Land banking
Encyclopedia
Land banking is the practice of purchasing raw land with the intent to hold on to it until such a time as it is profitable to sell it on to others for more than was initially paid. Land is popular as an investment as it is a tangible asset as opposed to shares or bonds
.
The intended increase in value may come from inflation, conversion for use as housing, or potential for extraction of raw materials.
Typically parcels of land desirable for land banking are those that lie directly in the growth path of rapidly developing cities. The initial goal is to buy undeveloped land that will increase in value because it lies in the path of urban growth. The investment objective is to identify these parcels well in advance of the developers and wait for the value to be realised.
A landbanking scheme that is a Collective investment scheme
is a "regulated activity" for the purposes of the Financial Services and Markets Act 2000 and, according to section 19(1), may only be operated in the UK by a person who is either authorised or exempt. Section 26 provides that an agreement made by a person in contravention of this is unenforceable and any sums paid to him may be recovered together with compensation for any loss suffered. After recent FSA enforcement of this regulation many companies selling UK land plots have moved outside of the European Union and only offer land plots to non UK residents who are not protected by FSA regulations.
There have been considerable losses recorded by investors in UK land plot investment schemes. A large number of British companies offering UK land plots have failed or been shut down by the FSA or other authorities.
Some companies have now moved offshore after FSA investigation. Some companies now offer UK land plots from locations such as Dubai or Singapore where the local authorities do not regulate such activities, or are not aware of the high risk nature of the investment. In June 2010 the Monetary Authority of Singapore (MAS) issued a warning on Land Banking plots schemes warning they may be a scam with specific focus on companies offering land from the UK and Canada.
No reference is ever made to the value of green belt or agricultural land, or the issues involved with the long term maintenance, and collectively selling tiny plots of land. The sales price is typically uplifted 10-100 times over the current value of the land. Plans shown have no validity in UK planning law and cannot be considered as any indication of progress in the planning process. No written contractual promise is ever given for planning permission despite typically extreme optimism by the sales person. The sales person will typically never mention that the land is protected, or greenbelt land and cannot be developed under current planning regulations. There is typically no possibility of planning permission in any reasonable timeframe.
The investor may end up paying a considerable amount of money for a small area of low value land which has a very high risk of standing undeveloped. Once the general public becomes aware of the lack of viability of the proposed plot investment scheme, the re-sale value of the individual plots collapses. This is typically followed by the land plot company liquidating completely, or relocating to another legal jurisdiction.
For customers that show a willingness to purchase such schemes there may also be attempts to sell additional plot based land banking products at alternate locations, or other high yield investment programmes. Customers may also be added to suckers lists
which are then sold to other companies offering similar schemes. When the Land Banking plot company fails plot investors may also be offered investment recovery or planning services for a fee. Such services typically are fraudulent or fail and lead to a further loss of money for the investor.
documentary, first aired on BBC Radio 4 in December 2006, criticized the services offered by many land banking companies in the United Kingdom, suggesting that they were scamming their customers. A land banking scam is based on the very low chance of any of the plots receiving planning permission and the very high profit margins taken on the land plots, with the seller using misleading marketing tactics to convince the buyer that they are making a sound investment.
A key strategy used for selling United Kingdom land plots is to imply that because a customer owns the land plot, they cannot lose their money. The land banking company typically suggests dramatic annual increases in the value of the land plots, and a very optimistic time frame for successful planning applications. These are never contractually committed. Typically the land banking company sells a land plot at a premium of 15 to a 100 times the current market value of undeveloped land. A purchaser might pay £15,000 for a land plot that only has a current market value of £500. On this basis the majority of the investment is not in land, and the small percentage annual increases in the value of the land plot are meaningless. The actual investment is in a proposed service to deliver valuable approved building land in the future. If that service is never delivered or is not successful, the remaining land asset is normally worthless. Should the selling company fail or disappear the plot owner cannot economically sell the plot, as the administrative effort and cost of sale typically exceeds the value of the land plot.
Many land banking companies target victims outside of the United Kingdom, particularly Canada, Singapore, Thailand, Brunei and Malaysia. Residents of these countries may be naive of the UK property market and local planning regulations such as green belt
zoning.
In 2008, the land banking firm UKLI was placed into administration due to insolvency, despite having taken £69m from 4,500 people for land plots. Land International was closed down in 2008 after losing investors £10m, and the same Land International plots were later offered for sale in Asia. In 2010 Land International (Far East) failed, causing investors to lose S$6M (£2.5M). MP David Heath requested a debate in the House of Commons following the offering of 209 plots in the village of Dean
, saying that "while Land Banking may not be illegal it is undoubtedly a scam".
The UK Land Registry
issued a press release on the 15th January 2009 advising consumers that the Land Registry has published a guide warning against land banking investment schemes. Land Registry Head of Corporate Legal Services Mike Westcott Rudd said that the public were being "misled about the prospects of obtaining planning permission", with well-known banks and developers being falsely cited as partners in the project, and that in some cases forged Land Registry paperwork was being presented to suggest that planning approval existed where it did not.
and Donald Trump
have reaped tremendous reward from buying large areas and holding the property until the market commanded a considerable return when sold. There have however, also been many land scams in the US, such as the large areas of worthless Florida swampland which were sold as being suitable for real estate.
Florida land scams have history as far back as the 1920’s Florida Land Rush. Many Florida Counties have traces of these land scams today. Polk County Florida in particular has been devastated with land banking scams. Polk County, being the land that lies between the city of Tampa, in Hillsborough County Florida and the city of Orlando, in Orange County Florida has been a hot bed for speculative land development. North Polk County falls within the lower Green Swamp. The State of Florida has declared the Green Swamp “land of critical state concern”. During the 1970’s through the late 1980’s the Green Swamp was sold as being suitable for real estate development. The development of Disney World and the attraction it received was the sales tool to persuade individuals to buy one acre lots at high speculative prices. These prices ranged from $2,000 to as high as $15,000 per acre. The Florida land banking scams continue today and are mostly operated outside of the United States. Unwary foreign customers are sold Florida land from outside the U.S. borders through contracts for deed arrangements.
In December 2008, at the depths of the Global Financial Crisis, the Foreign Investment Review Board (FIRB) relaxed laws regarding foreign investment in Australian real estate. Under previous legislation temporary residents were only allowed to purchase a property for Principal Place of Residence purposes valued at up to $300,000. Under new laws active since February 2009, this monetary limit has been removed.
In March 2010, the Reserve Bank of Australia governor announced that it is monitoring the effect of the rule change on the housing market.
On 24 April 2010, Assistant Treasurer Senator Nick Sherry announced the tightening of foreign investment laws as a result of a public backlash to the changes made a year earlier. Whilst they are still entitled to purchase a property of any value, temporary Residents must now sell their residence upon leaving the country, and must report all purchases to the Foreign Investment Review Board. effectively eliminating this land banking loophole. However, foreign companies are allowed to purchase property to house local staff.
It is possible for foreign individuals to create a registered company for the sole purpose of purchasing property in Australia and ctively bypass the loophole fix.
As of April 20, 2010, the COAG has agreed the Housing Supply and Affordability Reform Working Party will extend the land audit work to examine ‘underused examine private holdings of large parcels of land by mid-2010.
Such lands are often rather far away from existing infrastructure when purchased by the land banking investor, therefore prices being low. The investor anticipates that, because of the area's natural productive potential, an agricultural infrastructure (sufficient roads, specialised contractors, grain storages) will develop, with more land put under cultivation and land values multiplying.
Agricultural land banking is found where large tracts of fertile virgin land still exist, where valuations are low and where legislation allows large land holdings (free hold) by domestic and foreign investors.
Typical countries for such investments during recent years have been Argentina
, Brazil
, Uruguay
,
Paraguay
.
where land prices appreciated accordingly.
Though the perception that the world’s fertile land is a limited and valuable asset is by no means new, it received renewed public and media attention with the global food crisis, when phrases like peak wheat
or peak soil”
.
were coined.
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
.
The intended increase in value may come from inflation, conversion for use as housing, or potential for extraction of raw materials.
Typically parcels of land desirable for land banking are those that lie directly in the growth path of rapidly developing cities. The initial goal is to buy undeveloped land that will increase in value because it lies in the path of urban growth. The investment objective is to identify these parcels well in advance of the developers and wait for the value to be realised.
United Kingdom
Land banking in the UK was previously the preserve of the landed gentry or real estate developers. Many reputable listed commercial building companies engage successfully in land banking for future building projects. Companies also purchase land sites and easily divide them into smaller plots, then offer these plots for sale to individual investors. This relatively new practice in the UK does not fall under the control of the FSA Financial Services Authority. Many people are wary of this form of investment as many plot based land banking companies have failed or been closed down. There are currently no audited successes recorded for UK plot based land banking despite the UK having gone through a major property boom in the period 2002 - Jul 2007..A landbanking scheme that is a Collective investment scheme
Collective investment scheme
A collective investment scheme is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group...
is a "regulated activity" for the purposes of the Financial Services and Markets Act 2000 and, according to section 19(1), may only be operated in the UK by a person who is either authorised or exempt. Section 26 provides that an agreement made by a person in contravention of this is unenforceable and any sums paid to him may be recovered together with compensation for any loss suffered. After recent FSA enforcement of this regulation many companies selling UK land plots have moved outside of the European Union and only offer land plots to non UK residents who are not protected by FSA regulations.
Companies offering land banking plots in the UK
Since the changes in the land registration act, a number of companies offering UK land plots as an investment have been formed. Typically this land is greenbelt, nature conservation, flood plain, agricultural or protected land unsuitable for development. There are no recorded successful planning permission applications for plots sold under such collective investment schemes.There have been considerable losses recorded by investors in UK land plot investment schemes. A large number of British companies offering UK land plots have failed or been shut down by the FSA or other authorities.
Some companies have now moved offshore after FSA investigation. Some companies now offer UK land plots from locations such as Dubai or Singapore where the local authorities do not regulate such activities, or are not aware of the high risk nature of the investment. In June 2010 the Monetary Authority of Singapore (MAS) issued a warning on Land Banking plots schemes warning they may be a scam with specific focus on companies offering land from the UK and Canada.
Sales methods
A company representative may contact an individual by telephone, in temporary shopping center booths, or at property shows and offer a strategic land investment in the UK. Very often UK government or industry statistics, the proximity of the land to built up areas, or the recent history of UK house prices are quoted as a demonstration of why the land plot is a great investment. Verbal communication will often indicate that the land is fast tracked for building approval and has strong potential as building land. When pricing the land reference is typically made to approved building land prices at the market peak. Very often the land banking company will present detailed plans showing a housing development on the site. These plans are often referred to as "pre-approved", "concept" or "predevelopment". The sales person will focus on the potential future value of the land against the current selling price.No reference is ever made to the value of green belt or agricultural land, or the issues involved with the long term maintenance, and collectively selling tiny plots of land. The sales price is typically uplifted 10-100 times over the current value of the land. Plans shown have no validity in UK planning law and cannot be considered as any indication of progress in the planning process. No written contractual promise is ever given for planning permission despite typically extreme optimism by the sales person. The sales person will typically never mention that the land is protected, or greenbelt land and cannot be developed under current planning regulations. There is typically no possibility of planning permission in any reasonable timeframe.
The investor may end up paying a considerable amount of money for a small area of low value land which has a very high risk of standing undeveloped. Once the general public becomes aware of the lack of viability of the proposed plot investment scheme, the re-sale value of the individual plots collapses. This is typically followed by the land plot company liquidating completely, or relocating to another legal jurisdiction.
For customers that show a willingness to purchase such schemes there may also be attempts to sell additional plot based land banking products at alternate locations, or other high yield investment programmes. Customers may also be added to suckers lists
Sucker list
A sucker list is a list of people who have previously been successfully solicited for something.The major areas of "sucker lists" are solicitation of donations and fraud....
which are then sold to other companies offering similar schemes. When the Land Banking plot company fails plot investors may also be offered investment recovery or planning services for a fee. Such services typically are fraudulent or fail and lead to a further loss of money for the investor.
Controversies
A You and YoursYou and Yours
You and Yours is a British radio consumer affairs programme, broadcast on BBC Radio 4.-History:It began broadcasting in October 1970, its first presenter was Joan York. In the great rescheduling of April 1998 it was increased from a 25 minute programme to 55 minutes. In the 1980s it briefly ran...
documentary, first aired on BBC Radio 4 in December 2006, criticized the services offered by many land banking companies in the United Kingdom, suggesting that they were scamming their customers. A land banking scam is based on the very low chance of any of the plots receiving planning permission and the very high profit margins taken on the land plots, with the seller using misleading marketing tactics to convince the buyer that they are making a sound investment.
A key strategy used for selling United Kingdom land plots is to imply that because a customer owns the land plot, they cannot lose their money. The land banking company typically suggests dramatic annual increases in the value of the land plots, and a very optimistic time frame for successful planning applications. These are never contractually committed. Typically the land banking company sells a land plot at a premium of 15 to a 100 times the current market value of undeveloped land. A purchaser might pay £15,000 for a land plot that only has a current market value of £500. On this basis the majority of the investment is not in land, and the small percentage annual increases in the value of the land plot are meaningless. The actual investment is in a proposed service to deliver valuable approved building land in the future. If that service is never delivered or is not successful, the remaining land asset is normally worthless. Should the selling company fail or disappear the plot owner cannot economically sell the plot, as the administrative effort and cost of sale typically exceeds the value of the land plot.
Many land banking companies target victims outside of the United Kingdom, particularly Canada, Singapore, Thailand, Brunei and Malaysia. Residents of these countries may be naive of the UK property market and local planning regulations such as green belt
Green belt
A green belt or greenbelt is a policy and land use designation used in land use planning to retain areas of largely undeveloped, wild, or agricultural land surrounding or neighbouring urban areas. Similar concepts are greenways or green wedges which have a linear character and may run through an...
zoning.
In 2008, the land banking firm UKLI was placed into administration due to insolvency, despite having taken £69m from 4,500 people for land plots. Land International was closed down in 2008 after losing investors £10m, and the same Land International plots were later offered for sale in Asia. In 2010 Land International (Far East) failed, causing investors to lose S$6M (£2.5M). MP David Heath requested a debate in the House of Commons following the offering of 209 plots in the village of Dean
Cranmore, Somerset
Cranmore is a village and civil parish east of Shepton Mallet, in the Mendip district of Somerset, England. The parish includes the hamlets of Waterlip, East Cranmore and Dean where Dean farmhouse dates from the 17th century, as does The Old Smithy, just off the A361 which was originally two...
, saying that "while Land Banking may not be illegal it is undoubtedly a scam".
The UK Land Registry
HM Land Registry
Land Registry is a non-ministerial government department and executive agency of the Government of the United Kingdom. It was created in 1862 to register the ownership of land and property in England and Wales...
issued a press release on the 15th January 2009 advising consumers that the Land Registry has published a guide warning against land banking investment schemes. Land Registry Head of Corporate Legal Services Mike Westcott Rudd said that the public were being "misled about the prospects of obtaining planning permission", with well-known banks and developers being falsely cited as partners in the project, and that in some cases forged Land Registry paperwork was being presented to suggest that planning approval existed where it did not.
United States
Land banking as an investment, is nothing new to America. Several self-made billionaires started by purchasing large tracts in California where the development opportunities had not yet arisen. People such as Bob HopeBob Hope
Bob Hope, KBE, KCSG, KSS was a British-born American comedian and actor who appeared in vaudeville, on Broadway, and in radio, television and movies. He was also noted for his work with the US Armed Forces and his numerous USO shows entertaining American military personnel...
and Donald Trump
Donald Trump
Donald John Trump, Sr. is an American business magnate, television personality and author. He is the chairman and president of The Trump Organization and the founder of Trump Entertainment Resorts. Trump's extravagant lifestyle, outspoken manner and role on the NBC reality show The Apprentice have...
have reaped tremendous reward from buying large areas and holding the property until the market commanded a considerable return when sold. There have however, also been many land scams in the US, such as the large areas of worthless Florida swampland which were sold as being suitable for real estate.
Florida land scams have history as far back as the 1920’s Florida Land Rush. Many Florida Counties have traces of these land scams today. Polk County Florida in particular has been devastated with land banking scams. Polk County, being the land that lies between the city of Tampa, in Hillsborough County Florida and the city of Orlando, in Orange County Florida has been a hot bed for speculative land development. North Polk County falls within the lower Green Swamp. The State of Florida has declared the Green Swamp “land of critical state concern”. During the 1970’s through the late 1980’s the Green Swamp was sold as being suitable for real estate development. The development of Disney World and the attraction it received was the sales tool to persuade individuals to buy one acre lots at high speculative prices. These prices ranged from $2,000 to as high as $15,000 per acre. The Florida land banking scams continue today and are mostly operated outside of the United States. Unwary foreign customers are sold Florida land from outside the U.S. borders through contracts for deed arrangements.
Australia
Land banking or the speculative hoarding of government released land, is one of main obstacles laid in the path of housing affordability in Australia.In December 2008, at the depths of the Global Financial Crisis, the Foreign Investment Review Board (FIRB) relaxed laws regarding foreign investment in Australian real estate. Under previous legislation temporary residents were only allowed to purchase a property for Principal Place of Residence purposes valued at up to $300,000. Under new laws active since February 2009, this monetary limit has been removed.
In March 2010, the Reserve Bank of Australia governor announced that it is monitoring the effect of the rule change on the housing market.
On 24 April 2010, Assistant Treasurer Senator Nick Sherry announced the tightening of foreign investment laws as a result of a public backlash to the changes made a year earlier. Whilst they are still entitled to purchase a property of any value, temporary Residents must now sell their residence upon leaving the country, and must report all purchases to the Foreign Investment Review Board. effectively eliminating this land banking loophole. However, foreign companies are allowed to purchase property to house local staff.
It is possible for foreign individuals to create a registered company for the sole purpose of purchasing property in Australia and ctively bypass the loophole fix.
As of April 20, 2010, the COAG has agreed the Housing Supply and Affordability Reform Working Party will extend the land audit work to examine ‘underused examine private holdings of large parcels of land by mid-2010.
Agricultural land banking
While most land banking is based on the prospect of urban areas expanding at the expense of rural areas, in various parts of the world agricultural land is expanding at the expense of virgin land. The purchase of virgin land that has been identified as suitable for agriculture because of its climate, topography and soil properties, where the buyer has no intention to work the land himself or lease it out, would be agricultural land banking.Such lands are often rather far away from existing infrastructure when purchased by the land banking investor, therefore prices being low. The investor anticipates that, because of the area's natural productive potential, an agricultural infrastructure (sufficient roads, specialised contractors, grain storages) will develop, with more land put under cultivation and land values multiplying.
Agricultural land banking is found where large tracts of fertile virgin land still exist, where valuations are low and where legislation allows large land holdings (free hold) by domestic and foreign investors.
Typical countries for such investments during recent years have been Argentina
Argentina
Argentina , officially the Argentine Republic , is the second largest country in South America by land area, after Brazil. It is constituted as a federation of 23 provinces and an autonomous city, Buenos Aires...
, Brazil
Brazil
Brazil , officially the Federative Republic of Brazil , is the largest country in South America. It is the world's fifth largest country, both by geographical area and by population with over 192 million people...
, Uruguay
Uruguay
Uruguay ,officially the Oriental Republic of Uruguay,sometimes the Eastern Republic of Uruguay; ) is a country in the southeastern part of South America. It is home to some 3.5 million people, of whom 1.8 million live in the capital Montevideo and its metropolitan area...
,
Paraguay
Paraguay
Paraguay , officially the Republic of Paraguay , is a landlocked country in South America. It is bordered by Argentina to the south and southwest, Brazil to the east and northeast, and Bolivia to the northwest. Paraguay lies on both banks of the Paraguay River, which runs through the center of the...
.
where land prices appreciated accordingly.
Though the perception that the world’s fertile land is a limited and valuable asset is by no means new, it received renewed public and media attention with the global food crisis, when phrases like peak wheat
Peak wheat
Peak wheat is the concept that agricultural production, due to its high use of water and energy inputs, is subject to the same profile as oil and gas production. The central tenet being that a point is reached, the "peak", beyond which agricultural production plateaus and does not grow any further...
or peak soil”
.
were coined.
External links
- UK Seven Oaks council public statement on Land Banking
- UK Land registry publishes warning on land bank "investment" schemes
- UK Government Consumer Site - Land Banking Scams
- UK Financial Services Authority - Land Banking Statement
- Center for Community Progress
- Property Scam
- http://www.davidaaronllc.com