Breaking Down Land Banking

Almost a year ago, I was introduced to the concept of Land Banking, specifically Walton International. While there were plenty of praises and attractive numbers, it simply seemed too good to be true. Of course there exists the possibility that it is just me, but I was brought up to think otherwise.

So with a little due diligence which includes attending their seminar, I have come to understand Land Banking a little more.

WHAT IS LAND BANKING ?

Land Banking simply involves the acquisition of land, which does not enjoy planning consent, in advance of expanding urbanization. The price of an open space plot, not immediately subject to urban development pressures is low. When urban expansion occurs the land rises in value especially when planning consent is granted.

Land Banking is an alternative form of investment in solid ground whereby the investors are purchasing a piece of land collectively in Canada or America or UK . Each investor is required to sign sales and purchase agreement with land office in the respective country.

The huge potential for profit in land banking lies in buying land in specific areas with hope of future development.

HOW DOES LAND BANKING WORK?

Stage 1

2-3 years of research on a particular potential land will be conducted. This includes analysing the residential or industrial needs of the neighbourhood and estimating the demand of the land after future development.

Stage 2

Following confirmation of the potential of the land, land acquisition takes place.

Stage 3

The land banking company will convert the land title and develop a master development plan.

Stage 4

Now they have a product, the sales department goes to work. They actively look for potential developer/buyer with the intention to sell the land and its development plan to yield return.

In short, Land Banking is the process of acquiring a parcel of raw or undeveloped land, enhancing the status of the land by formulating the concept plans and submitting the plans to the authorities for approval. Once approved, the land value will gain value and will be sold for significant returns. You can look at it as selling future value of the land.

Their logo: "Don’t wait to buy land. Buy land and wait."

ADVANTAGES OF INVESTING IN LAND BANKING

Attractive Return - Walton International Group claimed their track record is above 10% pa(simple return) and actually almost 15% pa in recent years. It looks even more attractive when supported with countless testimonies. Most of their sales are repeat sales and Asia region alone capture 50% of the sales total sales volume.

Portfolio Diversification - Land Banking investment offers an opportunity that isn’t directly correlated or tied to the movement of other standard investments. This offers clients a unique opportunity to bring diversity to their portfolios

Minimum effort by Investor(Dummy Investment) - No Service or management charges. Investment includes one lump sum and with an estimated 3-6 years to reap the expected return. After your initial investment, you don't have to think or worry about it until the exit thus making it hassle free. This makes it very suitable for those without the time/education/patience for due diligence. Or just plainly, the lazy and ignorant.

Land is a finite resource - The key to land investing is to buy in countries with a shortage of land and a growing economy and population that will make prime land locations rise in price as they are developed. As such, they will only invest in metropolitans. True as it may, timing is crucial to this kind of investment returning a substantial profit in a reasonable time.

DISADVANTAGES OF INVESTING IN LAND BANKING

Minimum Liquidity – The minimum time line is 3-6 years for the land price to appreciate. Early exit will result loss. In some cases, it has taken over 15 years.

No guarantee on Exit - Companies operating these schemes are seeking investors to buy plots of land in areas which HAVE NOT YET been granted planning permission. There is no guarantee on when developers will buy over the land. Estimates by landbanking companies range from a period of three to eight years, to five to over ten years. They claim to hold a large proportion of the land so as to boost their bargaining power and increase their stake in the city development. However, the government's policies are beyond their control and can change at any time.

Land is located Overseas - The real value of the land is unknown. All you have is the promise of the marketer that no investor had sold the land at a loss (They would hold the land till a point in time that no loss has been made). No real loss anyways unless you take into account the opportunity cost and inflation.

Land banking is unregulated - This is a legal grey area with possible disputes between companies and individual investors, which means the basic security or protection you have is your trust in the land bankers.