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LANDBANKING
 
Investing
in land is nothing new; tycoons like Warren Buffett and Li Ka-shing have
profited from it. Yet such investment was traditionally the preserve of the
very wealthy because of the large size - and hence high cost - of the land
areas involved.
But now, with the rise of landbanking companies,
even small investors can enjoy a piece of the action. But be warned: there
are risks involved.
Landbanking companies begin by buying tracts of
undeveloped land. They keep part of each tract and divide the remainder into
units, which they then sell to individual investors. The hope is that the
land will appreciate in value.
To that end, landbanking companies work with
planners to get development approval. Once approval is obtained, developers
are expected to come in and offer high prices. The companies then sell the
land on behalf of their individual investors, who reap the returns.
This form of investment seems to be gaining ground
here.
Walton International, a Canadian-based company
which sells land in North America, became the first landbanking company in
Singapore when it opened an office here in 1996. It has since been joined by
Royal Siam Trust, which markets beach-front land in Thailand, and Profitable
Plots, which deals with UK land.
More Singaporeans seem interested too. Walton
International reported that as of July 2006, it had some 7,000 Singapore
investors, up from over 4,000 in July 2004.
Landbanking's growing popularity may be due to its
'windfall' potential. Although purchased land is expected to appreciate
regardless - Royal Siam Trust, for example, says the value of Thai
beach-front land has been growing at an annual rate of 20 to 25 per cent -
landbanking's appeal lies in the possibility of a one-time gain when
developers buy over the land.
However, the once-off nature of the returns makes
it hard to develop a risk-return profile for landbanking.
NO GUARANTEES
And landbanking does come with significant risks.
Firstly, landbanking is unregulated, and thus falls into a legal grey area.
This could pose problems if disputes arise between companies and individual
investors.
The Monetary Authority of Singapore was unable to
comment on the matter as landbanking is not under its purview. Suffice to
say that if an investment turns sour, all an investor may be able to show
for it is the title deed to a piece of land hundreds of miles away.
Other risks include the illiquid nature of such
assets, and exchange rate movements.
There are also 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.
Then there is the risk that landbanking's key
assumption may not hold: in other words, the purchased land may never
undergo development. This is not necessarily an unfounded fear.
In a BBC expose last September, it was revealed
that UK landbanking company Commercial Land had been selling sites which had
- contrary to the company's claims - very little development potential.
The district council overseeing one such site in
Dorset said there was no chance of obtaining planning permission, especially
since the area in question already had an oversupply of housing.
Landbanking companies may also leave investors
high and dry. 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.
Perhaps because of such cases, landbanking
companies are eager to reassure clients that they will not be left holding
unprofitable plots. Clients are generally allowed to resell their units
individually even if developers have yet to buy the area in question,
although a minimum holding period may apply.
To avoid being burnt, investors should do their
homework on the locations in which they plan to buy units.
LONG WAIT
Risks aside, the initial sums involved in
landbanking are not modest.
Royal Siam Trust, which sells units of
one-sixteenth of an acre, prices the first unit at US$17,500, and other
units purchased simultaneously at US$17,000 each. Profitable Plots begins
its pricing at 5,625 (S$17,067) per plot, though it is unclear how large
each plot is.
In short, investors should be prepared to face
high risks - and possibly a long wait - if they are focusing on the large
potential gains from land development rather than the gradual appreciation
of the land value. They must also be willing to stay invested for at least
the medium term.
Potential investors can enquire at the websites of
landbanking companies in Singapore or directly at the companies' Singapore
offices. The companies' advisors will then guide them through the process of
selecting and purchasing units of land.
It may not be the same as buying a plot for your
future house, but it might still prove fruitful. - by Janice
Heng SINGAPORE BUSINESS TIMES
22 January 2007
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