Land Banking / Investments
Investments in land have been a tried method of long-term investment, particularly with the expectation of significant capital growth as a result of the possibility of selling the land when the value rises. However, there have been a growing number of occasions when investments in land are exposed to risk and sometimes fraud. This has been evident via two methods; the division into smaller plots of land and investment via a Collective Investment Scheme (CIS):
a. Dividing the land into smaller plots
In the first instance, land banking companies divide land into smaller plots to sell it on to investors, on the basis that once it is available for development, its value soars. However, such land is often located in Green Belt or with other limitations (e.g. contrary to local planning guidelines) with little chance of it being built on. There may be other impediments with the plots, such as their being inaccessible, subject to subsidence, flooding, etc.
Initial contact with potential investors is usually unsolicited, with most schemes 'cold-calling' investors. These are told they will make big profits on small plots of land once planning permission is granted or development started.
Yet many plot-holders instead lose considerable sums of money in such schemes, as planning permission is often not granted or even applied for, and they are left with a plot that is practically worthless.
Whilst not all land banking schemes are fraudulent, it is often not made clear to investors that there are restrictions on the development of the land or that it is otherwise protected.
Investors should therefore be particularly careful when being offered to invest in such projects.
It is the FSC's view that these types of investments per se fall beyond its remit as a financial services regulator, as these 'investments' do not constitute regulated activities, given that investors purchase the actual land and not underlying financial instruments such as units or shares.
In other instances, it is considered that, if individuals do not directly own a portion of the plot of land, or e.g. an apartment in a complex, but that this is held collectively by the investors, then such an arrangement may be considered to be a CIS and therefore subject to financial services regulations. For further information, please see section below, and for information on what constitutes a CIS please follow this link.
Investments in land which are made as offers to the general public (as defined by the Prospectuses Act) would be caught under the Prospectuses Act. These may be set up for example, as a closed-end CIS or other type of scheme.
b. Collective Investment
A plot purchased at a low price may be revalued at a higher price for on-sale to investors, via for example, a collective investment scheme. This may be based on valuations based on a series of assumptions which are not realistic and as mentioned above, do not adequately consider factors such as whether the land can be built on. The land may therefore be purchased by investors paying considerably more than the realisable value.
In such instances, the FSC advises potential investors that they are comfortable that the basis for valuations are based on are recent, realistic information and contain no assumptions that may artificially increase the price.
Gibraltar Investor Compensation Scheme (GICS)
Please note that non-regulated entities or schemes will not be covered by GICS, so investors will not be protected by the scheme should things go wrong.