BUY a piece of land and sell it to property developers later for a tidy profit.
This is the pitch by landbanking companies to potential investors.
In landbanking, a company buys a plot of land, usually in a rural area in another country, subdivides it into smaller plots and sells them to investors.
Once planning permission is given, the value of the land will rise. But like all investments, returns are not guaranteed and could take years to materialise.
Marketing executive Rita Wong, 40, found this out after paying about $30,000 for 4,000 sqm of land in Ontario, Canada.
In 2003, at a friend’s invitation, Madam Wong attended a seminar organised by Walton International, a landbanking company with offices in Canada and Singapore.
She told The New Paper: ‘I was greeted by a salesman who kept telling me that Canadian land was a viable investment as there would always be demand for housing, thanks to immigration.’
The company told Madam Wong there was no fixed time-frame for the Canadian government to approve the land for development.
Six years later, she’s still waiting for this to happen.
‘I thought there would always be demand for land. I could have earned some money in a shorter time had I invested in fixed deposits,’ she said.
‘I may have to spend the rest of my life waiting for the Canadian government to allow the land to be developed.’
The New Paper contacted Walton for comment on Tuesday but it did not reply by press time.
A sales executive from Walton, however, told us that profits could take years to materialise and the company had investors who saw profits only after 10 years.
The Consumers Association of Singapore (Case) said it has received four complaints about landbanking companies so far this year.
It got three complaints last year and two in 2007.
Case executive director Seah Seng Choon said the complainants wanted to terminate the investment contracts, but Case could not help as investments do not fall under the association’s ambit.
Landbanking companies allow investors to exit their investments by getting someone else to buy over their plots and paying transfer fees of about 15 per cent of the plot price.
The companies said that should they go bust, judicial managers will take care of the investors’ interests.
Long-term decision
Mr Seah cautioned that landbanking carries high risks.
‘The land you buy may not appreciate in value for a long time and the money you invested may be stuck for a long time with no returns,’ he said.
‘Reselling the land, if possible, may also result in losses.’
The New Paper attended a landbanking seminar by Edgeworth Properties, a Canadian-based developer, on Wednesday.
Edgeworth develops land in oil-rich Alberta and part of its development strategy is to get funds from overseas investors to buy plots.
Edgeworth said it had already submitted applications for planning permission and that returns of 75per cent on land in Alberta were guaranteed after four years.
The price of each plot of land costs C$10,000 ($15,000), depending on the size. So if you invest $15,000, you would get back $26,250.
The returns were guaranteed in Edgeworth’s sales contracts.
There was no hard-selling.
Mr Leslie Ng, country manager of Edgeworth Properties, told The New Paper: ‘The investor has to ask why this particular location makes it viable and attractive for a developer to want to build there.
‘But bear in mind that your funds will be locked in for four years. If you foresee big financial commitments in the near future, please consider carefully.’
Mr Ng added that Edgeworth has 1,800 investors in Singapore.
He said: ‘We used to get C$2m ($2.65m) a month in investments, but we took a hit after the financial crisis, when monthly investments fell to between $250,000 and $500,000.
‘But we’re recovering nicely now.’
We asked Edgeworth if it had any successful investors but it said its first project would only mature next year.
Other companies, such as Jardin Smith International and The Profitable Group, could not guarantee when investors could see returns.
Jardin Smith, which has been operating here since 2005, sells land in the UK to investors and also applies for planning permission there.
Its chief executive, Mr Stewart Gunnery, said that none of its plots in Water Orton, a village in Warwickshire, has received planning permission.
He said: ‘Landbanking is a medium-to-long- term investment. If you’re looking for short-term gains, you can try the stock market, but that’s volatile.
‘Our sites are all carefully selected using specific criteria, such as good communication links and proximity to local amenities and schools.
‘We carry out extensive checks on the viability of the land through our UK planning agents and our lawyers.’
When we asked Mr Gunnery if it was better to buy land that was already zoned for development, he said it was too expensive.
He said: ‘Greenbelt (conserved) land is cheaper and once planning permission is granted, its value rises and investors will make money.’
Checks with the UK Land Directory showed that greenbelt land could be used if there is demand for residential and commercial developments.
Approval for developing greenbelt land, however, is a long process that starts with directives from the housing ministry and ends with permission from the county councils.
Too risky?
Property analysts here feel landbanking is too risky an investment.
Mr Albert Lu, managing director of C & H Realty, said: ‘I’ll never invest in landbanking, because these companies are just selling you a plan that will materialise only if the land can be developed.’
He feels it would be better to invest in residential property overseas since prices have dropped with the recession.
Mr Donald Han, managing director of real estate consultancy Cushman & Wakefield, said unseasoned investors should be careful when it comes to foreign investments.
He said: ‘It will take time to get planning permission so if you’re looking for short-term gains, this type of investment is probably not suitable for you.’
Mr Han added that investors should find out the exit strategies in the worst-case scenario.
He said: ‘Market cycles come into force. A downward cycle in Singapore may last two years but in another country, it could be 10 years.’
The uncertainty surrounding landbanking explains why some countries view it with suspicion.
Last June, the Financial Services Authority in the UK, an independent body that regulates financial services, shut down UK Land Investment after 4,500 investors paid £69m ($162m) for 5,000 plots of land.
None of the land, which was in conservation areas, was ever granted approval for development.
