Land Banking Schemes - a Word of Warning

Schemes under which developers, and in more recent times large supermarkets, buy up tracts of land either with a view to future development or to prevent competitors acquiring the land are relatively well-known.

A more recent phenomenon however are schemes where a land banking company is formed specifically to stockpile land in anticipation of dividing sites into plots and selling those plots to individuals who themselves sell on to third parties at a profit.

The sale of the individual plots is made more attractive by the land banking company holding out the prospect that in due course a planning consent will be obtained for an overall scheme of development on the entire site and that with economies of scale, the cost of this can be shared leaving individual plot owners to take the benefit of the enhanced value of the land once planning consent has been obtained.

In the current economic climate where banks no longer appear to be a safe haven for cash and where, even if they were, the possible investment returns available are negligible due to low interest rates, investing in the security of land with the possibility of a substantial return may seem an attractive proposition.

Such schemes have been popular for some time in the United States.  They are only a relatively recent phenomenon in the UK.

There are a number of risks attaching to these schemes and potential investors should consider the following points:-

• The land banking company is unlikely to do anything to enhance the value of the land itself but it may offer to handle the planning application process for a substantial fee.

• The land concerned may have little or no prospect that planning consent will be granted.

• Even if consent becomes available the land may be unsuitable for a number of other reasons for development use.

• There is considerable doubt as to whether these schemes are regulated by the Financial Services Authority and schemes can be established so that they remain outside the regulatory regime.  It is therefore important to check whether a scheme has been constituted as a collective investment scheme for the purposes of regulation.

• Because individual plots are sold and it is difficult to determine the position of boundaries from title plans the temptation is to fence individual plots.  Although such fencing is permitted without planning consent provided it remains under the permitted height, Planning Departments who are becoming increasingly concerned about the proliferation of unsightly fencing in such schemes are soon to be given authority to withdraw general development rights and require plot owners to apply for planning consent for all boundary fences around their plots.

In the current economic climate such schemes might seem an attractive investment but there are many pitfalls, particularly for unsophisticated investors.

There is useful additionaL advice on the Financial Services website but for individuals thinking about investing in such schemes the watchword must be to take proper legal advice before proceeding.