The term ‘land banking’ is used often in the real estate market, but what does it mean? Land banking is often referred to as the process of buying undeveloped land purely as an investment, with no specific objective for its development. But the reality is, ‘Land Banking’ means different things to different groups depending on what their objectives are.
Types of Land Banking:
The term refers to buying undeveloped land, which the purchaser has an expectation will increase in value in the future because it will be used for future development, generally for residential development. Generally, there are two different types of land banking:
- Speculative investors
- Residential property developers
Speculative investors buy parcels of land in areas in which there is likely to be regeneration, This is because house prices are increasing or because there is residential development taking place in areas surrounding the land.
Speculative investors will then simply sit on the land and wait for the value of the land to increase. In some cases, the investor may obtain planning permission to develop the land (to further enhance its value) and then sell it at a profit. However, in many scenarios, the investor won’t need to obtain planning consent and will simply be able to sell the land to a developer who will obtain planning permission to develop the land.
Land is often viewed by investors as a good investment because it is a finite resource. When real estate prices increase, it is because the value of the underlying land increases rather than the buildings which sit on it. As well as being a finite resource, the land is also indestructible and requires very little maintenance.
Many market commentators have issues with this practice because, investors may have to wait many years before selling the land, during which time it will often remain empty and unproductive. This can create pockets of land that can blight city centres and have a negative impact on communities and prevent other development from taking place. The issue is particularly acute in the residential market because there is a significant shortage of new housing.
In major cities, the rapid increase in the value of land can make land banking a lucrative investment. However, tying up sites can also prevent the demand for property from being satisfied, a demand which is the key cause of the increase in value of the investment.
Residential Property Developers
Many residential property developers are often accused of the practice of land banking. And specifically, many residential property developers buy and hold land for long periods of time to limit its supply and artificially inflate property values by maintaining scarcity of new housing.
It is true that most major developers do, in fact, participate in land banking. However, the reality is that they do this to ensure their own supply of land. After all, land is a fundamental requirement for the development of new housing. Developers, in fact, must land bank in order to maintain operations, because they require a constant supply of new land for development in order to maintain their core operations. They cannot simply go out and buy new land, in the same way, that a manufacturer operates a ‘just in time’ model for raw supplies because:
- The land market is highly competitive and just because they need land at a certain point of time it does not mean that a developer will be able to buy new land. Because there is no guarantee that appropriate parcels of land will be available and for sale at the time they require it or that they will be able to buy it if there is. After all, the market for land is highly competitive and others will be competing for the same parcels of land.
- The other issue for developers is the time it takes to obtain planning permission to develop a new residential development scheme. It takes between 2 and 4 years in the UK to obtain consent on a residential development, so developers need to hold land for a long-period of time in order to take it through the planning process. In addition, for parcels of land which are not zoned for residential use, the developer may need to spend upwards of 10 years promoting the land through the planning system.
Accordingly, developers typically undertake two forms of land banking; short-term land banking and strategic land banking.
Short-term Land Banking
Developers regularly purchase land without planning consent, which is zoned for residential use. This land is for medium-term development within the next 5 years. Developers buy the land with the intention of obtaining planning consent and developing it into housing.
The advantage of this land is it is already zoned for residential land use and they only need to obtain permission for a specific building. Generally, this process tends to be circa. 2 – 4 years.
Strategic Land Banking
Most major developers have what is referred to as a ‘strategy land team’ this team buys land which is not at the time zoned for residential use. This may be farmland, greenbelt or industrial land, the team will then spend several years promoting the scheme to the local authority to be re-zoned for residential use.
The advantage of this land is it is significantly cheaper than land which is zoned for residential use. The disadvantage, however, is the time it will take to promote through the process, which is on average 10 years.
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