Land banking investment in Canada: My personal cautionary account

Traditionally, people with financial resources would invest in land by purchasing it outright. They then apply for planning permission to change the land use to a higher use and either develop it themselves or sell it for a significant profit. Alternatively, they would hold onto the land until the area is developed and sell it at a higher price, with or without planning approval.

Long-term land investment is a great way to potentially earn high capital appreciation. It is also boring: you buy, wait, and hold.

Investing in land banking schemes involves purchasing small portions of undeveloped land typically owned by a developer or investment company. Please don’t confuse investing in schemes with buying the entire plot.

The situation is different if you are a portion owner of a land in a land banking scheme. The company would increase the price of the land, causing investors to pay more than its actual value for their share. You may have little or no control over when and for how much to sell your portion, and you must wait until the entire property is sold before you can receive your proceeds. The company is responsible for decision-making and management; land banking schemes are typically unregulated. Investors have limited protection in case things do not go as planned. In such schemes, you mainly invest based on trust and the company’s reputation.

In this article, I will share my experience with a land banking investment and the information not disclosed during the purchase.

A fateful decision

According to the contract terms, the buyers have an undivided interest in the property and will hold it as a tenant in common along with all other owners. Although this may give the impression that investors have co-ownership rights, it doesn’t provide any control over the property or the ability to sell interests separately. Additionally, there were no valuation reports or audited accounts, and the voting process lacked transparency.

Follow the crowd

I usually steer clear of investment opportunities like this, but some acquaintances from my hometown recommended it to me. The company has a global presence and has been in business for many years, with an office in Kuala Lumpur. I purchased a single unit in 2007 because the cost was affordable. Google searches have revealed that this company has received unfavourable reviews and lawsuits.

Far land, great returns

The land in question is approximately 90 acres and is located in Canada. Its current land use category is agriculture, meaning any landowner must abide by the stipulated conditions and use the land for agricultural purposes. Failure to do so constitutes a breach of condition.

The strategy was to change the land use classification to residential development by obtaining the necessary planning approval from the authorities. After approval is obtained, the undeveloped land will be sold. The estimated waiting time for such an approval was approximately five years on average. However, some projects could be approved as early as three years, while others might take as long as nine years. The expected average yearly rate of return was around 10%, but it could go as high as 15%. These were the projections.

Uncertainties looming

I contacted the manager when the deadline to sell the property within five years was over. She informed me they were having trouble obtaining planning approval due to certain long-standing restrictions in the area. These restrictions were not disclosed or mentioned in the update reports during the purchase.

This particular company was once considered reputable. I doubt that they were not aware of the restrictions relating to the property when they offered it to investors. To verify these restrictions, investors would need to spend extra money to hire an independent consultant to investigate and confirm with the relevant authorities. The sales staff who sold us the land had left the company by then, and the Kuala Lumpur office was closed. We were shuffled around from one manager to another, with each one trying to reassure us that all efforts were being made to obtain the necessary approval and that investors could expect to exit within the next three years.

Long wait, bad news

In 2021, the company informed us that they had received an offer for the land we had invested in after waiting for fourteen years. Unfortunately, the buyer’s offer was only half of what we had initially paid for the land. As per the contract signed between the company and investors, a 60% vote by investors is required for the sale to proceed.

During an online Zoom meeting, the company explained that they could not obtain planning approval due to the restrictions in the area. The council had put in place measures to preserve greenbelt areas, and as a result, the company did not achieve their goal. They apologized for their failure and mentioned that they had made significant efforts and spent a lot of money lobbying for the project. However, they saw no hope of continuing their efforts. Therefore, they recommended selling the Canada project and using the proceeds to invest in their fast-moving projects in the United States.

Markup price

According to the company, the offer to buy the land at 50% of the initial purchase price was based on recent comparable transactions of lands with agriculture classification. The value of agricultural lands tends to appreciate over time, and they hardly depreciate. Even in the worst-case scenario, where the land value has not increased since 2007, it would seem that we bought the land at double the price of the whole land. A valuation report determining the value at the time of purchase and sale would reveal the actual land value. However, no professional reports were given.

Exorbitant fees

We only received 37% of our initial investment after paying 23% in legal fees and 3.4% in agency fees, making a bad investment even worse.

The sales consultant never informed us about the exorbitant legal fees. The contract was very thick, with many legal terms and fine print. I doubt most people can decipher all that information, let alone read it.

Lack of transparency

After the meeting, we were sent an email form to cast our vote. However, we were not able to see how others had voted. A few months later, we were informed that the investors had approved the sale with a 60% vote. The process lacked transparency, as the company did not provide us with a copy of the signed sale and purchase agreement. In 2022, we received an interim payment, and the final payment was made in 2023.

It’s a lottery game

This is my account of what happened to our Canada project, which impacted over four hundred investors. Not all land banking investments are bad, but if you choose to invest in something where you have no control and rely on the investment to perform well, please check if there is a buyback guarantee. Even with this option, if the company goes bankrupt, there is little that you can do, and you must be prepared to accept the outcome. In my opinion, this is similar to playing a lottery game; I might as well have gone to the casino. At least I could decide when to stop playing.

References:

1. Joint Property Ownership Disputes and Legal Issues | LegalMatch