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Land Banking has become very popular nowadays. This investment is traditionally reserved for the very rich; as they are the only ones who can afford to buy hundreds of acres of land parcels that cost millions of dollars. However, through a unique joint venture program, Land Banking is now available to within the reach of everyone. Now a number of companies have opened up this investment to a wider audience.
Whenever you visit the property fair, for sure you won’t missed name like Walton International Group, Land International, Strategic Land Investment, UK Land International and many more.
I was invited by a mutual friend to attend a talk by one of the top Land Banking company last week at Kuala Lumpur . Here is what I gather for about half hour talk.
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 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 way to make big capital gains in land banking, involves buying land in specific areas in the hope of future development.
It is exactly like what a local developer is doing in areas for instance Puchong, Damansara and the Mines . Land price escalated over the period via value-added process as well as natural appreciation. Mutiara Damansara of Selangor for instance was purchased by SCB Developments at RM15.88 per sq ft in 2000. It was subsequently sold at RM157.00 per sq ft in 2003. Enormous return with Land-Banking with 10X growth in 3 years! ( 6 Oct 2003- The Sun,)
How Land Banking work?
2-3 years of research on a particular potential land will be conducted. At the same time, analyses the demand of the land for residential or industrial needs for further development.
Upon confirming the potential of the land, the land banking company will acquire the land.
The land banking company will convert the land title and develop a master development plan.
Actively look for potential developer / buyer and sell the land with development plan to yield return.
In short, Land Banking is the process of acquiring a parcel of raw land or undeveloped land and enhancing the status of the land by formulating the concept plans and submitting the plans to the authorities for approval.
As the value of the land increases tremendously once approval is received from authorities, the land will sell to developers with significant returns.
"Don’t wait to buy land. Buy land and wait." – Will Rogers
Advantages of Investing in Land Banking
Attractive Return - Walton International Group claimed their track record is above 10% pa(simple return). Many of Walton sales rep and managers are investors themself! 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 Investing) - No Service or management charges to pay. Just invest one lump sum and wait for about 3-6 years to reap the expected return. It offers a hassle free investment because you pay your initial investment, and you don’t have to think about it until exit. Very suitable for who do not have the time/education/patience to study and do research
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
Disadvantages of Investing in Land Banking
(What "they" prefer Not to Tell You in details)
Minimum Liquidity – You are expected to hold the investment minimum for 3-6 years for the land price to appreciate. Early exit will result loss.
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 guarantees on how soon developers will buy over the land. Estimates by landbanking companies range from a period of three to eight years, to five to seven years.
Basically the companies will apply to convert from agriculture to Commercial land status from the Government. Government may changed their policies anytime.
Land is located Oversea - You do not know the real value of the land, except the promise of the marketer that no investor had sold the land at a loss.
Land banking is unregulated , and thus falls into a legal grey area. This could pose problems if disputes arise between companies and individual investors. You cannot complaint to Central Bank of Malaysia (Bank Negara Malaysia) for dispute as land banking is not under its purview.
In November 2006, UK landbanking company, Land Heritage (UK) closed down after an investigation by the Financial Services Authority. Its 700 investors were not refunded.
There is NO perfect Investment . Therefore Investors need to do their due diligence before investing. As my guru(Milan Doshi ) always say all is depend on your Unique Investment Profile!
For those who have experience in Land Banking , please share your feedback on the comment below.