Monday, May 16, 2011
Dear Reader,
Land banking is where we buy a piece of raw land because we believe something will happen to make it more valuable in the future. That something might be a new highway from a major city or a new airport that makes the area more accessible. For example, last year I recommended land banking on Ecuador’s north coast. A new highway was set to connect this stretch of coast with Ecuador’s capital, Quito. The highway is now open, making Ecuador’s north coast the closest beach area to Quito.
Maybe (in the case of an emerging economy) we expect that economic growth and a new middle class will lead to the growth of new suburbs. If your land is in the area where the suburbs are moving to, it will be in hot demand from developers.
The returns can be stratospheric. In the 1970s, you could have picked up beachfront land south of Cancun, Mexico, for a song. And simply waited for the big hotel 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
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
Legacy investors take a much longer view. They might expect to wait until the next generation to 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 or 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
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 your stock that you can sell in the future. A real estate development is self-liquidating. Developers always need land in the bank for future projects.
Governments
Governments land bank for nature preservation or to ensure that land is available for future infrastructure and services.
Now, 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 land bank too.
Here’s how:
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, ideally within two hours of an international airport
-Water, electricity, sanitation close by
-Easy and transparent permitting process
-Beachfront
-Ocean-view
-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.
Ronan McMahon
P.S. In the past two years I have been investigating and negotiating land banking opportunities in four countries on behalf of an ultra-high net worth associate. It’s been fun…and a seriously steep learning curve. You wouldn’t believe the things I have seen, the nuggets I’ve found and the bullets I’ve had the good fortune to dodge. I’ve learned a lot. I’m working on a special report for members of Real Estate Trend Alert where I share everything I’ve learned…and some funny stories. RETA members, watch your inbox in the coming weeks. If you’re not a RETA member, you can Learn more about RETA here.
Posted Under:
appreciation potential, real estate opportunities, land bank
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