Property Report: Speculators stash land

Land banking is a term real estate agents and property investors use to describe a piece of land that is not used for much, but in the future should be worth a lot of money. Photo / Brett Phibbs

Land bankers have become increasingly active around Auckland's fringe — many waiting to cash in on areas earmarked for future development.

Buy land, they have stopped making it, said writer Mark Twain during the great American land rush in the late 1800s. The statement is just as true today in fast-growing Auckland. Land banking is a term real estate agents and property investors use to describe a piece of land that is not used for much, but in the future should be worth a lot of money.

There are at least two kinds of land banking.

One is to buy a section in the urban limits, pay the rates and then sell in several years. Across the road from my house in Titirangi are two undeveloped sections. Once a year the owners spray the grass with weed killer and trim the berm. The neighbours hate the mess and the way they have scarred the land. This land-banked property produces no income, the owners have to pay rates, but it is worth many times what it was when it was subdivided, circa 1960. Data supplied by Auckland Council indicates there are more than 8,000 such vacant urban residential sections in Auckland and 3,200 vacant rural residential sections.

A second strategy is to take a punt on how the zoning will change on Auckland's outskirts. The speculator buys a plot of land, farm or lifestyle block that will one day be ripe for subdivision. It can then be sold off for a capital gain after the council changes the zoning, the theory goes.

Such land banking is common in Auckland. Quotable Value operations manager northern Jan O'Donoghue says: "We are still seeing a lot of land banking on the urban rural fringe of the city in places like Silverdale and along the Waitakere fringe, between Massey and Kumeu in areas such as Don Buck Rd and Fred Taylor Drive."

Paul Adams, manager of the Kumeu Barfoot and Thompson office, reckons the land rush began about three years ago. He says buyers include companies, developers, families and individuals; many are long-term investors. Some people buy early in the cycle, others will wait for the council to announce a zoning change.

"Some will sit on it (the land) for 30 years," he says. Although, buyers are active now, "it has always happened".

QV's research says some pockets of urban fringe land have increased by 80 to 300 per cent in four to five years, says O'Donoghue. "This has tended to be for land previously zoned "future urban" under the respective district plans, but also more recently "future urban" under the proposed Auckland Unitary Plan.

Many are now in Auckland Council's special housing areas — examples include Don Buck Rd, Massey; Fred Taylor Drive, Massey; Huapai Triangle, Kumeu; Hingaia, Flat Bush and areas on Pukekohe's fringe, O'Donoghue says.

Areas such as Kumeu and parts of Dairy Flat will look very different in 10, 20 or 30 years. There will still be a green belt beyond Albany, but a few kilometres north there will eventually be thousands of houses. Despite its plan to intensify near town, Auckland Council's website outlines its plan to soon begin freeing up land around peripheral areas. There will also be significant development in the south.

A downloadable document on Auckland Council's draft Unitary Plan (see graphic below) provides an outline of the areas currently beyond the city limits that could soon be inside them.

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The document identifies 11,000ha of land, room for 92,000 to 116,000 new houses. The land will be released over three decades. The first tranche includes the fast-tracked special housing areas, as well as Flat Bush in the south, Whenuapai and Paerata.

Decade two (2022-2031) includes Pukekohe, Kumeu-Huapai, Redhills and Warkworth North. Areas including Dairy Flat-Silverdale, Karaka and Wainui are likely to be opened up in decade three (2032-2041).

David Clelland is Auckland Council's manager growth and infrastructure strategy and heads the Special Housing Area establishment team. He distinguishes land bankers from commercial property developers, who take a 10 to 15-year view and buy large chunks of land to develop later. They work in conjunction with the council so roads, drains and other costly infrastructure are built.

Although many Special Housing Areas have been set up working with one developer, Clelland says the council has to negotiate with a variety of owners, some of whom are unco-operative because they are land bankers, aspirant developers, or people opposed to development. "Almost inevitably" land bankers get in the way of the council's plans for new housing, although "we can't quantify it", he says.

Is land banking a good way to make money? In this time of change and growth and a co-operative rating and tax regime, it would seem to be. The council is transparent about which areas will be open for development. On average, land value goes up faster than money in the bank, although the market moves in fits and starts.

Developers or builders who bought with the purpose of resale will also pay income tax, regardless of when they bought the land.

Shane Hartley, principal of Orewa Planners Terra Nova, says today's situation where the council is planning to change the zoning on so much land is rare.

Arguably, the rating system favours land bankers, as generally with no improvements on the property, they pay lower rates than householders. With the soon-to-be introduced capital gains law, tax is unlikely to be paid, unless you sell within two years. If you are a developer, rather than just an owner, you will pay tax on land sold at any time.

So what is the downside? Auckland's Unitary Plan is not yet finalised. "It is still only proposed, there are no guarantees," says Hartley.

If you are a developer, rather than just an investor, you will have to contribute to the pipes and roads the council needs to build.

The biggest barrier to freeing up land over time is the cost of infrastructure, especially after decade one. The council estimates the total bulk infrastructure cost at $14 billion, equivalent to 10 Waterview tunnels. The initial cost is $2.8 billion in the first decade alone, a similar cost to the Central Rail Loop. Some of the work has already been done and paid for.

Eventually many costs will fall on developers, says Hartley. "Development contributions are very high (today) and are expected to pay for much of the infrastructure." He reckons many small time investors and owners underestimate developers' skill, which is largely about picking the right part of the cycle.

Could the council or the Government make it harder for land bankers, sitting on their investment? After all, land banking slows up supply in times of high demand. It is a speculative activity; people try to avoid paying tax.

The rating system could be changed to tax land rather than improvements. And one day, could there be a tougher capital gains tax?

Australia has a capital gains tax and stamp duty and has not made land banking illegal — except that foreign investors need government permission to buy farm land. "There is nothing in the tax rules" to prevent land banking in Australia, says tax specialist Scott Farrell of KPMG Sydney. Capital gains tax is paid when the property is sold. "If you own land and later sell it, you are (generally) taxed at disposal."

Things get more complicated with property developers.

And in both jurisdictions, foreign investors need the Government's permission to buy farmland. Was Mark Twain right? Maybe, but you need someone to sell to.