How the Land Bank is Boosting the Nigerian Property Market
With record levels of inflation upsetting the logic of traditional savings through commercial banks, a new form of banking is gaining ground, writes EDIDIONG IKPOTO
For centuries, the traditional banking system has offered customers the platform to save money, whether for interest or other purposes.
Historically, banking has been around since the first coins were minted and wealthy people wanted a safe place to store their money.
Ancient empires also needed a functioning financial system to facilitate trade, distribute wealth, and collect taxes. Banks were to play a major role then, just as they do today.
But, as it is characteristic of human existence to evolve with the times and the seasons, the banking sector itself has by no means been immune to the paradigm shifts that have characterized the different eras of the economy. human existence.
Today, there are several forms of banking that have infiltrated various spheres of human activity, including the real estate sector.
In principle, the land bank is by no means a new concept. In fact, studies have shown that a large majority of people who acquire land do so with the intention of reaping future capital appreciation, as opposed to acquiring for development purposes. What is new, however, is the terminology itself as well as the conscious effort to create the niche for a fraction of the investing public who want to buy real estate as a way to save money.
With rising inflation hitting the budgets of many, investors are beginning to question the wisdom of saving money through the traditional banking system.
Land banking, as the name suggests, refers to banking through the instrumentality of land (real estate). The basic premise of this is that rather than putting money into a savings account (which will earn little or no interest over a long period of time) or the stock market (which can go bearish in the blink of an eye eye), some entrepreneurs have opted for an alternative approach by acquiring land. In doing so, they chose to put the money in a fixed tangible asset, an asset less likely to be damaged by inflation or a stock market decline.
In a land banking system, property developers typically buy land, divide it into smaller blocks, and offer it to investors. As an investor, you either buy land or buy an option to buy land. These are known as “option contracts”.
One of the best-known investors in land banks in recent years was John Jacob Astor, who used this strategy to become the first multi-millionaire in the United States.
He realized the power of land banking when he purchased large tracts of land that are now known as “Manhattan”.
He acquired this land at a time when no one else realized the opportunity. At the time of his death, Astor’s estimated net worth was reportedly equivalent to $110.1 billion in 2006, making him the fourth richest person in American history at that time.
The option agreement is usually triggered when the land has been approved for development by the local council.
Historically, land banking is one of the oldest real estate investment practices. It allows investors to buy small or large amounts of undeveloped land with the intention of profiting from the resale of the land.
Simply put, investors seek out land in underdeveloped neighborhoods and bank it until there is substantial infrastructure development or population growth in the area before selling it at a higher price. or expand them to meet the growing demand for housing.
In Nigeria, although landing bank is not particularly a new concept, few real estate companies have integrated it into the real estate market in terms of the type of offers offered to subscribers and customers.
For the most part, the focus has usually been on finding clients who want to buy land and convincing them why owning real estate is a good investment or a good deal. Others have focused on development for different categories of tenants and in doing so have reduced the housing deficit in the country.
However, the endless drive to scale permutations and lure potential customers to new offerings has spawned what has become a somewhat formalized land banking program at many real estate establishments.
The ultimate objective is not only to encourage clients to invest in real estate, but to give them the assurance of being able to dispose of these temporary assets within an acceptable period of time.
Sometimes a major disincentive for investors looking to invest in land ownership is having the time or expertise to resell and cash out those investments on specific timelines. At this stage, questions regarding the possibility of selling the land in time or dealing with land grabbers will arise.
A development associate of PWAN real estate company, Simon Etim, in a conversation with our correspondent, pointed to the role of a real estate company in distributing land assets in a desirable time frame as the fundamental point urging investors to grasp the idea.
According to him, while land banking could be done by any individual without necessarily using the services of a real estate company, certain subtleties could harm the investment.
He said: “The idea of the land bank is this, we call it ‘buy to sell’. You buy land and the company sells it for you. You don’t worry if the land is going to be sold or not. The company will usually give you a deadline. Twelve months is the longest period. When the time expires, the company expects to have sold that land and to profit from it. This profit becomes your interest.
“The interest for a 12 month period is normally 40%. Say you invest N10m in land, the company will give you a post-dated check for N14m. When the deadline expires, the investor can cash this check and return the documents to the company. This means that the land has been sold for you. You don’t have to worry about looking for a buyer.
A Lagos-based real estate agent, Michael Ajibola, meanwhile offered a cautious approach to land banking.
These days, due to the proliferation of unscrupulous individuals and business entities that are on the prowl for unsuspecting victims, Ajibola said the land bank idea itself exposes a potential investor to a significant vulnerability.
He further noted that for an individual seeking to invest or save money through land banking, the technical details surrounding land such as those marked under “acquisition” should be settled to avoid investing in land that had been earmarked by the government for public use.
“One thing about the land bank is that some of these plots of land are places where people don’t really have access. So you go there before some people so that when the place starts to develop the land will appreciate as the development happens. This is essentially what the land bank is for.
Despite the clear guiding principle that dictates the rubric of land banking in any real estate ecosystem, Ajibola said that many real estate companies offering the program to potential clients/clients have turned it into a quasi-Ponzi scheme. He advised investors to carefully scrutinize the establishments to which they entrust their funds.
“Some of these things gradually turn into Ponzi schemes because nobody can tell you with authority that they can give you that kind of money on a consistent basis. Being an industry insider, I can tell you that there are companies that are already having problems.
“I really don’t advise my clients to engage in this kind of investment. As an expert, what I normally do is analyze the client’s risk appetite. Real estate is illiquid. Some of these places are coming soon. So when they assure you that they will give you 40%, that means they are going to collect from another person and pay you. What if they can’t recover from another and the thing crashes? »
For Ajibola, the best form of land banking would be to take the good old-fashioned approach of investing land with the prospect of development in and around it, then being patient until capital appreciation to occur over a long period of time.
In most developing countries like Nigeria, a change in government policy can prohibit certain forms of development on the land, which could, in turn, affect the resale value of the land.
Additionally, environmental issues such as erosion and flooding can significantly depreciate the value of the land if they persist for an extended period. The land may become too deformed to build on and the cost of repairing the land may be higher than the capital invested and the potential profit combined, experts said.
In some countries, land banks are under constant threat from land grabbers who pose as the original landowners and resell the same land to different people. These lands can be litigated for many years, and the cost of hiring lawyers over time can exceed the value of the land itself.
In order to avoid unpleasant situations when investing in a land banking system, experts have emphasized the importance of due diligence. This may involve hiring a lawyer to do a thorough check and confirm the legality of the land under consideration and ensure that there are legal documents and contracts to support the transaction.