Banking on land? Don't bet too high
Investment in possible future development is tempting but risky, says David Prosser
Saturday 14 October 2006
Nigel Walter, managing director of UK Land Investments Group, is on a mission to convince the world that land banking is a legitimate investment activity. "There is nothing wrong with marketing a product to investors that enables them to benefit from profits previously only made by property developers and private landowners," he says.
Making the case is an uphill battle. The land banking sector is under fire from everyone from financial regulators to the Campaign for the Protection of Rural England and has been regularly attacked by the media - not least because it attracts so many conmen.
Make up your own mind. Land bankers buy up undeveloped land across the UK, often on green-field or even green-belt sites. They offer it for sale - usually breaking one site into many plots, costing from £10,000 each - on the basis that when the land is re-zoned as suitable for development, investors will cash in.
The catch is there is no guarantee the land will ever be re-zoned. In many areas, local councils insist they will never give permission for the land to be built on, which could leave investors with worthless plots.
On the other hand, the UK faces a housing crisis. The Government target is 4.2m new builds over the next 20 years but there is a current shortfall of 50,000 houses a year. These properties must be built somewhere and there is no doubt land will be re-zoned in the future; the owners of that land will make money.
Greg Mulholland, Liberal Democrat MP for Leeds North, is not convinced. On Friday he will present a private members' bill to outlaw land banking.
"I think land banking is unethical," says Mulholland. "It puts pressure on land in developing communities and it's an investment gamble - most people would only go into this if they expected a reasonable return within a reasonable time period, and I think that's questionable."
The dilemma for investors is twofold. First, there's the question of whether there is any money in land banking - not one company can produce examples of investors who have bought into land subsequently re-zoned, though this is a young industry selling five-year to seven-year investments.
More worrying is the vast number of cowboy operators. Up to 50 rogue companies are currently marketing plots with promises of huge returns, despite having no idea whether planning permission will ever be granted.
In March, the Department of Trade and Industry became so concerned about one company, United Land Holdings, it raided the land banker's stand at the Ideal Home Exhibition. The DTI is now trying to wind up the company.
The Financial Services Authority, the UK's chief City regulator, would regulate any land banker set up as a collective investment scheme. That means the company both finds land for investors and then manages it, maintaining it and filing planning permission requests. But currently the FSA authorises no such companies.
"The FSA cannot regulate companies operating beyond its remit, even if we think they're up to no good," warns Eleanor Hughes, a spokeswoman for the regulator. "If we don't regulate a scheme, investors who lose out have no recourse to ombudsmen schemes or our compensation fund."
The only other protection is that the DTI can take action against lawbreakers. A company cannot deliberately make misleading claims about its goods and services - but it's sometimes hard to establish where marketing spiel ends and deception begins.
As Mulholland's bill is almost certain not to become law - it will not get sufficient parliamentary time - the MP says the next best thing would be to bring the land banking industry fully under the supervision of the FSA. That call is backed by Walter, who says one of the biggest frustrations for legitimate land bankers is the damage done by scam merchants.
In the meantime, Walter says there are at least four checks to make on a land banking company before you even consider whether a potential investment has genuine merit.
Check with the Land Registry that the company actually owns the plot on offer, he says. Check the track record of the land buying and planning team, and ask how it can back up claims that the plot is suitable for development. Study the company's accounts - does it have sufficient cash to fund planning processes and is it retaining its own stake in land investments?
Finally, get agents to take you to the site and explain its promise - if it's not next to existing residential developments, be suspicious. "Clearly, plots of land being offered for £10,000 or less with promises of obtaining planning permission within a couple of years is nonsense," says Walter.
A 250 per cent return - if the land is finally cleared for development
A site in Earl Shilton, Leicestershire, is typical of the sort of property that UK Land Investments has been marketing.
The project began when UK Land identified East Midlands as an area where existing housing targets had been set at a low level - it expected these to be revised upwards. It then identified the plot in Earl Shilton on the basis that outline planning approval had been given for a bypass of the town.
The site that UK Land bought was between the existing residential area of the town and the proposed bypass route, with the new road separating the land from open countryside.
Since UK Land acquired its plots, local housing targets have been increased and the bypass given final planning approval. The company believes that once the bypass is completed, towards the end of 2008, "it will greatly assist in the case for [the land] to be included within the settlement boundary of Earl Shilton... and serve to contribute towards the required housing targets".
The company has just finished marketing the site and investors have bought plots for prices from £8,000 to £12,000. UK Land is predicting returns of 250 per cent over a five- to seven-year term.
However, while the land looks promising, there are no guarantees. It has yet to be rezoned for development and local councillors currently do not have plans to do so.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
How couples can protect their financial interests when cohabiting
Money alert: Overdrafts at HSBC and First Direct
'Dismal' eurozone data sparks concerns
How to protect your assets if the stock markets begin to head south again
Child Maintenance Service to replace Child Support Agency - but is it better?
- 2 ALS ice bucket challenge co-founder Corey Griffin drowns, aged 27
- 4 Kajieme Powell: Missouri police release video footage of second man killed by officers
Scottish independence: English people overwhelmingly want Scotland to stay in the UK
Richard Dawkins on babies with Down Syndrome: 'Abort it and try again – it would be immoral to bring it into the world'
Isis threat: Cameron wants an alliance with Iran
Crisis? What crisis? A visiting US doctor gives the NHS a rave review
Michael Brown shooting: Chaos erupts on the streets of Ferguson after autopsy shows teenager was shot six times – twice in the head
Scottish Independence Referendum: Salmond described as 'arrogant, ambitious and dishonest' by Scottish women
iJobs Money & Business
£65000 - £75000 per annum: Harrington Starr: .NET Developer (4.0, C#, Windows ...
£1 per annum: Harrington Starr: A leading financial software house with its He...
£45000 - £50000 per annum: Harrington Starr: C #Developer (.Net 4.0/4.5/ C#, A...
£1 per annum: Harrington Starr: JQuery Developer JQuery, UI, Tomcat, Java - Tr...
Day In a Page
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony