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October 21, 2011

Land banking – a property development strategy for the times


How many times have you driven past a property and said to yourself, “If only I had bought that property when it was for sale five years ago?”

BY MICHAEL YARDNEY

Who wouldn’t have bought more properties 10 years ago if they knew they would have doubled in value, like many well-located properties have done over the past decade?

Fast forward to five years from now – would you like to own a property development site that cost you much less than its current price?

Well maybe you should consider land banking – a strategy used by many professional property developers.

How Does Land Banking Work?

Land Banking is simply the process of securing future development sites today, at the current price.

Many large property development companies buy greenfield sites, farms or large tracts of land and put them in their ‘land bank’ to ensure they have a sufficient stock of land for future developments. Over time they rezone the land, put in the necessary roads and infrastructure, undertake a subdivision and onsell the individual lots.

While holding a bank or stockpile of land has helped many developers make big profits in a rising market, it has also been the downfall of a number prominent developers when property values slumped, or rising interest rates blew out holding costs.

Land banking is a great strategy for smaller developers too. It’s an approach I’ve used successfully for the last few decades because I’ve learned to keep my holding costs to a minimum so they don’t break the bank.

You see, I don’t buy vacant blocks of land.

I buy old houses close to their ‘use-by date’ on well-located blocks of land, with development potential in top suburbs. While the rent I receive partially offsets my holding costs, I add value to my property by obtaining development approval and then over time, proceeding with the development.

Why is land banking a good investment strategy?

Many investors have made small fortunes by land banking because they’re able to use a number of different property wealth accelerators that, when combined, generate substantial profits:

1. Land appreciates – we all know that it’s the land component of your property investment that appreciates, so buying a property close to its land value can be a smart strategy.

2. Adding Value – by obtaining development approvals you can add substantial value to a property.

Once you obtain a development approval for subdivision or for multiple dwellings, apartments or townhouses, you’ve taken out one element of the development risk – the council approval process.

This makes your property more attractive to developers who may be prepared to pay a premium for it and gives you the option of selling for a profit or refinancing your property and continuing with the development process.

3. Riding the property cycle – I like securing potential development sites in a ‘soft’ property market. At these times, completing a development may not be particularly lucrative, so I can buy these sites at a good price.

As the market moves on, and it always does, the combination of a stronger market and owning a property with development approval in a prime position allows me to complete my development and make a substantial profit.

This strategy works particularly well in the inner and middle ring suburbs of our capital cities, where there’s no vacant land for future development, but there’s an increasing demand for new medium-density developments from a whole new demographic of smaller households. This includes Gen Ys starting out by buying apartments, DINKS (dual income no kids households); MINGLES (Middle Aged Singles) and Baby Boomers who are downsizing.

The combination of the current flat property market, a limited supply of potential development sites and the future demand for more medium density development make a perfect recipe for successful land banking.

What are the risks

?

While this strategy offers significant rewards, there are a host of traps for the unwary.

The biggest one is in relation to what type of development (if any) can fit on the property. There are some properties – in fact many properties – that even if in the right location, don’t make good development sites. To use this strategy it’s important to understand your local town planning regulations.

But in today’s flat property markets, where the feasibility of many potential residential developments just doesn’t stack up, buying well-positioned property for future development may be a good strategy for you to adopt.

Have you used land banking as a property investment strategy? If so, tell us your experiences – did it prove to be profitable?

Michael Yardney is the director of Metropole Property Investment Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Investment Update blog


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6 Comments

  1. Hi Michael,

    I’m definitely interested in this strategy. I should have adopted it for my PPOR, but I got impatient and renovated instead so it wouldn’t make sense to knock it down now. I plan to sell a property shortly that should free up some money to go shopping. I’ve always bought and held rentals, but I wouldn’t mind mixing it up a bit to see what work for me.

    Thanks for the tips

    Comment by Shaun @ Money Cactus — October 22, 2011 @ 11:34 pm

  2. Michael, what do you think about buying solid, older three-bedder houses on larger, regular level blocks of land (ie. 800sqm and upwards) in say, the outer Eastern suburbs of Melbourne (but not the ‘fringe’), renting these out in the meantime till subdividing in the future? Logically, would this also work, if albeit less profitable?

    In theory of course, inner and middle ring suburbs will do better than properties in the outer ring in the long run. However, realistically, a lot of these properties for ‘land banking’ in the inner and middle ring are not affordable to the average investor. Furthermore, a house near its ‘used by date’ on such blocks of land will generate very low yield, making the property highly negatively-geared and holding costs can be very high. I was hoping to hear an opinion on a more affordable version of ‘land banking’ as yields in outer suburbs are still reasonable and reduce holding costs.

    Comment by House — October 23, 2011 @ 2:41 pm

  3. House
    I don’t know what your investment strategy is. Sure the hypothetical property will increase in value, but probably not as much as inner suburbs.

    I understand that you may not be able to afford a “landbank” property at present. Maybe you should consider buying an apartment in a better location.

    You are likely have better capital growth plus higher yield and a great investment

    Comment by Michael Yardney — October 23, 2011 @ 4:17 pm

  4. Hi Michael, thanks for the suggestion. I also read your other recent article titled “Why Apartments Will Outperform Houses”. A lot of good points there also, however I have to admit that I’ve always had a habit of buying ‘land’. Having a limited budget has pushed me to investing in the suburbs or looking at large regional centers. Reading your articles and books, I can tell you are not a fan of neither of these types of property.

    Time will tell if it was the right decision to buy in those locations, but this is the great thing about today’s property market I suppose, there is a great variety of residential property available to an investor. There is sure to be something for everybody.

    Comment by House — October 23, 2011 @ 5:10 pm

  5. Hi Michael,

    It just so happened the UK’s Dail Mail published a story on Lanbanking yesterday. Basically it advises investors to ‘BEWARE’! Good advice to ensure investors aren’t being sold a dream that will never happen and the other side of your story. click here for the piece – http://bit.ly/vkJpUm – or cust and paste the link.

    Regards.

    Comment by Investor-gate — October 26, 2011 @ 1:27 pm

  6. This is a great strategy if you’ve got the cash to get started. As you mentioned, there are downsides, but purchasing at the bottom of a down market is usually the best place to buy. These prices won’t stay down for long. Great post!

    Comment by fredericksburg va real estate — January 28, 2012 @ 9:56 pm

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