Land banking is the strategic acquisition of raw land that you hold until an anticipated future event will result in an increase in value.
The returns can be stratospheric. For example, in the 1970s, you could have picked up beachfront land south of Cancun, Mexico, for a song. And simply waited for the resorts to come in. When they do, you are sitting on pure gold. Cancun wasn’t a one-off. At any given time, there are opportunities just like the Cancun one.
Different groups land bank…
Speculators buy with a plan for a relatively quick flip, based on an expectation that an imminent event is going to dramatically increase demand. A speculator might buy in an area where a new bridge will open up a piece of coast that was inaccessible.
Legacy investors take a much longer view. They might expect that the next generation will reap the rewards. They will look for somewhere with intrinsic value—beautiful beachfront, for example. The beachfront might be in an area that is currently inaccessible, unfashionable and completely off the radar. Legacy investors will take a view that given enough time, the perception and accessibility issues will disappear, and they will be holding beautiful beachfront in an area where resort and residential developers are bidding prices up.
Developers always need to have a land pipeline. Remember, the development business is like the mining business. As soon as you start selling lots or condos you are reducing the amount of these you can sell in the future. A real estate development is self-liquidating. Developers always need land in the bank for future projects.
Governments land bank for nature preservation or to ensure that land is available for future infrastructure and services.
You probably think that land banking is only for the mega rich and powerful. Yes, they make fortunes (or sometimes make bets that don’t come off) from this strategy but the small guy can do this too.
Pick an area where something that’s going to happen in the future will result in an increase in value. Look for infrastructure development…new airports, roads and bridges.
In this business, you make your money buying. In many emerging markets where you can find large land parcels for land banking, pricing is “made up”—and there are no comps to give you an idea of current market values. Many properties listed are only for sale if the owners find a gringo who will pay top dollar. The key is to find a motivated seller, someone who needs cash now. Today, there are more motivated sellers around. If you buy well, you are ahead of the game from the get-go.
Same as with any residential purchase, when choosing land always focus on who the ultimate end user will be. Who will you sell the land on to? For the biggest returns, you will want to sell to a developer. You need to look at the land through a developer’s eyes. He will look for:
- An accessible location
- Water, electricity, sanitation close by
- Easy and transparent permitting process
- Potential for amenities like golf
- Capacity for high density. The higher the potential density, the more the developer can make per acre so the more he will be willing to pay for raw land.
- Holding costs. How much will it cost in taxes, security, etc., just to sit on the land
- Can income be derived from the land while you are sitting on it?
Finally, you need to be willing to stick with this for the medium term at least, if not the long term. Changes can happen slowly. But, when they do, the returns can more than justify the wait and the risks.
As I said, this strategy isn’t just for the big guys. I’ve seen small beachfront pieces in Ecuador suitable for condo development for $200,000. Join with some friends and family and you could be in the land banking game with a relatively modest investment.