Banking on land? Don't bet too high

Investment in possible future development is tempting but risky, says David Prosser

Nigel Walter, managing director of UK Land Investments Group, is on a mission to convince the world that land banking is a legitimate investment activity. "There is nothing wrong with marketing a product to investors that enables them to benefit from profits previously only made by property developers and private landowners," he says.

Making the case is an uphill battle. The land banking sector is under fire from everyone from financial regulators to the Campaign for the Protection of Rural England and has been regularly attacked by the media - not least because it attracts so many conmen.

Make up your own mind. Land bankers buy up undeveloped land across the UK, often on green-field or even green-belt sites. They offer it for sale - usually breaking one site into many plots, costing from £10,000 each - on the basis that when the land is re-zoned as suitable for development, investors will cash in.

The catch is there is no guarantee the land will ever be re-zoned. In many areas, local councils insist they will never give permission for the land to be built on, which could leave investors with worthless plots.

On the other hand, the UK faces a housing crisis. The Government target is 4.2m new builds over the next 20 years but there is a current shortfall of 50,000 houses a year. These properties must be built somewhere and there is no doubt land will be re-zoned in the future; the owners of that land will make money.

Greg Mulholland, Liberal Democrat MP for Leeds North, is not convinced. On Friday he will present a private members' bill to outlaw land banking.

"I think land banking is unethical," says Mulholland. "It puts pressure on land in developing communities and it's an investment gamble - most people would only go into this if they expected a reasonable return within a reasonable time period, and I think that's questionable."

The dilemma for investors is twofold. First, there's the question of whether there is any money in land banking - not one company can produce examples of investors who have bought into land subsequently re-zoned, though this is a young industry selling five-year to seven-year investments.

More worrying is the vast number of cowboy operators. Up to 50 rogue companies are currently marketing plots with promises of huge returns, despite having no idea whether planning permission will ever be granted.

In March, the Department of Trade and Industry became so concerned about one company, United Land Holdings, it raided the land banker's stand at the Ideal Home Exhibition. The DTI is now trying to wind up the company.

The Financial Services Authority, the UK's chief City regulator, would regulate any land banker set up as a collective investment scheme. That means the company both finds land for investors and then manages it, maintaining it and filing planning permission requests. But currently the FSA authorises no such companies.

"The FSA cannot regulate companies operating beyond its remit, even if we think they're up to no good," warns Eleanor Hughes, a spokeswoman for the regulator. "If we don't regulate a scheme, investors who lose out have no recourse to ombudsmen schemes or our compensation fund."

The only other protection is that the DTI can take action against lawbreakers. A company cannot deliberately make misleading claims about its goods and services - but it's sometimes hard to establish where marketing spiel ends and deception begins.

As Mulholland's bill is almost certain not to become law - it will not get sufficient parliamentary time - the MP says the next best thing would be to bring the land banking industry fully under the supervision of the FSA. That call is backed by Walter, who says one of the biggest frustrations for legitimate land bankers is the damage done by scam merchants.

In the meantime, Walter says there are at least four checks to make on a land banking company before you even consider whether a potential investment has genuine merit.

Check with the Land Registry that the company actually owns the plot on offer, he says. Check the track record of the land buying and planning team, and ask how it can back up claims that the plot is suitable for development. Study the company's accounts - does it have sufficient cash to fund planning processes and is it retaining its own stake in land investments?

Finally, get agents to take you to the site and explain its promise - if it's not next to existing residential developments, be suspicious. "Clearly, plots of land being offered for £10,000 or less with promises of obtaining planning permission within a couple of years is nonsense," says Walter.

A 250 per cent return - if the land is finally cleared for development

A site in Earl Shilton, Leicestershire, is typical of the sort of property that UK Land Investments has been marketing.

The project began when UK Land identified East Midlands as an area where existing housing targets had been set at a low level - it expected these to be revised upwards. It then identified the plot in Earl Shilton on the basis that outline planning approval had been given for a bypass of the town.

The site that UK Land bought was between the existing residential area of the town and the proposed bypass route, with the new road separating the land from open countryside.

Since UK Land acquired its plots, local housing targets have been increased and the bypass given final planning approval. The company believes that once the bypass is completed, towards the end of 2008, "it will greatly assist in the case for [the land] to be included within the settlement boundary of Earl Shilton... and serve to contribute towards the required housing targets".

The company has just finished marketing the site and investors have bought plots for prices from £8,000 to £12,000. UK Land is predicting returns of 250 per cent over a five- to seven-year term.

However, while the land looks promising, there are no guarantees. It has yet to be rezoned for development and local councillors currently do not have plans to do so.