Take on the landbanking minefield with caution

Investing in land has traditionally been the preserve of builders acquiring sites for housing development or companies seeking to build retail outlets, warehouses or industrial premises. But in recent years the private investor has joined in, often working through companies that acquire land and then sell it on in smaller parcels.

Landbanking, as this is known, is a perfectly respectable activity and can make a sensible investment, provided the developer sticks to the rules and investors go in with their eyes open. Too often, though, neither is the case.

The Financial Investment Authority, the watchdog for the investment community, recently asked the High Court to wind up the UK’s largest landbanking company, UKLI Limited, for operating an illegal "collective investment scheme" and denying investors protection for their money.

UKLI sold plots of land to people by claiming it could get planning permission that would increase their value and make investors a large profit once they were sold to a developer, the FSA said. About 4,500 investors paid £69m to buy the land but none was ever granted planning permission.

The reason why UKLI fell foul of the watchdog was that it operated as a collective investment scheme that should have been authorised by the FSA – but wasn’t. This lack of authorisation meant investors were not entitled to make a complaint to the Financial Ombudsman or claim compensation from the Financial Services Compensation scheme.

A collective scheme is an arrangement that takes any asset, including cash, so as to allow participants to take a profit or income from the acquisition, holding, management or disposal of the asset. This definition is not particularly helpful to the man or woman in the street and the FSA says it judges schemes "on a case-case basis." But the degree to which the scheme arrangers actively manage the assets is an important factor. You can check approved schemes on the FSA website, www.fsa.gov.uk. Even if your scheme is not on the list, it may be perfectly legitimate because it does not meet the criteria for being judged a collective scheme.

The problem with some landbanking schemes is that they make unrealistic promises to investors about the chances of gaining permission to develop. Land that is in the green belt or is designated open space in a local authority’s strategic plan is unlikely ever to gain planning permission for housing or commercial development, whatever the landbankers promise. The planning process is notoriously complex and uncertain, and recent government utterances have suggested a rethink of the "green belt" that rings many large cities, but it is best to be cautious about any likely easing of the rules.

The landbanking companies often promise investors that they cannot lose, even if development is refused. But they typically sell land to individuals at many times its value as agricultural land so if planning permission does fail to materialise, you will probably be selling it off at a huge discount to what you paid. Basic checks that you should make before buying include a call to the local authority, to confirm the status of the plot, and a call to a local estate agent, to see what values are being fetched by local agricultural land. They may have stopped making land but you can still pay too much for it.

By Charles Batchelor

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