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Land banking is a property investment strategy that involves buying large tracts of undeveloped land to sell at a higher price after development.

land banking investment strategy


Managed Land Banking Schemes

A managed land banking scheme is one where the investors do not have any control over the regular management of their investment. In such schemes, a developer pools investor funds to further the development of the land.

Under a managed scheme, investors can either buy a plot or the ‘option’ to buy one. These plots, most often, are sold by concept plans, representing a developed housing block on the land. Here, the main point of sale is the potential future value of this conceptual plan. Of course, there is no guarantee whether the area will receive approval for development in the future or what a plot would look like, if and when such approval is received.

Australian Securities and Investments Commission (ASIC) warns that in order to run a managed scheme, the developer or promoter must have an Australian Financial Services Licence (AFSL) that you can check here.


Investing In Land Banking Schemes

Property investors struggling to expand their portfolio in an over-priced market might be advised to invest in a land banking scheme by property developers, real estate agents or the very persuasive property spruikers who run wealth creation seminars, often luring inexperienced investors with the promise of quick wealth generation through property investment.

In theory, land banking is an exceptionally lucrative investment strategy. The combination of low cost at entry and the likelihood of significant returns make it an appealing proposition for any investor.

However, very often, developers fail to apprise investors of the risks associated with the scheme. It is not very uncommon to hear of land banking investment scams or scheme collapses. ASIC’s recent move to wind up the VKK land banking scheme operated by Gem Management Group, with up to $22 million pumped in by around 125 investors, is a case in point.

Investors must take legal and financial advice before investing in any such scheme. It also helps to understand the risks associated with land banking schemes at the outset.


The Risks

Most investments are speculative. For example, when you invest in property, you speculate that the value of your investment is going to rise in the future. Luckily, the current state of the real estate market reduces the speculative risk involved in property investment to an extent.

However, when you invest in a land banking scheme, while you speculate on the increased market value of your investment, the primary wager is whether the land will gain future developmental approval or not, which makes it comparatively riskier than buying a house.

Failure to get developmental approval

In a land banking scheme, the worth of your unit depends on future zoning changes and the consequent demand. Sadly, there is no guarantee that the land will get council approval for development in the future or not. If the land you are buying is rural farming land, there is no surety that it would be rezoned to residential land. Thus, when you invest in a land banking scheme, there are chances that you end up with a dud piece of land that you are unable to build upon or resell for profit.

Being misled by concept plans

Often, developers offer investors the ‘option’ to buy a plot for an initial option fee on the basis of concept plans that are not officially approved. However, it is important to know that a concept plan is only a representation, and not a promise, of what the sub-units or plots would look like in the future.

Another common problem arises when a sunset clause is built into an agreement to buy an ‘option’. In such a case, if the developer is unable to meet the terms by the Sunset Date, the contract will be rescinded without any penalty being applicable on either party. In short, if the developmental approval is not received within the stipulated period, ‘option’ holders could lose their hard earned money.

Unregulated schemes

Land banking schemes are inherently risky. Investors stand to lose money if the developers run into financial difficulties, especially in the case of unregulated schemes. For safety, investors must remember that developers cannot offer shares or plots in a managed scheme that is not registered with ASIC.


Tips to Protect Yourself

For investors who are ready to take on the risks of a land banking scheme, the returns could turn out to be quite handsome, if all goes well. By researching the scheme and the background of the developer thoroughly, it is possible to minimise the associated risks.

Do your research

When investing your hard-earned money, it is imperative to carry out independent research rather than relying on the information provided by the developer.

• As a first step, check whether the scheme is managed and the developer holds Australian Financial Services License to run it. A managed scheme should also be registered with ASIC.

• The next step is looking into the background of the developer or promoter. How did their previous projects fare? If you find a troubled past, be wary of the future!

• As part of your due diligence, you must contact the local council regarding the plans for the development of the area.

• Read and understand the product disclosure statement, which must be provided for a managed scheme. It outlines all the information regarding features, benefits, fees, commissions, risks and the redressal procedure.


Get independent financial and legal advice

Often, developers suggest special financial advisers and lawyers to their clients for professional advice. Do not fall for the trap. It is critical to seek independent legal advice before you invest in any such scheme or sign any binding document.


Land Banking – The Fabled Road to Riches?

Property spruikers, in their forceful wealth creation seminars, often tout investing in land banking to be the fastest road to riches. Financial experts, however, warn that hardly any land banking schemes in the country have benefitted the investors. Indeed, the possibility of gain with a land banking scheme is quite high, but only in theory. Going by practical examples, a simple Google search will through up several cases where enigmatic property spruikers and promising developers duped hundreds of investors in the past (Read about the famous McIntyre case here).

Going by conventional wisdom, there isn’t any ‘quick’ road to riches. However, over the past few decades, property investment has proven to be an efficient wealth creation strategy. Here is an investment guide to get you started on your journey.

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By Vidhu Bajaj
HashChing Content Writer
 

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