved", "concept" or "predevelopment". Such plans can only be considered as a proposal from a planning or development company, these plans are not an indication of progress in the planning process.
A 'You and Yours' documentary, first aired on BBC Radio 4 on the 14th December 2006, debated about the services offered by many of the UK land banking companies, marketing tactics used by some companies, the debate suggested that land banking needed to be regulated to protect the customer. The land banking investment opportunity is based on the plots receiving planning permission,although not guaranteed.
A key strategy used for selling UK land plots is, a customer owns the land plot they cannot lose their money. The land banking company suggests annual increases in the value of the land plots, and a very realistic time frame for successful planning applications. These are not contractually committed. Typically the land banking company sells a land plot at the current market value of undeveloped land. A purchaser might pay $15,000 for a land plot that has a market value today of $15,000. On this basis the high returns of the investment in land are seen upon planning applications being succesfull. The high return investment is in a proposed service to deliver valuable approved building land in the future. If that service is not delivered or is not successful the remaining land asset is appreciating at market rates so the return on investment will be lower. Should the selling company fail or disappear the plot owner can sell the plot to regain initial investment plus appreciation at market rates.
Many land banking companies target markets outside of the UK, particularly Canada, Singapore, Brunei and Malaysia as residents of these countries enjoy tax benefits when entering the UK land market.
UKLI in the UK was placed into administration on the 22nd April 2008 after receiving £69m from 4,500 investors for UK land plots.
UK MP David Heath recently requested a debate in the house of commons saying that Land Banking is not illegal following the offering of 209 plots in the village of Dean.
HM Land Registry issued a press release on the 15th January 2009 advising consumers that the Land Registry has published a guide for land banking investments which are often advertised as offering high potential returns on investments in land. The Land Registry Head of Corporate Legal Services Mike Westcott Rudd said: "Members of the public need to be informed 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 cases Land Registry letters have been produced to suggest that there is official Land Registry planning approval. However, The Land Registry plays no part in the planning process."
Many UK authorities and newspapers are now debating about plot based Land Banking.
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.
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
“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
"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
"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.
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.
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 . 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”. were coined.
- Land Economy
- Land reform
- Planning permission