Governmental organisations, private companies, and non-governmental organisations (NGOs) sometimes engage in ‘land banking’. In a nutshell, that’s the practice of buying and holding desirable land parcels to support their long-term goals and vision.
While the practice does offer benefits to the new landowner and their stakeholders, it also features risks and crucial considerations that cannot be ignored.
Read this article until the end to understand what it is, how it works, and how stakeholders can benefit from the practice of land banking.
Understanding Land Banking
Land banking is the practice of acquiring and holding land based on a long-term strategy. Depending on the entity buying the land, the strategy could be to develop it in the future.
Alternatively, that land bank could exist for preservation purposes, seeking to hold land that benefits the local community and environment.
As you can imagine, the strategy guiding a land bank’s acquisition of new plots depends on its mission. For example, property developers and investment firms might seek to acquire land for future profit. Meanwhile, non-governmental organisations (NGOs) might do the same to develop affordable housing or preserve natural habitats.
Later in this article, you'll discover that land banking goes beyond acquiring strategically important land parcels. It also involves actively managing and monitoring the land to decide when to develop or sell it.
While some land banks are privately owned, you can find publicly available information on others, like those owned by listed property and construction companies in Malaysia.
Important Considerations
Earlier, you read that land banking is a practice that involves long-term strategising and planning. Part of that includes a wide range of crucial considerations an entity must resolve before deciding whether to add a parcel to its land bank.
Here are 4 important considerations that take place in the land banking process:
Legal And Regulatory Complexities
A critical consideration in land banking revolves around the complexities of local laws and regulations.
Simply put, the rules in some areas might allow or disallow certain kinds of activities on the land, thereby affecting its suitability.
For example, holding a land parcel to someday build a residential building might be pointless if the area isn’t zoned for that kind of development.
Financial Constraints And Risks
Buying and holding a land parcel involves a significant upfront investment, posing significant financial risks.
That’s especially true, considering the purchase is part of a long-term land banking strategy, meaning it won’t generate immediate cash flow.
To make matters worse, there’s always a chance that the land parcel will not ultimately be usable for its intended purpose, forcing its sale.
The entity considering the purchase might find they’re better off renting the land through a platform like TanahSewa.com for short-term use instead.
Local Community Interests
The land banking process must also consider the surrounding community and its interests.
Any disagreements with residents about the long-term intended use of the land can lead to friction and unnecessary conflicts. However, locals might be supportive if the land banking process spurs wider investments in their area.
Environmental Impacts
Lastly, all potential environmental impacts of holding and eventually developing the land must also be considered.
Some of those impacts can be positive, which is what drives some land banking strategies in the first place.
For instance, buying and holding a plot of land to conserve its wildlife could also help the surrounding environment thrive. As such, acquiring that land would fit perfectly in the strategy of an NGO’s preservation efforts.
The Land Banking Process
Organisations maintain different land banking processes depending on their overall strategy, priorities, and in-house practices. Still, you can expect to see some common practices among them.
Here are the steps you can expect to see in a typical land banking process:
Step 1: Develop Long-Term Strategy
The land banking process begins with an organisation establishing its long-term strategy regarding the acquisition of land parcels.
Naturally, that long-term strategy will align closely with the organisation's overall goals and vision. Meanwhile, organisations must also decide what they'll do with any acquired land in the meantime, whether that's to leave it unused or rent it out for other temporary uses like agriculture.
The first step also includes creating a system to monitor and manage any parcels in the land bank.
Step 2: Identify Opportunities
Having a clear strategy and management system in place then enables the organisation to look for opportunities. That includes researching areas with land parcels that fit the strategy and analysing trends that might affect their long-term attractiveness.
For example, an NGO that prioritises environmental preservation might purchase a land parcel to protect local wildlife from nearby developments.
Step 3: Acquire Land
Once suitable land parcels are identified, it's time to begin the acquisition process. This step is where the organisation negotiates with land owners or developers to secure the land at the best possible price.
Any potential land acquisition will also involve due diligence, such as conducting land surveys to verify the land parcel's features before making any purchase.
Step 4: Hold And Manage Land
After acquiring the land parcel, the new owner must decide how to manage it. Some might leave the land as-is, while others might find other short-term uses.
That could include using the land for agricultural purposes or renting it out to generate cash flow while it's held in the land bank.
Step 5: Monitor, Plan, And Develop
Whatever the case, the land, its local area, and the overall market must all be monitored to decide how best to use that land parcel.
Visit Tanah Sewa To Learn More
In this article, you’ve seen that land banking is the practice of acquiring and holding land parcels to support an organisation’s long-term strategy. That strategy could be to develop the land when market conditions make it favourable or preserve the land and its habitat for the future.
Whatever the reasons driving a land banking strategy, it’s crucial to consider factors like the financial and environmental risks involved and how local residents might react to the acquisition of nearby land parcels.
Have a land parcel to rent out? Visit Tanah Sewa to learn more!
Ray Hasbollah
Content Strategist
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