Land banking as an alternative or supplementary investment remains fraught with risk and questions
Over the last few years investors at all levels have increasingly diversified their personal portfolios. Stocks and bonds have been complemented by more and more real estate, as well as alternatives such as art, jewellery (vintage and new) and wine. Within the real estate sector traditionally popular options like resort properties in Thailand and flats in London have been joined by urban parking spaces, storage facilities and purchasing in emerging or re-emerging markets such as Dubai, Las Vegas, Miami and Jakarta. Another, often controversial, investment option is land banking. However, the question remains as to whether or not the practice is a scam. We’ve all heard the joke about knowing a guy with a nice piece of Florida swampland to sell you.
Land banking was born in the post-war United States with the move towards a less industrial, more service-based economy. Land banking has been an under-the-radar option for many years, however the key to successful land banking is owning property in freehold states, but that is not always necessary; holding on to a Causeway Bay walk-up could be considered a type of land banking. But there’s a fine line between speculative purchasing and land banking, and much of it pivots on future development, not simply rising prices. Land banks are most often governmental or administrative bodies created specifically to manage and develop specific parcels of land, such as abandoned waterfront buildings or unused railroad land. Prominent American developers like Donald Trump have made this kind of investment extremely profitable, but those cases are rare, costly and take extremely long views.
A Tempting Offer
In the UK, land banking is a fairly new trend and a slew of several corporations like UK Land Investments — which fall outside the auspices of the Financial Services Authority — have sprung up since a series of changes to the land registry act in the UK offering UK land as an investment. With almost any real estate investment opportunity drawing attention in the UK these days, the idea of holding land for “inevitable” development in the housing-strapped country can be an easy sell: the potential for high returns is tempting.
As defined by the UK’s Financial Conduct Authority, land bank investment happens when a company breaks up a plot of land, “to sell to investors on the basis that once it is available for development it will soar in value. However, the land is often in areas of natural beauty or historical interest, with little chance of it being built on.” Land bank investment bodies often show up at the property expos that hit Hong Kong and Singapore every year (like Mipim) touting great opportunities and fat profits. However, investor losses have driven many into new jurisdictions and Singapore’s monetary authority has sent out warnings about scams involving UK (and frequently Canadian) land schemes. The FCA estimates land banking has costed UK investors upwards of £200 million.
The primary issue with land banking is that it relies on “guaranteed” future development. If an investor buys a house in Canada and the house burns down, the land is still a valuable piece of real estate in itself. It was zoned for a home and could be again. No problem. Derelict industrial land or riverbanks are quite another story. True title and other factors related to the land come into play when investors discover land they “own” is protected, is agricultural, sits on a greenbelt as the FCA noted, or has absolutely no plans for development of any kind by any council or governing body in the works.
Then there’s hoarding. In 2010 the Australian government set its sights on closing a loophole in its foreign land sales policy that allowed large tracts of developable residential land to be held in perpetuity, with critics claiming land hoarding was blocking development of affordable housing. In March of this year, The Guardian reported that London’s housing crunch has brought an end to everyone’s patience with land banking, including mayor Boris Johnson. Though developers sitting on land and waiting for values to rise are the targets of the fury, a 2012 report by housing consultancy Molior stated, “A very striking 45 percent of homes for which permission had been gained would not be built because the companies that had secured them were not actually in the building business. Owner-occupiers, historic landowners, government, investment funds and “‘developers’ who do not build,” were listed,” as among the land bankers holding up supply.
Look Before Leaping
Like Australia, even the US has asked questions about the connection between land banking and its own property market recovery. In March, Forbes asked if cash buyers from overseas (specifically China) were wreaking havoc with prices simply to have a place to park money — or land bank it.
Land banking in the UK is not illegal, nor is it a scam in every case. The FCA recommends ensuring the investment is a collective investment scheme, which it regulates, and indeed not all land bank schemes go bust. The key is understanding the risks involved, how reputable the firm offering the investment is and something about the location where your land investment is. The UK is developing high value housing across London, but even it has its limits, and Canada is enormous, but not all its land is for office towers. Ultimately, as the Hong Kong Monetary Authority does not regulate land banking schemes overseas, it’s a case of habeas corpus. Or perhaps just sticking with a nice house.