What is US land banking?

Posted by By at 20 June, at 11 : 21 AM Print

PI03_USlandbanking_nycLand banking has been gaining ground worldwide, but the notable difference is that some countries perceive it as a positive strategy, whereas some are ready to introduce measures that restrict a strategy that breeds millionaires.

According to Property Investments, land banking is the process through which people, companies, authorities etc. purchase pre-developed parcels of land, hold or sell it after a considerable period for a significant profit. Due to scams that put a spotlight on land banking, it has become important to identify and purchase parcels for major metropolitan growth corridors ahead of new development. In countries all over the world, purchased land is kept until its value has increased considerably. The U.S., just like any other country, has transformed land banking into a major opportunity, thanks to the population growth, municipal extension and demand. However, this process is hardly new to the U.S.

John Jacob Astor took up land banking over 500 years ago and became the United States’ first multi-millionaire. He started by purchasing large tracts of land and realised that no other investor saw this strategy as a sound opportunity. Astor’s investment created what we now call Manhattan. (pictured) The transactions helped him become the fourth richest person in American history. It has been estimated that, at the time of his death, Astor’s wealth exceeded $110.1 billion in the economy of 2006.

Developers and retailers have started to put their knowledge regarding land banking to good use, therefore resulting in the emergence of many multi-millionaires. This strategy requires two key things: a) purchasing land in suburban areas and 2) the patience to let it’s value grow.

Today’s Problems

According to Forbes, land banking in the U.S. has become an opportunity for foreign investors. California is now the promoter of Chinese buyers who wish to invest in appreciable assets from the U.S., Australia, Vancouver, etc. The same source concluded that in 2012’s third quarter, up to 43 per cent of Hong Kong’s luxury homes were purchased by Chinese buyers. The U.S. also represents a growing interest for Chinese nationals who invested over $9 billion in 2012, CBRE reports.

According to Zillow, Chinese property purchases in the United States rose to $11 billion in 2013, thus making them the second biggest foreign investors in the US, first being Canada.

At the same time, Fitch Ratings suggests that homes in California were overvalued by over a fifth, Financial Times reports. Alex Buehlmann of McGuire Real Estate concluded that this area has plenty of opportunities for investors, but also overrated prices due to the vicinity to San Francisco and Silicon Valley. The same publication also added that Buehlmann says more international buyers from Canada, China, the UK and Russia have come to the U.S., especially to California. As a result, there are concerns of overheating in these markets, mainly because property prices have doubled since 2007.

However, the U.S. is not the only country where foreigners have decided to invest. In Australia, the proportion of foreign buyers reached new heights. While in 2011 there were five per cent foreign buyers, in 2013 the numbers have more than doubled. Property developers in Sydney have concluded that about 85 to 90 per cent of property buyers are mainland Chinese, Forbes stated.

London Land Banking Crisis

While other countries like Australia and the United States have flourishing land banking, the United Kingdom encounters problems when it comes to this strategy. The Guardian reported that politicians have labeled land banking as dangerous, especially since Greater London Authority figures show that approximately 210,000 homes have received planning permissions, but 180,000 have not been finished.

Moreover, housing consultants Molior found that 45 per cent of the homes that received permission were not built because the buyers were not even in the building business. As a result, politicians are currently thinking of introducing a measure to lessen land banking, i.e. a land value tax.

Regardless of the problems that the U.K. is currently facing, countries like the U.S. and Australia have reached the peak of land banking.


Excerpted from an article originally published in issue 3 of Property Inc. magazine. 


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