There has been significant adverse publicity surrounding the practice of land banking in recent months. The Financial Services Authority (FSA) has secured injunctions against a number of land banking scheme operators and the Land Registry has issued an updated Public Guide, warning about the potential risks of investing in land banking schemes.
Land banking is, in essence, a legitimate form of real estate investment. The land banker stockpiles land with one of the following intentions:
- to develop the land itself in the future and sell the developed site to a third party at a profit. This practice is most commonly adopted by house builders and commercial developers;
- to sell the land at a profit to a third party developer. This is common practice for those who invest in property on behalf of trusts or pension schemes;
- to divide the land into plots before selling them to third parties at a profit.
So why is this practice now the target of FSA investigations and Land Registry warnings when many reputable building companies and supermarket chains have favoured it in the past?
Whilst land sales are not regulated by the FSA as a 'specified investment', a land banking scheme may be a 'collective investment scheme' (CIS) where:
- investors do not have day-to-day control over managing their plot;
- the scheme involves pooling investor funds; and
- the operator is responsible for managing the scheme as a whole.
If the scheme is a CIS, the operator of the scheme must be authorised by the FSA. If the operator of a CIS is not authorised by the FSA, investors in the operator's scheme will not have access to the Financial Ombudsman Service or Financial Services Compensation Scheme if things go wrong (although they will still have statutory rights to recover their money and claim compensation which they can seek to enforce privately against the operator).
If you are considering investing in land banking schemes:
- question the sales and marketing information given to you - is the investment opportunity too good to be true?;
- check the identity and background of the scheme operator - are they or should they be authorised by the FSA?; and - seek independent legal advice before parting with any money.
The most common complaint from investors in what transpire to be illegal land banking schemes is that they were misled into believing they were investing in a high yield property development scheme, only to discover that they had in fact paid substantial sums of money for land which could not, and cannot, be developed (usually because the land in question is unsuitable for development, due to planning restrictions or otherwise). Some relatively simple checks can be made via a solicitor, prior to investing in a scheme, to limit the risk of this happening.