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Investing in undeveloped land can be high risk and there's little protection if something goes wrong.
What is land banking?
Investing in undeveloped land (sometimes called land banking) is an investment where returns depend on the land increasing in value, being rezoned or approved for development.
In a land banking scheme, property developers may 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, especially when it's rezoned or approved for development.
Land banking may be promoted at property spruikings or investment seminars. These can be 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.
Why land banking can be risky
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 or worth less than you paid.
Schemes can collapse
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 operator to become insolvent. If you're an option holder, you can lose all the money you've invested.
A number of land banking schemes have collapsed in Australia and overseas without the promoted development ever proceeding.
Option agreements can expire
Some land banking option agreements have a 'sunset clause' that ends the agreement if the land fails to be rezoned or developed by a certain date.
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.
Advice may not be independent
Promoters may refer you to lawyers, accountants or financial advisers who they have a pre-existing business relationship with. The adviser may also have a personal interest in the property development.
Always seek independent legal or financial advice.
What to check before investing in land banking
Check whether the development is likely
Contact the local council and ask whether the land is likely to be approved for development or rezoned in the future. Don't rely solely on claims made by the promoter or agent. If their information differs from the council's advice, ask questions and seek independent advice.
Understand what you're buying
Before you invest, get independent legal advice. Make sure you understand who owns the land, whether you’re buying land or an option to buy land, and what your rights are if the development does not go ahead.
Check if the investment is regulated
Ask whether the land banking investment is a ‘managed investment scheme’. Regulated managed investment schemes must meet legal requirements designed to protect investors, including providing clear information about risks, fees and your rights. If the investment is not regulated, you may have fewer protections if something goes wrong.
Read the product disclosure statement
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.
To help protect your money, follow our stop, check and protect tips and read more about investment warnings to be aware of. Learn about other ways to invest in property.