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PROPERTY - What is Land Banking?

Land banking and property investment schemes

Land banking is a real estate investment scheme that involves buying large blocks of undeveloped land with a view to selling the land at a profit when it has been approved for development.

You may think land banking is a way to expand an existing investment portfolio or get into the property market; however, there are some things you should be aware of before you hand over your money. Here we explain how land banking works and the risks you take with this type of investment. 

What is land banking?

Property developers usually buy land, divide it into smaller blocks and offer it to investors. Investors either buy a plot of land or buy an option to purchase a plot of land. These are often known as 'option agreements'. The option agreement is usually triggered when the land has been approved for development by the local council.

Land banking schemes may be managed investment schemes or involve the sale of a financial product. If this is the case, there are strict legal requirements that must be met.

Concept plans

Developers often sell the plots of land from 'concept plans'. These plans are not approved subdivision plots and only offer a view of what the land could look like if it is approved for residential zoning and sub divided for development in the future.

If the land is ever developed, there is no guarantee the plot of land an investor initially buys will be the same plot of land they get in the future.

How land banking is sold to investors

ASIC is concerned that investors who get involved in land banking schemes are not aware that the schemes are often unregulated and investors have little protection if something goes wrong.

Potential investors often hear about land banking at property spruiking or investment seminars, where they are described as 'a get rich slow option'. Glossy brochures and presentations are used to persuade investors that land banking is a cheaper way to get into the property market than through buying an investment property.

Property spruiking events and investment seminars are often high pressure environments and participants can be rushed into making a decision. People are usually not given enough time to consider the investment carefully or to receive independent advice before they sign up.

See avoiding sales pressure for our tips on resisting the hard sell.

What can go wrong in a land banking scheme

Development approval

There is real potential that investors can be misled by developers about the prospects of rezoning or developing the land.

Some developers offer land as an investment without knowing for certain that they will get council authority to develop it. In some cases developers have also failed to tell investors that there are restrictions on how the land can be developed.

If development approval is not granted, investors are left with an unsaleable investment that is likely to be worth less than they originally paid.

Scheme collapse

It may take many years and lots of money to get planning approval. Over time, ongoing legal and planning costs can eat into the funding for the development and may lead to the development company becoming insolvent. If this happens, option holders may lose all the money they've invested.

A number of land banking schemes have collapsed in Australia and overseas without the promoted development ever proceeding.

Option agreements

Some land banking schemes have option agreements with a 'sunset clause' that is triggered 20 or 25 years from the date of the agreement if the land fails to be rezoned or developed. If this occurs, investors may lose the initial option fee they paid if there's not enough money to repay all option holders.

When investors enter into an option agreement they may also have to pay legal fees, commission payments and payments to the development company that may not be refunded if a sunset clause is triggered.

ASIC is also concerned that option holders may be misled into purchasing options in a 'concept plan' and not an officially approved plan.

Investment scams

Investors may be scammed by developers who are offering options in land that they do not own.

See our tips on spotting an investment scam. If you suspect you've come across a scam, please report it to ASIC.

For more information from ASIC's Money Smart website, click here. 

Source  :  http://www.propertyobserver.com.au/forward-planning/advice-and-hot-topics/57511-property-101-land-banking-and-property-investment-schemes.html?utm_source=Property+Observer+List&utm_campaign=13efc5fcf4-01_September_2016&utm_medium=email&utm_term=0_a523fbfccb-13efc5fcf4-245348873

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