Land banking and why it’s important
Written by: Eric Ochieng’
Edited by: Linet Kanario
It is in the dream of every person, young or old, to be great at what they do and make the maximum profit out of it. When it comes to investment and real estate this rule still applies, ever wondered what differentiates great developers/investors from good ones? The former have mastered a key strategy called land banking where they bet on barren and underdeveloped land to grow into real estate empires. In this blog we shall delve into the power of buying and holding land and why it is the secret to great returns.
What is Land Banking?
According to Local Housing Solutions land banking is the practice of buying barren or underutilized land with the intention of holding onto it until such a time when a profitable sale can be made or for development. This, however, is one among the many definitions that exist on the same. Land banking, just like other real estate terminologies, can be understood in various ways influenced by context and whether it is pursued by the private or public sector.
In the context of private sector, developers use land banking as a speculative investment strategy by acquiring land in advance that might appreciate as nearby infrastructure or new developments emerge. In the public sector, on the other hand, land banking is used as a strategy for dealing with urban regeneration, preserving open spaces and stabilizing land values especially in developed countries.
When it comes to third world countries like Kenya, the concept is often associated with the government providing land for public purposes such as housing, sports areas and managing land markets. Recently, The Kenya Kwanza government, through Affordable Housing Program (AHP), gave private developers access to public land set aside for housing and infrastructure for construction of affordable housing units.
Steps of land banking
There are three crucial actions to land banking that determine whether its objectives are met. These are:
- Land acquisition
- Land management
- Land development
Each of these is undertaken differently by the private and public sectors as discussed below.
a) Land acquisition
This involves identifying, purchasing and holding land for development or sale upon future value appreciation. Private developers focus on prime pieces of land that are strategically located with high value appreciation. Often, these developers acquire land near potential commercial or transport hubs to benefit from the increased demand for housing units and commercial spaces later. Two Rivers Social City along Limuru road and Northern bypass and Garden city along Thika Road are key examples of these.
In the public sector, governments undertake land acquisition to promote long term social and economic benefits such as urban planning and community regeneration processes. For instance, in Kenya, land banking can be seen in the government’s strategic efforts under Vision 2030 and the State Department for Land and Physical Planning. The department plays a pivotal role in maintaining land bank to support planned development projects such as infrastructure expansion and affordable housing initiatives. One such initiative is the LAPSSET Corridor Program, where government has reserved land in strategic locations for future development along transport and energy sectors.
b) Land Management
After land acquisition, effective management is important to ensure the original value of the land is maintained. In the private sector, its primary goal is value maximization in anticipation of future profit. Private developers employ strategies such as holding costs and maintenance, active monitoring of market trends and regulatory compliance to ensure appreciation in the long term. Take a case scenario where a developer buys and holds land in the urban periphery until zoning changes allowing for residential and commercial investments.
In the public sector, governments focus on stabilizing neighborhoods and ensuring equitable development which serves the social and community-oriented purpose. Key activities undertaken by the government on this are; property maintenance, community partnerships and strategic redevelopment planning. A notable example of land bank in Africa is the Land and Agricultural Development of bank of South Africa established in 2002 to promote agricultural transformation and development by encouraging equitable land ownership and addressing environmental risks like water scarcity and biodiversity loss.
c) Land development
This is the most crucial step when it comes to Land banking in that, it unlocks the potential of land parcels held. For the private sector, this step comprises residential and commercial projects, infrastructure improvement, phased development and market adaptation which are aimed at profit making.
In Kenya, Centum Real Estate’s Vipingo Development demonstrates private sector land development, where barren land has been transformed into a vibrant commercial and residential hub supported by critical social and infrastructure amenities such as water and power reticulation.
In the public sector, the aim is to emphasize community growth and sustainable development. Governments develop land to meet objectives such as public infrastructure development, affordable housing programs and combatting urban blight.
Why land banking is attractive in Kenya
- Potential for value appreciation
One of the characteristics of land that makes it valuable is that it is limited in supply, therefore, its value is expected to rise over time. World population review projects that over 50% of Kenya’s population will live in urban areas by 2050. Coupled with planned infrastructure developments by the government such as industrial parks and highways, the value of strategically located land in Kenya will rise. Notably, land along Standard Gauge Railway and Nairobi Express Way projects has experienced significant appreciation, attracting interest from investors targeting long term capital growth.
- Low holding and maintenance costs
Underdeveloped land is relatively cheap to maintain as it requires much fewer resources than built up properties. The property taxes incurred are much lower and basic upkeep is manageable making it suitable for passive, long-term investments.
- Hedge against inflation
In regions experiencing rapid urban growth, the demand for real estate outpaces inflation rates. According to data from Statista, it is forecasted that the Kenyan real estate market will experience an annual growth rate of 5.18% from 2024 – 2029 resulting in a market volume of $944.10bn by 2029. As a result, as inflation rises, so do property prices, offering a natural inflation hedge.
- Speculative Opportunities
In land banking, the correct timing is a goldmine. Acquiring land before zoning amendments and major infrastructure upgrades allows investors to enjoy significant value appreciation when government or real estate projects materialize. If the market trends align, pre-purchase land and hold or develop in anticipation of long-term market opportunities.
- Tax Incentives and Benefits
Investors holding undeveloped land in some jurisdictions enjoy tax incentives, alleviating the financial burden on investors. In Kenya, land designated as export processing zones and special export zones enjoy tax benefits. A notable SEZ in Kenya is the Two Rivers International Finance and Innovation Center (TRIFIC).
While land banking offers significant benefits, it also presents various hurdles. These difficulties, however, do not measure up to the forementioned benefits hence making land banking a smart investment.
Conclusion
Several trends are driving growth of land banking in Kenya. One predominant trend is the rapid urbanization rate, currently at 4.3% annually. As more Kenyans move to urban areas, the demand for space for housing, commercial development and industrial use is increasing. As one pursues their personal objectives it’s important to identify suitable land, ensure legal compliance, explore various financing options and factor in holding and management costs in the long run. With strategic foresight, patience and effective management to overcome its inherent challenges, land banking is a powerful strategy that offers substantial potential for profit with relatively low risk.
References
Real Estate – Kenya | Statista Market Forecast
Acharya, B.P (1987) ‘Policy of Land Acquisition and Development – Analysis of an Indian Experience’. Third World Planning Review. Vol 9, No.2. Liverpool University Press. United Kingdom.
Alexander, F. (2005) Land Bank Authorities. A Guide for the Creation and Operation of Land Banks. Local Initiatives Support Corporation. http://www.lisc.org/resources.
Berrisford, S assisted by Kihato, M and Klug, N (2003) Element Two: International shifts in shelter and settlement policy and their implications for South African praxis. Report prepared for USAID. 30 October 2003.
Bertoldi, A. (2005) Discussion Document. Municipal Property Management.
Shisaka Development Management Services (Pty) LTD. (2003) Phase One: General Research. Land Markets Overview Report. Research Project sponsored by FinMark Trust, Ford Foundation, Micro Finance Regulatory Council/USAID, South African National Treasury and the National Housing Finance Corporation.
Sisulu, L.N (2005) Speech by Ms LN Sisulu, Minister of Housing at the occasion of the Budget Vote 2006/2007, National Assembly. 24 May 2006. http://www.info.gov.za/speeches
SmartGrowthTactics (2005) Land banking – Michigan’s new economic growth tool. http://www.planningmi.org . Issue Number 10. January 2005 United Nations Economic and Social Commission for Asia and the Pacific (1993)
Municipal Land Management in Asia: A Comparative Study. http://www.unescap.org/huset/m_land/toc United States Conference of Mayors (2006) Problems of Vacant and Abandoned Properties. Best Practices in 27 Cities. June 2006.
Dr Kirsten Harrison (2007) An Urban LandMark paper commissioned in support of the Gauteng Department of Housing, South Africa