What Land Banking Actually Is, And Why Australian Regulators Shut It Down

What Land Banking Actually Is, And Why Australian Regulators Shut It Down

Land banking sounds prudent. Buy undeveloped land cheaply on the city fringe, wait for the urban boundary to move, sell at a substantial gain.

The underlying idea is sound. Property developers do this professionally, with capital, planning expertise and decades-long horizons.

What was sold to retail Australian investors under the land banking label was something quite different, and in 2016 the Federal Court declared five such schemes unlawful.

The structure

The investor typically did not buy land. The investor bought an option over a lot in a proposed subdivision on land the promoter controlled through some arrangement.

The value of that option depended entirely on a rezoning that had not happened, might never happen, and was outside anyone’s control. Local councils and state planning authorities decide urban growth boundaries on their own timetables and criteria. No promoter can deliver one.

Meanwhile the option money went to the promoter immediately.

Why it was unlawful

In ASIC v McIntyre [2016] FCA 1276, Justice Bromwich found that the five schemes were unregistered managed investment schemes, and that the associated companies had conducted an unlicensed financial services business.

The distinction is the whole point. If an investor buys land, that is a property transaction. If an investor contributes money to a pooled arrangement, managed by someone else, in expectation of a return generated by that person’s efforts, it is a managed investment scheme — and it must be registered, with disclosure obligations, a responsible entity, and a licensed operator.

Registration is what forces the promoter to tell investors what the money will actually be used for. Avoiding registration avoids that.

The outcome for investors

Approximately $7 million was raised from 152 Australian families across the five schemes. Deloitte was appointed liquidator. Deloitte could not locate the funds.

Justice Bromwich described the promoter as completely financially incompetent and a menace to the investing public. Both McIntyre brothers were banned from managing corporations for ten years.

The warning signs, generalised

Land banking is largely finished in Australia. The model is not.

The signature features transfer to any jurisdiction: undeveloped land, a masterplan, a distant completion date, a return dependent on an approval nobody controls, money payable now, and a structure that keeps the arrangement outside the regulatory perimeter.

Australians looking at off-plan property in Indonesia should recognise how much of that description applies, and note that Indonesian purchases sit outside the Australian regulatory framework entirely.

The warning signs, generalised

Land banking is largely finished in Australia. The model is not.

The signature features transfer to any jurisdiction: undeveloped land, a masterplan, a distant completion date, a return dependent on an approval nobody controls, money payable now, and a structure that keeps the arrangement outside the regulatory perimeter.

Australians looking at off-plan property in Indonesia should recognise how much of that description applies, and note that Indonesian purchases sit outside the Australian regulatory framework entirely.

Australians looking at off-plan property in Indonesia should recognise how much of that description applies, and note that Indonesian purchases sit outside the Australian regulatory framework entirely.