How land banking drives Nigeria’s real estate market

How land banking drives Nigeria’s real estate market

With record levels of inflation upending the logic of saving money traditionally through commercial banking, a new form of banking is gaining increasing traction, writes EDIDIONG IKPOTO

For centuries, the traditional banking system offered customers the platform to save money, either for interest or other purposes.

Historically, banking has been around since the first currencies were minted and wealthy people wanted a safe place to store their money.

Ancient empires also needed a functional financial system to facilitate trade, distribute wealth, and collect taxes. Banks were to play a major role in that era, just as they do today.

But, as is characteristic of human existence to evolve with the times and seasons, the banking industry itself has, by no means, been insulated from the paradigm shifts that have characterised different epochs of human existence.

Today, there are several forms of banking that have permeated into various spheres of human endeavour, including the real estate sector.

In principle, land banking is by no means a new concept. As a matter of fact, studies have shown that a vast majority of people who acquire landed properties do so with the intention of reaping future capital appreciation as opposed to acquisition for development purposes. What is new, however, is the terminology itself as well as the conscious efforts to create the niche for a fraction of the investing public who wish to purchase real estate as a means of saving 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 implies, refers to banking via the instrumentality of land (real estate). The fundamental principle of this is that rather than put cash into a savings account (which will accrue little or no interest over an extended period of time) or the stock market (which can become bearish within the twinkling of an eye), some entrepreneurs have taken an alternative approach by acquiring land. In doing so, they have chosen to park money in a tangible, fixed asset – one with less likelihood of being damaged by inflation or a stock market pullback.

In a land banking scheme, property developers usually buy land, divide it into smaller blocks and offer it to investors. As an investor, you either buy a plot of land or buy an option to purchase a plot of land. These are known as “option agreements.”

One of the most well-known investors in land banking over the past years was John Jacob Astor, who used this strategy to become the first multimillionaire in the United States.

He realised the power of land banking when he purchased large plots of land which are now known as “Manhattan.”

He acquired this land at a time when nobody else realised the opportunity. At the time of his death, Astor’s estimated net worth would have been equivalent to $110.1bn 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 quantities of undeveloped land with the intention of profiting from the resale of the land.
Simply put, investors seek land in underdeveloped neighborhoods and bank it until there’s substantial infrastructural development or population growth in the area before selling it for a higher price or developing it to meet the growing housing demand.

In Nigeria, while landing banking is not particularly a new concept, not many property firms had brought it to the mainstream of the real estate market with regard to the kind of offerings made to subscribers and clients.

For the most part, emphasis has usually been placed on seeking customers who desire to purchase land and convince them on why owning a piece of real estate is good investment or business. Others have focused on developing for different classes of tenants and, by doing so, cut the housing deficit in the country.

However, the unending drive to rescale permutations and entice prospective customers to new offerings has birthed what has become a somewhat formalised land banking scheme in many property establishments.

The ultimate goal is to not only encourage clients to invest in real estate, but to provide assurance of being able to dispense of these temporary assets within acceptable timelines.

Sometimes, a major discouragement for investors looking to invest in landed property is having the time or expertise to resell and cash out on these investments on specific timetables. At this juncture, questions surrounding being able to sell the land on time or dealing with land grabbers will arise.

A Development Associate at real estate firm, PWAN, Simon Etim, in a chat with our correspondent, underlined a real estate company’s role in dispensing landed assets within a desirable timeframe as the fundamental point drawing investors to key into the idea

According to him, while land banking could be done by any individual without necessarily enlisting the services of a property firm, certain intricacies could hurt the investment.

He said, “The idea of land banking 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 time frame. Twelve months is the longest time-frame. At the expiration of the timeframe, the company is expecting to have sold that land and make profit from it. That profit becomes your interest.

“The interest for a 12-month period is normally 40 per cent. Let’s say you invest N10m on a land, the company will give you a post-dated cheque for N14m. At the expiration of the timeframe, the investor can cash that cheque and return the documents to the company. That means the land has been sold for you. You don’t have to bother about looking for a buyer.”