Land banking is an investment scheme wherein someone buys a piece of land and sells it later for a profit. Sometimes they divide the land into a number of smaller plots and sell each one to generate a profit. The investor can hold the rights to the land for a short time and make a quick profit or hold the position for years before selling the land.
Often the plot is a piece of pristine land that is agricultural in nature, but it can also be former industrial land which might be contaminated. If the landowner is able to get building permission to develop or rezone the land, it will increase the value of the land, and they can make a profit by selling it to a building developer. Sometimes the land is completely undeveloped and it might be possible to use it for farming.
Advantages of land banking
One of the great advantages of land banking over other kinds of investment is this: the investor owns something that physically exists. This is different from stock and commodity traders who own a certificate, a piece of the business which is not really tangible to certain people or in other more complex finance instruments, they are just "numbers on a computer". Land banking thus often appeals to a different kind of investor who like the idea that their investment is actually a tangible asset.
Problems with land banking
I have written previously to warn people about the risks of investing in land banking schemes, primarily because it is often unregulated investment in many countries. In a previous poll that I did , respondents also felt that land banking was one of the more toxic investments around. Most people in Singapore are also probably aware of the case surrounding Profitable Plots which was involved in land banking.
Like any other form of investment, the price of land can go down as well as up. If the piece of land contains industrial contamination or can never get permission for development then it becomes close to worthless.
Another problem with land banking is that a number of unscrupulous people have used it as a way to defraud people. They buy a plot of cheap land and then produce fake documents that make it look like it is worth more than it actually is and sell it on to unsuspecting investors. The rogue land bankers just vanish with the money leaving the investors with a worthless tract of land.
Location of the land
Land bankers can, in theory, invest in land anywhere in the world. However, some countries have laws that prevent non-nationals from owning land. If you are considering investing in land it is important to consult a lawyer who is an expert in the laws where you are buying the land. This will help to prevent any legal problems surprising you in the future.
In some areas of the world, virgin land is being taken and cleared to become agricultural land. This virgin land is often some way from existing agricultural land and infrastructure making it cheap to purchase. The investor can then hold the rights on the land until the infrastructure moves closer to it. At this point, they can rent it out to farmers or sell it for a profit. It might also be that the land is in an area suitable for mining and the investor buys the land in the hope to sell it to a mining company. In either case, the government could decide that the land lies within a protected area
Land banking is one way for people to invest and actually have the feeling of owning something tangible. It can be a great way to make money, but it is also a risky business. Anyone considering this should probably get legal advice first and only risk money that they can afford to lose.
By Financial Freedom, a Singapore personal finance blog whose founder is a contributor to CPF's IMSavvy. Posted via www.MoneyMatters.sg, your guide on how to make more money, save smarter, invest intelligently, and enjoy your money like a pro. Click here to get our free report on what you must know about financial freedom.