Land Banking Risks
Land banking in US still attracts a sizeable crowd. I did not meet the sales consultant for a few weeks, and she told me the project she had introduced to me was more or less sold out. She then introduced another project in Texas to me. I promptly bought it.
Some of the risks for such projects should be mentioned. First of all, currency risk is very strong. Nobody ever expected the Canadian dollar to be stronger than the US dollar, but it happened. The US dollar is declining, and the Singapore government had mentioned that they would continue to let the Singapore dollar appreciate against the US dollar to combat inflation.
When I put my deposit, the exchange rate was S$1.39. When I paid the rest, the exchange rate was $1.37. The sales consultant was overly excited about the exchange rate, though I told her coolly that it would fall further. True enough, it fell another $0.02. In the short term, the currency risk is very strong.
However, if you look at it long term, if the company promises to double your investment, the gains should outweigh the risks. With the economy in downturn now, it should recover in 4-7 years time, and it should emerge stronger. Promises of doubling also are dependent on the length of time. An investment that is worth $20000 now compared to the original $10000 may sound good. However, if it takes 7 years, then the annualised returns are definitely much lower than a 4-year turn.
One reason for the quick launch of the new project was in part related to the crisis in US. The homeowner needed cash urgently, and the land banking firm had the cash as it is cash rich, so it was able to depress the prices even lower. The original project costs US$40000 per acre, while the new project costs US$30000 per acre and it was even closer to suburban areas instead of rural areas. This means that the speed of development could be shorter, but again, this is dependent on the plans and in my opinion, the US economy.
Actually, I think Canada will make a better investment choice as it is rather constant in terms of development and they are not facing any crisis.
Another risk involved in land banking is the length of time. For other investments, the liquidity level is quite high. For land banking, you must be prepared to wait. It is possible to sell back to the developer before the land is sold, but there would be other hidden costs. Some people may require the sum of money urgently, and this is a problem as they cannot liquidate the holdings quickly. It would take quite some time even if you sell the unsold land share. Hence, this form of investment is not encouraged for those who require cash urgently. This should be additional money you do not require.
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