Investment Instrument Series - Land Banking

This will be a series of investment instruments which I will be writing. As I have been to a presentation and done some research, I decided to start on this investment instrument.For a start, land banking is quite new in Singapore. I believe it appeared around 3 years back.

I believe all knows that property is normally a good investment. If you research on most, if not all, property markets in the world, you will see that the property market gives a return of at least 10% pa (this is provided you take a long term view). In Singapore, the type of properties that are worth more are the freehold properties. People are not interested in the building when they buy the "property", they are more interested in the land beneath it. Land appreciates while the building depreciates over time. That is why companies are now selling land rather than the property as the returns can be very lucrative. Just a carrot here, the returns can be as high as 10-20 times your capital. In London, land prices has been rising at about 20-25% for the last 5 years.

How these land banking companies work.
They buy a hugh plot of undeveloped land first. Then they split them up into small pieces and sell them to investors. Previously, such investments are only for the super rich as the hugh plot of land cost millions. Now, with the smaller pieces, small investors can join in the fun. The cost of a small piece of land is as low as S$10,000 (area of about a 4 room flat). Please note that as this is a piece of undeveloped land, the price is very low. The company then tries to get this plot of land approved by the government to be developed into either residential or commercial land. When it does get approved and developers will then buy over this piece of land at the current residential or commercial land price. Normally, this price is at least a few times your buy price. A catch in land banking.....you will have to sell your piece of land at this stage(as contracted).

Question: Why does the company not want to buy the plot, get it approved and take all the profits?
This is an economy of scale. Say for example the land cost $1million. If this company has a million dollars, it can buy this land, wait for a few years and then sell it for 5million. But on the other hand, if it cuts this land into 100 pieces and sell each at $20,000, it would have immediately $2million. These companies normally will keep about 20% of these cut-up land. If the company sells 80 pieces of the cut-up land at $20,000, it would have $1.6million. They could then use this money to buy another 1-2 pieces of land and do the same thing. When the land gets approved, they would also profit from the 20 pieces of cut-up land that they have kept. The new pieces of land then are cut up and sold again and the cycle goes on. With this concept, the company then can generate enough money and profit to keep the operations going.

In Singapore, the 2 main players are Walton International (http://www.waltoninternational.com/asia/about.asp?ArtID=104) and Profitable Plots (http://www.profitableplots.com/). WI is selling Canada land whereas PP is selling UK land. It seems that more Singaporeans know WI but with PP's advertisement in English Premier League, I believe more people are aware of PP now. PP's website has more information on how it sells, market and gets approval for the land they sell. WI has recruited quite a number of salesperson to sell their land.

To all who are reading this, though I have vested in land banking, I have not heard of any track records from both these 2 companies in the lands which they have sold to Singaporeans. Maybe it is only 2-3years since they have started and it normally takes about 5 years to get any approval. That is why I have only vested a minimum amount with Profitable Plots. If you are interested in this investment, feel free to contact me. If I refer you to PP, there is a referral fee. We can share this fee (win-win). In any case, please do your due diligence before deciding to invest in land banking.