What Does Land Banking Mean?
Land banking involves strategically buying large blocks of undeveloped but potentially valuable land for property development purposes. It’s important to look for land that has development potential in high-growth areas. This land is often not yet approved by the relevant local council for development. However, once the development application has been approved, the land can be:
- Subdivided into smaller lots and offered for sale once the development application for the land has been approved. For example, a new housing estate.
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- Used to build multi-residential dwellings like unit, apartment or townhouse complexes.
- Used to build commercial premises such as office, warehouse, factory or retail space if the land has been zoned for commercial development.
- Alternatively, undeveloped land that isn’t yet approved for development can also be subdivided and options to buy can be made available to investors. The option to buy becomes activated once there is council approval for the land’s development.
Land banking investment is a common strategy for developers. It allows land to be sold at a profit when it’s rezoned for development. The land could be rezoned as residential property, commercial property or mixed use.
The most important factors are the location of the land and its suitability for high-quality development that will generate investor demand. You should always thoroughly check your land’s suitability for the development project you have in mind before you buy it. For example, does it have the right soil conditions to make it easy and cost-effective to build on?
Is Land Banking a Good Investment?
Buying large tracts of land potentially can have both advantages and disadvantages for property developers. It’s important to seek independent financial advice before you purchase land for this purpose.
We’ll now look at the pros and cons of a land banking scheme in turn.
THE PROS OF LAND BANKING
- Buying undeveloped land either before or after it’s zoned for development and then developing it appropriately can allow you to make very good profits. The value of land can increase significantly after rezoning and/or suitable development. This is because governments and businesses can invest in necessary infrastructure once the land is rezoned. For example, roads, utility service connections, public transport and community facilities.
- Land appreciates, so buying land for future use can be both a good hedge against inflation and provide you with capital growth opportunities over time. Land values in strategic locations in Australia (e.g. in major capital cities and close to CBDs where the strong population growth tends to occur) has a strong long-term growth record over the past three decades. In fact, the value of land can increase faster than the value of any residential dwelling or commercial premises that are subsequently placed on it.
- You don’t necessarily have to buy vacant blocks of land. For example, you can buy multiple older, existing properties on blocks of land and rent them out while you’re waiting for a land redevelopment application to be approved.
THE CONS OF LAND BANKING
- There is risk of buying undeveloped land. For example, it may not necessarily be rezoned by council for development. If your development application isn’t approved, the land will be hard to sell for the price you paid for it. Or if it is approved, restrictions may be placed on how the land can be developed.
- Land development applications can be expensive and they can take several years of council negotiations before a decision is made. A land banking investment strategy requires you to be patient. You also need to factor legal, planning and holding costs into your land banking scheme and do a thorough financial analysis to make sure you will get a good return on your investment if your application is approved. Holding costs include council rates on the land as well as interest on any funds you borrow to buy your land.
- Property spruikers and real estate agents who promote land banking schemes at investment seminars sometimes develop a bad reputation through their sales tactics. It’s important not to mislead investors when selling undeveloped land that hasn’t been approved for development.
Choosing the Right Land Banking Company
When considering a land banking investment, it’s crucial to work with a reputable and experienced land banking company. A reliable land banking company will have a proven track record of successful developments and a deep understanding of the local property market.
Look for a land banking company that conducts thorough due diligence on the land they acquire, ensuring that it has the highest potential for future development. They should also have a clear strategy for rezoning and developing the land, as well as a realistic timeline for when investors can expect to see returns.
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A trustworthy land banking company will be transparent about the risks involved in land banking and provide comprehensive information about their investment opportunities. They should also have a strong network of industry professionals, such as surveyors, architects, and local council members, to help navigate the complex process of rezoning and development.
Diversifying Your Land Banking Investment Portfolio
One way to mitigate the risks associated with land banking is to diversify your investment portfolio. Rather than investing all your funds into a single plot of land, consider spreading your investments across multiple parcels in different locations.
By diversifying your land banking investment portfolio, you can potentially offset any losses incurred if one development project fails to materialize or experiences delays. It also allows you to take advantage of growth opportunities in various regions, as different areas may experience population growth and infrastructure development at different rates.
When selecting land for your portfolio, consider factors such as proximity to major cities, planned infrastructure projects, population growth projections, and the local council’s attitude towards development. A well-diversified land banking investment portfolio should include a mix of short-term and long-term opportunities, as well as a balance between residential and commercial zoning potential.
The Importance of Patience and Long-Term Thinking
Land banking is not a get-rich-quick scheme. It requires a patient, long-term approach to investing. The process of rezoning and developing land can take several years, and there may be setbacks and delays along the way.
However, for investors who are willing to take a long-term view, land banking can offer significant rewards. As cities expand and populations grow, the demand for developable land increases, driving up land values and creating opportunities for substantial profits.
When engaging in land banking, it’s essential to have realistic expectations about the timeline for returns and to factor in the ongoing costs associated with holding the land, such as council rates and interest payments on loans. Working with a reputable land banking company can help you navigate these challenges and make informed decisions about when to sell or develop your land.
The Role of Land Banking in Urban Planning and Sustainable Development Land banking plays a significant role in shaping the future of our cities and communities. By strategically acquiring and holding land for future development, land banking companies can help ensure that urban growth is planned and sustainable.
As cities expand, there is a growing need for affordable housing, efficient transportation networks, and green spaces. Land banking can help address these needs by providing a supply of developable land in key locations, allowing for the creation of well-designed, livable communities.
However, it’s important that land banking is conducted in a responsible and ethical manner. Developers should work closely with local councils and community groups to ensure that their projects align with the needs and values of the local population. They should also prioritise sustainable development practices, such as incorporating green spaces, energy-efficient design, and affordable housing options into their plans.
Land banking can be a lucrative investment strategy for those who are willing to take a patient, long-term approach. By strategically acquiring undeveloped land in high-growth areas, investors can potentially realize significant profits when the land is rezoned and developed.
However, as with any investment, there are risks involved in land banking. It’s crucial to work with a reputable land banking company, conduct thorough due diligence, and diversify your investment portfolio to mitigate these risks.
Ultimately, responsible land banking has the potential to shape the future of our cities and communities, creating well-planned, sustainable urban environments that meet the needs of growing populations. As an investor, being part of this process can be both financially rewarding and personally fulfilling.
Land Banking FAQs
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When selecting a land banking company, look for a reputable firm with a proven track record, a clear development strategy, and transparent communication about potential risks and returns.
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To mitigate risks, diversify your land banking investment portfolio across multiple parcels in different locations, and be prepared for a long-term investment horizon.
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Land banking can help shape sustainable urban growth by providing developable land for affordable housing, efficient transportation, and green spaces, but it must be conducted responsibly in collaboration with local communities.
How do you get land banking finance?
Choosing the right lender and the right loan is crucial to help ensure the maximum return on your property investment.
At ARG Finance, our experienced team of finance brokers can help you to source the right finance for buying a property. We’ll take the time to understand your needs before recommending appropriate financing solutions. We work with clients in a diverse range of property markets.
Contact us today to find out how we can help you to finance your land banking investment.
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