Singapore Property Frontiers

Investing in land is nothing new; tycoons like Warren Buffett and Li Ka-shing have profited from it. Yet such investment was traditionally the preserve of the very wealthy because of the large size - and hence high cost - of the land areas involved.

But now, with the rise of landbanking companies, even small investors can enjoy a piece of the action. But be warned: there are risks involved.

Landbanking companies begin by buying tracts of undeveloped land. They keep part of each tract and divide the remainder into units, which they then sell to individual investors. The hope is that the land will appreciate in value.

To that end, landbanking companies work with planners to get development approval. Once approval is obtained, developers are expected to come in and offer high prices. The companies then sell the land on behalf of their individual investors, who reap the returns.

This form of investment seems to be gaining ground here. Walton International, a Canadian-based company which sells land in North America, became the first landbanking company in Singapore when it opened an office here in 1996. It has since been joined by Royal Siam Trust, which markets beach-front land in Thailand, and Profitable Plots, which deals with UK land.

More Singaporeans seem interested too. Walton International reported that as of July 2006, it had some 7,000 Singapore investors, up from over 4,000 in July 2004.

Landbanking’s growing popularity may be due to its ‘windfall’ potential. Although purchased land is expected to appreciate regardless - Royal Siam Trust, for example, says the value of Thai beach-front land has been growing at an annual rate of 20 to 25 per cent - landbanking’s appeal lies in the possibility of a one-time gain when developers buy over the land.

However, the once-off nature of the returns makes it hard to develop a risk-return profile for landbanking.

NO GUARANTEES

And landbanking does come with significant risks. Firstly, landbanking is unregulated, and thus falls into a legal grey area. This could pose problems if disputes arise between companies and individual investors.

The Monetary Authority of Singapore was unable to comment on the matter as landbanking is not under its purview. Suffice to say that if an investment turns sour, all an investor may be able to show for it is the title deed to a piece of land hundreds of miles away.

Other risks include the illiquid nature of such assets, and exchange rate movements.

There are also no guarantees on how soon developers will buy over the land. Estimates by landbanking companies range from a period of three to eight years, to five to seven years.

Then there is the risk that landbanking’s key assumption may not hold: in other words, the purchased land may never undergo development. This is not necessarily an unfounded fear.

In a BBC expose last September, it was revealed that UK landbanking company Commercial Land had been selling sites which had - contrary to the company’s claims - very little development potential.

The district council overseeing one such site in Dorset said there was no chance of obtaining planning permission, especially since the area in question already had an oversupply of housing.

Landbanking companies may also leave investors high and dry. In November 2006, UK landbanking company Land Heritage (UK) closed down after an investigation by the Financial Services Authority. Its 700 investors were not refunded.

Perhaps because of such cases, landbanking companies are eager to reassure clients that they will not be left holding unprofitable plots. Clients are generally allowed to resell their units individually even if developers have yet to buy the area in question, although a minimum holding period may apply.

To avoid being burnt, investors should do their homework on the locations in which they plan to buy units.

LONG WAIT

Risks aside, the initial sums involved in landbanking are not modest.

Royal Siam Trust, which sells units of one-sixteenth of an acre, prices the first unit at US$17,500, and other units purchased simultaneously at US$17,000 each. Profitable Plots begins its pricing at 5,625 (S$17,067) per plot, though it is unclear how large each plot is.

In short, investors should be prepared to face high risks - and possibly a long wait - if they are focusing on the large potential gains from land development rather than the gradual appreciation of the land value. They must also be willing to stay invested for at least the medium term.

Potential investors can enquire at the websites of landbanking companies in Singapore or directly at the companies’ Singapore offices. The companies’ advisors will then guide them through the process of selecting and purchasing units of land.

It may not be the same as buying a plot for your future house, but it might still prove fruitful.

Source: The Business Times, 22 January 2007