Land banking is a controversial subject, described by Minister for Building and Housing Dr Nick Smith as “a money-printing machine where you can hold the market to ransom”.

As a socially responsible New Zealander, you’re shaking your head and tutting. As an investor, though, a tiny part of your brain is thinking that’s a hell of a sales pitch.

What is landbanking? It’s buying land and holding onto it in the hope of future gains. Theoretically it’s like putting money in the bank: you can’t do anything with it, but you hope it’s safely making a bit of a profit while it’s sitting there.

Landbanking can take several different forms, which include:

• Buying a big section

• Buying to develop

• Buying rural land

Buying a big section

Real-estate agents are fond of promoting any subdividable section with the slogan “Develop or landbank!” The idea being that your large section could in future be subdivided or developed further, increasing your options and your potential future gains.

However, this isn’t what anyone in the property industry would consider landbanking; it’s pretty straightforward residential investment. It’s relatively affordable and fairly low-risk. Lenders like it and the value of your land will rise or fall with the overall residential market.

Buying to develop

The main reason for purchasing land is to develop it – to subdivide it and build houses or commercial properties on it. Developers buy with a project in mind, but a truckload of paperwork, mammoth holding costs, and mountains of red tape have to be worked through first. Sometimes it can take up to 10 years to finally start building.

Bob Howard is the owner of Harcourts in Kumeu, a formerly rural small town northwest of Auckland. He says every piece of ‘banked’ land in this area is owned by someone who is either planning to develop it, or waiting for it to be rezoned so they can sell it to a developer. In the meantime, the land sits vacant and usually appreciates in value as suburbs pop up around it.

Rural land is sometimes unserviced, relying on bore or tank water, with no wastewater systems and occasionally limited power and no phone lines. Putting this infrastructure in place immediately adds value.

To make serious money, you normally need to hold the land for at least a few years. Even when rezoning does come through, it’s not always easy to sell for a quick profit, says Howard: “Holding costs really eat into your pockets – if you don’t make the right investment, it can go bad fast.”

The only way to get an income from unused land is to graze it, which is unlikely to cover your holding costs (mainly council rates and interest charges). And you’re only likely to be able to borrow 50 to 60 per cent of the cost of the land.

Lenders also like to see plenty of evidence that the project will succeed – ideally it needs to be zoned for development, and have resource consent and subdivision consent. The fewer of those boxes you can tick, the harder it will be to borrow, and the higher your interest rate is likely to be.

Rural landbanking

Is a massive chunk of cash burning a hole in your pocket? Do you not want to put it in the bank because returns are so low? Are you happy to tie that cash up for five to 10 years?

You could buy rural land on the fringes of a city and hope the city develops out towards your tract of real estate.

Quite a few of the people who have made millions in recent years are locals who bought rural land 20 or 30 years ago, says developer David Whitburn of Fuzo Property.

He recently inspected a site in Ranui, West Auckland. It was being sold by an 85-year-old farmer who purchased it in the 1980s for less than NZ$50,000. The site is now worth about NZ$18 million. Whitburn says the farmer couldn’t be characterised as a landbanker – he’s just been lucky.

But individual buyers are intentionally landbanking rural sites in the hope of this type of future gain. Chinese investors are most often associated with landbanking, but Whitburn says American, Indian, Australian, and Kiwi investors are also using this strategy.

Investors typically spend NZ$5 million or more on each transaction. And they love New Zealand property because there’s no stamp duty or capital gains tax, says Whitburn.

If you want to invest in farmland, your borrowing will fall into the specialist rural lending sector, so you’ll need an even larger deposit. One lender told JUNO that if a customer asked to borrow NZ$1 million to buy a NZ$10 million farm, “we still might say no”.

Only a tiny number of individuals can afford to park millions of dollars in land that brings in almost no income. If you’re one of these extremely cashed-up individuals, rural landbanking could be a great option for your money. But you probably already know that…

For the rest of us, a decent section or small-scale subdivision is probably the best we can hope for. But it’s still a good investment strategy, even though it’s on a smaller scale.

First published 23 February, 2017

By Amy Hamilton-Chadwick

The editorial below reflects the views of the editorial contributor only and content may be out of date. This article is sourced from a previous JUNO issue. JUNO’s content comes from sources that it considers accurate, but we do not guarantee that the content is accurate. Charts are visually indicative only. JUNO does not contain financial advice as defined by the Financial Advisers Act 2008. Consult a suitably qualified financial adviser before making investment decisions.