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.
  • 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 is a common investment 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 land banking schemes 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.
  • 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.

Land banking FAQs

Do you have to be a big developer to start land banking?

Not necessarily, you can start off on a small scale. In fact, you probably should so that you get to understand what’s involved in terms of getting council approvals. This should give you the experience and confidence to explore larger-scale projects.

What does a managed investment scheme mean in relation to land banking?

Managed investment schemes must be licensed by Australia’s corporate regulator, the Australian Securities and Investments Commission (ASIC). Your land banking scheme will need to be licensed if:

  • you pool investor’s funds,
  • these pooled funds are used to further your development project, and
  • your investors don’t have control over how their investment is managed.
What is a comparison rate?

A comparison rate is the cost of interest plus any loan fees and charges. Lenders in Australia must advertise their comparison rates on their loan products to comply with the provisions of the National Credit Code. That’s why you usually see two interest rates advertised on a loan product.

The comparison rate will be a higher rate than the nominal rate, which only includes the cost of interest. Always use the comparison rate when comparing different loan products so that you know the full cost.

What is a loan-to-value ratio (LVR)?

The LVR is the value of your loan expressed as a percentage of the property you want to buy. For example, if you want to borrow $1.6 million to buy land that’s worth $2 million, your LVR is 80% (i.e. $1.6 million divided by $2 million).

If you have a deposit less than 20%, you’ll usually be required to pay for lenders’ mortgage insurance (LMI). This can be a significant cost and should be considered in the cost/benefit analysis for your land banking project. LMI protects the lender if you don’t make your loan repayments.

You can lower your LVR by providing your lender with a higher deposit.

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.