Potential Risks Of Buying Undeveloped Land

Source : The Sunday Times, September 23, 2007

THE gains from investing in undeveloped or raw land might sound attractive, but experts say retail investors need to take care.

Mr Ku Swee Yong, the director of marketing and business development at property consultant Savills Singapore, said such investments can be ‘a good tool’ because of the potential for capital gains and because they require smaller sums than direct property purchases.

He pointed out, however, that investors keen on land banking have other options, for instance, buying uncompleted properties or investing in real estate investment trusts.

The chief executive of wealth management firm dollarDEX, Mr Chris Firth, warned that ‘a big problem’ with land banking is that most of these activities are not regulated anywhere. Thus, the offerings vary greatly, ranging from ‘genuine ones to scams’.

Pricing is another issue. ‘In some cases, the markup from wholesale plots into retail plots is so huge, investors have virtually no hope of turning a profit.’

In July, in Britain, four firms that had sold plots of agricultural land to the public were wound up by the High Court after a probe into misrepresentations. It was revealed that the sites had little or no chance of getting planning permission.

The chief investment officer of private wealth manager Providend, Mr Daryl Liew, said investors should perform due diligence on the firm and assess the land’s potential.

Here are some issues you should consider.

Absence of regulation

The buying of raw land as an investment is not regulated in Singapore. If investors choose to deal with investments not regulated by the Monetary Authority of Singapore, they forgo legal protection.

Consumers are thus urged to find out as much as possible about the company, understand the product and ensure the investment fits in with their financial goals.

Long wait for developers to come in

There is no guarantee as to how soon developers will buy over the land. Estimates by strategic land investment companies range from three years to eight or even 14.

Fruitless wait; the land is never developed

It is possible the land might never undergo development. It was reported last November, that British land banking firm Land Heritage (UK) closed after a probe and its 700 investors were not refunded.

High ‘hidden’ costs

Depending on the country, you might have to pay capital gains tax, withholding tax or miscellaneous legal fees before you can realise the profits. These costs could well eat up half your profits.

Lack of liquidity

Land assets are illiquid. In most cases, there is a minimum holding period before you can sell your individual plots of land even if developers have yet to buy the area in question.

Exchange rates

If you bought the land in a foreign currency, there is a risk of currency moving against you.