Landbanking and developing land for retail investors can prove immensely profitable, with returns ranging between 30 -50% per annum. Asian Property Review dives deep with land expert Tan Hwa Chuan on the intricacies of landbanking.
- How prevalent is land banking among retail investors? Property investors who can invest in land are usually already very well-off. They can be divided into three categories based on what land they buy – bungalow, agricultural or development land (categorised into industrial, residential or commercial). Typically, land investors will sell to developers. To be successful, they must be equipped with the relevant knowledge, able to conduct due diligence such as checking with the local authorities on the low cost housing requirement, car park requirement, etc. Land investors need to know how to ‘read the land’.
- Where are the popular areas in the Klang Valley and what are their typical price range?
For bungalow land, Damansara (RM400 psf, Tropicana (RM400 – RM600 + psf), Country Heights (RM400 + psf), Desa Park City (RM700 – RM800 + psf). If you can find anything below RM400 psf, that’s a good deal as times are bad now.
Prices may vary subject to various factors such as whether it’s flat, hilly, or rocky land, whether it’s joint ownership, guarded and/or gated, landscaping, proximity to any Tenaga Nasional Berhad (TNB) power stations, etc. During this lockdown period, prices in Country Heights can even go as low as RM300 + psf while valuations can reach RM500 psf.Agricultural land is usually transacted in Raub and Bentong in Pahang because these are durian-oriented areas catering to the highly lucrative durian market. The market price of raw land is about RM100,000 + per acre; if it’s planted with durians, the price can range between RM200,000 – RM700,000 per acre depending on how old the durian trees are.For development land, personally, I prefer areas located within 25-30 mins’ drive from Kuala Lumpur city centre. I personally prefer Cheras (RM300 psf), Selayang (landed at RM40 psf), and Mont’ Kiara (RM400 psf).
Development land is further classified into residential or commercial because the price varies greatly depending on car park requirement, density (residential), or plot ratio (commercial).
As land retail investors, we need an exit plan. The best is to buy land that’s easiest to sell to developers which is development land. That’s why I prefer to buy development land especially commercial since overall, developers prefer commercial land. The typical time frame to exit is 1 – 1 1/2 years while waiting for development approval.
So, the game plan is to sell to big developers like Sunway, Mah Sing, MKH, etc. Otherwise, you can opt to develop the land yourself jointly with another developer.
Some of my favourite areas are Cheras commercial land which was recently transacted at RM700 psf; Sunway Velocity area (transacted at RM800 psf); Mont’ Kiara (transacted at RM400+ psf, some even at over RM1,000 psf).
I also like Selayang/Rawang area for residential landed (transaction price about RM40 psf). In general, for certain residential areas, if you can buy at RM300 psf, it’s a good deal. Also, if you can work with Malay Reserved Land, anything below RM250 psf is a good deal.
- Can you share an example of how you derive the ROI?
Say for Damansara bungalow land which you can buy at RM400 psf for 10,000 sq ft. That’s purchase price of RM4 mil. You can borrow 70% loan i.e. RM3 mil. So, you need to come up with cash of RM1.2 mil. (refer to Table 1)Therefore, you use RM2-3 mil to make another RM2-3 mil, hence, it’s 1 to 1 meaning 100% profit after three years – one year to obtain development order and another two years to complete construction.
If you can sell fast meaning before construction starts or before completion of construction, then your working capital is low, about RM1 – 2 mil only. Hence, you can get ROI of 30 – 50% per year in this scenario. But typically, as a developer or land investor of bungalow, it’s possible to make 33% per year if you can sell the completed bungalow within three years.
- What ROI’s are developers looking at? The formula for development land is very simple – at minimum, can RM1 make RM5? After leverage from term loan and bridging loan, with speedy sales, the developer will buy the land after due diligence. The rule of thumb is if they come up with RM10 mil, can they make RM50 mil within 5 years. This means per year 100% return, or 500% return within five years. Contrast this with banks’ Fixed Deposit that yields 2% interest per year, so developers are still making money especially with pocket land. Ideally now, investors of land should buy development land to sell to developers with KPI of RM1 for developers to make RM5 within 5 years.
- What are the pitfalls one should look out for when investing in landbanking?
No knowledge to do due diligence, for example, don’t know how to check with local authority in respect of zoning, car park requirement, etc. Take for example, you managed to find a deal in Melawati area for RM20 psf when the market value is RM100 psf. Why the big difference? If you had done proper due diligence, you would have found out that the land is gazetted under forest reserve, meaning you can’t develop the land with the exception of one bungalow within one acre. Also, can’t visualise the land when standing on it to see what kind of product is sellable.Another example is when you project the selling price of a KLCC condominium unit at RM4 – RM6 mil, a price which is very difficult to sell these days. It’s much easier to sell a RM600K condo at KLCC. So, it’s all about knowledge and experience to make it a success.
*All tables are extracted from “Make Big Money via Land” by Tan Hwa Chuan. He can be contacted via Facebook: tan hwa chuan.