Land banking is a real estate investment scheme that involves buying large blocks of undeveloped land. These schemes are often unregulated and there's little protection if something goes wrong.
In a land banking scheme, property developers usually buy land, divide it into smaller blocks and offer it to investors. As an investor, you either buy a plot of land or buy an option to purchase a plot of land. These are known as 'option agreements'. The option agreement is usually triggered when the land has been approved for development by the local council.
The land is expected to be sold at a profit when it's rezoned or approved for development.
Land banking schemes sold at property seminars
You might hear about land banking at property spruiking or investment seminars. They are described as a 'get rich slow' option.
Glossy brochures and presentations promote land banking as a cheaper way to get into the property market.
Property spruiking events and investment seminars are often high-pressure environments. You can be rushed into making a decision. You may not be given enough time to consider the investment carefully or to seek independent advice before you sign up.
How land banking schemes go wrong
The land is undeveloped
Developers can mislead investors about the prospects of rezoning or developing the land.
Some developers offer land for investment without knowing whether they can get council approval to develop it. Some have failed to tell investors that there are development restrictions on the land.
If the land doesn't get development approval, your investment could be unsaleable and worth less than you paid.
Schemes can collapse
A number of land banking schemes have collapsed in Australia and overseas without the promoted development ever proceeding.
Planning approval can take many years and lots of money. Ongoing legal and planning costs can eat into the funds to support the development. This can cause the company to become insolvent. If you're an option holder, you can lose all the money you've invested.
Option agreements can expire
Some land banking option agreements have a 'sunset clause'. The sunset clause ends the scheme 20 to 25 years from the date of the agreement, if the land fails to be rezoned or developed.
The sunset clause can mean investors lose the fee they paid if there's not enough money to repay all option holders. You may not get a refund on any legal fees, commissions and other payments you paid.
Land banking scams
Investors may be scammed by developers who are selling options in land they do not own.
Legal or financial advice kickbacks
Land banking scheme promoters may refer you to lawyers, accountants or financial advisers. Be aware that they may have a pre-existing business relationship with the promoter or developer, who may receive a kickback for referring you. And, they could have a personal interest in the property development.
Always seek independent legal or financial advice.
ASIC has taken action against land banking schemes run by Askk Investment Group, VKK Investments Unit Trust, Realestate Equity Investment Trust (REIT), 21st Century land banking companies and Midland Hwy.
What to check before investing in land banking
Contact the local council
Ask the local council if the land will ever be released for development. A land banking promoter may try to persuade you that the council is not aware of all potential developments. You should question the promoter's motivation for telling you this.
Check if it's a managed investment scheme
Managed investment scheme operators need an Australian financial services (AFS) licence. The scheme may be a managed investment scheme if:
- Investors do not have day-to-day control over managing their investment.
- The scheme involves pooling investor funds.
- The funds are used to further the development.
You can check ASIC's Professional Registers Search to see if the developer and the promoter hold an AFS licence.
Read the product disclosure statement (PDS)
If it is a managed investment scheme, you must be given a product disclosure statement (PDS). The PDS must include information about the scheme's key features, fees, commissions, benefits, risks and complaints handling procedure.
Make sure you read the PDS. If you don't understand the investment, get independent financial or legal advice.
Do not confuse the PDS with marketing material used to sell the investment, such as brochures or information sheets.