July 21, 2012

Investors warned off land banking schemes

Despite problems facing both the property and construction sectors, owners of land with a clear development potential can still demand significant sums in a sale. This has led many investors to view plots of land as a viable investment opportunity causing dramatic growth in the number of land banking schemes being set up. Such schemes involve a large plot of land with supposed future development potential being segmented and each plot sold to a separate investor. As with any investment the focus of the scheme is the potential future value of the land against its current selling price.

Often the future development potential of these plots is greatly exaggerated and in some instances completely fabricated leading to grossly inflated expectations for the land’s potential future value. Even in cases where land has been granted planning permission or has legitimate development potential, the subdivision of the land will often make it less appealing for developers, therefore affecting its value.

The Financial Services Authority (FSA) estimates that victims of land banking schemes have lost in excess of £200m. In the most recent case organisers of several land banking schemes, including Countrywide Land Holdings, were ordered to pay approximately £32m to the FSA so this could be returned to investors. However, land banking schemes are unregulated leaving investors with few, if any, avenues for remedy in the event they lose their investment. It is often the case that such schemes own insufficient realisable assets for an amount of any significance to be raised and returned to investors.

When considering purchasing land for its development potential as part of a land banking or similar scheme, it is imperative that independent advice is sought from an RICS regulated surveyor and planning law expert.

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