Land Banking – Look Before You Leap
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 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?
Investing in land is not always equivalent to investing in solid ground. Some land banking schemes have turned out to be scams.
Investors should be cautious of land banking when the land is being sold in a location with which they are not familiar. It is also useful to check if warnings have been issued to caution investors.
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.
3) Is land banking regulated by the Monetary Authority of Singapore (MAS)?
With the focus on financial markets, the SFA regulates the offering of real estate related investments if they are in the form of securities. However, land banking investments typically involve investors acquiring direct interests in real estate rather than securities related to real estate. As such, land banking investment typically falls outside the scope of the SFA and FAA.
MAS advises consumers to deal with regulated persons when it comes to managing their financial affairs such as investments. You can check two lists:
MAS aims to safeguard the interests of investors by authorising competent and professional persons to provide regulated financial services. If investors choose to deal with persons that are not regulated by MAS, they forgo the protection afforded under laws administered by MAS.
4) Key Questions to ask yourself
Even if you have sighted the land, how much do you understand about the property, prices and land development laws in that country, and in that area? How can you be sure if the purchase price quoted to you is a good deal? Do you know what is the likelihood of the land value rising? Do your own research and do not simply rely on the salesman’s advice. They may exaggerate the value of the land in order to close the sale.
b) What do you know about the company you are dealing with?
There might be a professional looking website and an authentic sounding name but what is the background of the company? Have you checked if the firm is regulated in the country that they are set up in or selling the land in? If they offer to “reserve” you a plot of land for a small cost, how can you assess if this is a credible offer? Can you really trust them with your money? Have you found out what recourse options would be available to you if you later find that you have a problem in your dealings with the company?
c) What do you know about the law of the country where you are investing in?
What would be your rights to the land as an investor? What recourse is there if a dispute arises with the company?
d) How can the company afford to offer such high returns or promise of a big profit?What are the returns dependent on and how often will you receive them? Are the returns guaranteed and do you have this in writing? How easily can you find out about any increase or decrease in value of the land? How long must you stay invested for and what are the pitfalls if you need to draw out your money early?