Land Banking
What is land banking? Is it a financial investment available in Singapore? Are you investing money in a bank that owns land? Or are you investing money in land that pays out money like a bank? To answer these and other questions on land banking as a financial investment, check out this finance-related article from MoneySense.
Land Banking
Received an offer to invest in undeveloped land in a foreign country, with the potential to double, treble or multiply your money in a few years?
Attractive as this may sound, consider carefully before you part with your money. Even if you are presented with financial reports showing the possibility of consistent and high returns for the investment, or testimonials of how other investors have benefited from land banking, take a step back and consider what the risks are. This is critical.
After all, where there is an opportunity for you to make some money, there is always a chance that you can lose some or all of your money. There is no free lunch. In the case of land banking, you may have seen media reports about investors losing money in land banking schemes in various countries. Some schemes have also turned out to be scams!
This article explains what land banking is, highlights the key risks and important questions you should consider before deciding whether to place your money in a land banking proposition.
1) What is land banking?
Land banking is the practice of purchasing undeveloped land with the intention of holding on to it and selling it (often to a developer) at a profit at a future date.
Land banking companies typically seek investors to buy small plots of land and promise them high potential returns. Some may also promise regular payouts for a fixed period.
The land is usually on the outskirts of a city, where urban development appears to be likely to take place. Investors are often told that developers would be willing to buy the land at much higher prices when the land is developed or when plans for urban development are drawn up.
2) What are the key risks?
a) It could turn out be a scam
Investing in land is not always equivalent to investing in solid ground. Some land banking schemes have turned out to be scams.
The UK’s Land Registry issued a guide in 2008 warning the public about land banking investment schemes that often advertise big returns, and that many investors end up handing over money for plots of land which have little or no chance of being developed. You can read the guide here www.landreg.gov.uk/assets/library/documents/public_guide_021.pdf
In Canada, the New Brunswick Securities Commission has also warned investors to be wary of land banking. Investors should be cautious of land banking when the land is being sold in a location with which they are not familiar.
b) What if plans to develop the land are derailed?
Consider what factors could derail the land banking firms’ plans to develop the land plots as planned.
Land banking schemes generally project that the value of the land would increase exponentially when permission is obtained from the relevant authorities to develop the land, be it for housing or other purposes. This may sound promising. But if permission to develop the land is not obtained, the value of the land plots would be affected. Do also note that in some countries, “green belt” or agricultural land are often protected from development by planning law. Selling these land plots would be very difficult, especially at a profit.
Also, even though the company may project that the value of the land would increase in, say, four or five years time, this is only a projection and ultimately still depends on an acceptable offer coming in to buy the land.
Once an offer does come in, the sale may be conditional on a majority (for example 60%) of unit holders in the land parcel agreeing to sell. So when an offer comes in, there will be a vote. You may be willing to sell but if the majority wants to hold out for a higher price, your money will be tied in for longer.
If no offer comes in, your money could also be stuck in the scheme for longer than the projected period.
It is also useful to find out what could happen if the firm is unable to sell the land plots within a certain time frame. How would the timeline for developing the land be affected? Drawing up development plans and developing a piece of land takes time, at least a few years. What could happen to your investment if the firm does not have financial resources to see through the project?
c) What if you need cash urgently?
For land banking, you must be prepared to wait. If you find that you need cash urgently before the land banking operator sells the land to say a developer, you may find it difficult to sell your land plot to other parties.
d) Foreign exchange risks
Land banking propositions are usually marketed to overseas investors. If you purchase a land plot in a foreign country such as Canada, USA or the United Kingdom, you would be exposed to foreign currency risks.
This article on Land Banking was obtained from MoneySense. (source: www.moneysense.com.sg)
