Is land banking the property development strategy of the pros?
Would you consider land banking as part of your property strategy? In fact, land banking process is commonly used by many professional property developers. How does land banking work?
Land banking process is all about securing future property development sites and locking in profits today at the current price.
Many large property development companies buy sites like farms or large tracts of land to add value as part of their “land bank” ensuring they accumulate sufficient stock of land for future property developments.
Over time they rezone the land, put in necessary roads and infrastructure, undertake a subdivision and on-sell the individual lots.
While holding a land bank or stockpile of land has helped many developers make big profits in a rising market, it has also been the downfall of many developers as real estate values slumped and or rising interest rates blew out their holding costs.
How many times have you driven past a property and said, if only I had bought that property when it was for sale five years ago?
Would you buy more properties if you knew land doubled in value, like many well located real estate has done over the last decade?
Fast forward 5 years from now, would you like to own a property development site which cost you much less than its current price?
Land banking is a great strategy for smaller property developers too…if used successfully by keeping holding costs to a minimum.
Is the land banking process a good investment strategy?
What if you understood the land banking process was not actually just about buying vacant blocks of land?
What if you used land banking process as a way to purchase old houses which would be good for demolition?
What if these old houses are located on blocks of land with the specific strategy of using the land for property developments in top suburbs?
The land banking process would in reality, allow rental income to partially offset holding costs, right? Plus you would be able to add value by getting a property development approval (D.A) to development property for generating substantial profits…
Many investors use land banking process because they’re able to leverage a number of different strategies:
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 getting property development approvals you can add substantial value to a site.
If you get a development approval for subdivision or multiple dwellings, apartments or townhouses, you’ve taken out one element of property development risk out of the equation…and that’s the council approval process.
The D.A can make a specific site more attractive to developers which may be prepared to pay a premium. It also gives you the investor the option of selling for a profit or refinancing and continuing with the property development process.
3. Riding the property cycle. The idea is by securing potential property development sites in a “soft” market because completing a project may not be particularly lucrative, so you can look to buy these sites at a below market price.
As the market moves up this creates a combination of a stronger market. Owning a block of land with development approval in a prime position allows you to complete your project and make a substantial profit.
The land banking strategy works great in the inner and middle ring suburbs of capital cities, where there is no vacant land for future development.
The catch is there needs to be an increasing demand for new medium density developments from a whole new demographic of smaller households which includes:
- Gen Y’s starting out in apartments
- Dual income no kids households
- Middle aged singles
- Baby boomers which are downsizing.
What do you think would happen with the combination of a flat property market, limited supply of potential property development sites and future demand for more medium density housing? Yes, it make a perfect recipe for successful land banking.
Land banking process…what are the risks?
Land banking is just one of a host of other property development and renovation strategies, in short here are some cautions…
Land banking as a strategy does offer significant rewards, if done the right way, however there are a host of traps for the unwary. The biggest one is in relation to what type of project (if any) can fit on the property?
There are some properties, in fact many properties, which even if in the right location, simply don’t make good development sites.
Firstly, you want a detailed checklist to assess properties for development potential and 0nce you understand local council’s requirements some of the steps you’d look for assess a site’s suitability for property development include:
1. Size and dimensions – how big is the site and are the dimensions (length x width) suitable for development? Is it a corner site that allows better subdivision potential?
2. Current dwelling? What is on land at present, can it be leased while obtaining D.A? Are there problems with demolition, e.g. heritage, asbestos?
3. Topography: Is the site flat or does it slope? Does it slope in the right direction for the natural fall of services (sewerage & drainage) or will expensive pumping be required?
4. Significant trees or obstacles? Are there any significant trees on property or nature strip which need to be retained? How does this affect the development? Are there power poles on footpath which may need to be moved to allow for crossovers?
5. Site Orientation: Which way is the site facing? In certain councils this has objection implications for planning (natural light), overshadowing and overlooking (privacy issues with neighbours).
6. Neighbourhood Character. What type of properties are in the neighbourhood and how does this impact on the scope of proposed development?
Are there new developments in the street which could act as a precedent for proposed project? What type of neighbours are you likely to have? Are they likely to object to a new development in their street?
7. Neighbouring properties. What are their setbacks from the street (may affect required setback of new development) and what are their setbacks from your boundaries? Are they single or double storey?
Do they have windows facing the proposed new project? All these factors could significantly affect size and positioning of proposed project in terms of overshadowing or impacts on privacy.
8. Utilities: What utilities are available? Water, electricity, phone and gas? Will utilities need upgrading? Are there any easements affecting supply of utilities?
9. Site Accessibility: easy to access site for construction (can be a problem in tight or narrow inner suburban streets).
10. Title Checks: Search for the following on the certificate of title or online planning scheme…
- Easements – are there any easements on the site?
- Covenants – are there any covenants or restrictions in the title deed?
- Development overlays – are there any flood overlays that affect building heights?
Why do you think the land banking process is an excellent property investment strategy?
Land Banking Process