Nature
and Background of the Land Markets
Land Bond is a
high-yield debt security with its underlying assets based in North America, since there
are enormous supplies of freehold land from the private sector, whereas in Asia, the
government usually controls most of the land particularly in the prime locations. The land
owners/title holders in North America seldom develop their lands and they tend to sell the
land to developers who know how to process and negotiate the rezoning details with the
government.
Originally, most of these lands have very little value until substantial work
required for rezoning are duly performed such as feasibility studies, geological surveys,
environmental studies, urban development design and considerations, and rezoning
application, which can usually take 3 to 5 years to complete. All these processes are time
consuming and costly, only those experienced buyers/developers would invest into raw lands
that have the potential and upside for investment and development. In order to secure
buyer’s interests in the land during the process, buyers would usually demand for an
unconditional purchase option of the land at a price fixed for an extended period of time
required for the rezoning process.
In fact, government auctions for crown land are not the main stream of land
supplies for the market, there have been a great number of privately held lands traded in
such a way in North America. On the contrary, land supplies in most Asian countries
especially in metropolitan cities like Hong Kong, Tokyo, Singapore, Taipei and Seoul are
limited and precious as governments control and regulate the majority of land supplies in
these countries. Developers usually buy their lands through government auctions and
tenders; therefore, they tend to develop the land themselves. Most of these crown lands
would be sold at premium prices since revenues derive from land sales have been an
important source of income for the Asian governments.
In
North America, it is quite a common phenomenon that potential buyer/developer may sell the
land when an option to purchase is secured with the titleholder during the process of
rezoning, as the value of the land will appreciate if the rezoning permit is likely to be
granted after the submission of all necessary studies, design and related reports. Upon
receiving the rezoning permit, the land is very much ready for development.
Land Bonds For Land Owners and
Developers
Land
Bonds in fact have the simplest structures among most other debt securities but have
higher investment risks due to their unpredictable nature in terms of payment and cash
flow patterns. With respect to historic performances, Land Bonds by far generate one of
the highest returns to investment in the financial market. Despite of its high-risk
nature, investing in Land Bonds is a goal of earning maximum total return from high
interest payments and realized capital gain.
The risk level
of Land Bonds lies between medium to high depending on the creditworthiness derives
primarily from the originator’s paying ability and other sources of credit enhanced
protections. On the other hand, the credit quality of a Land Bond relies significantly on
the backgrounds and track records of the developers/originators in the affairs of
converting the use of land. Investing in Land Bonds always regards as high-risk that may
not be suitable to most general investors with low risk tolerance. However, most Land
Bonds are relatively simple and straightforward in their structures that will attract
certain investors who look for better than average returns to their investments. Due to
their high leverage nature, Land Bonds could perform a handful of hedging functions as
effective as other hedging tools available for the land/property related investment assets
when the market matures.
Land Bonds
differ from most other kinds of bonds particularly in the nature and value of the
underlying assets. If the asset backing of a Land Bond is based on a piece of raw land due
for rezoning, it requires tremendous efforts and costs to quantify the future claims in
sales and development of the land in relation to feasibility studies, geological surveys,
environmental studies, preliminary architectural layouts and urban considerations, and to
the most time consuming extent, negotiations with various government, city, urban and
community councils for rezoning conditions. Since the value of raw land is usually low,
the main function of issuing a Land Bond is to facilitate a leverage based on the
potential selling value of the land upon successful rezoning.
The success rates are likely in favor of the
big developers who have the kind of experience, resources and knowledge required to deal
with various governmental departments and councils for an extended period of time. Barely
with the asset backing of a piece of raw land without on-going evidence to further assure
investors about the success rate and to the extent the progress details in rezoning, the
issuance of the Land Bond is impossible.
The success issue of Land Bond is just the
beginning of many subsequent issues of other related bonds to follow such as Property
Bond, Mortgage Bond, Secondary Mortgage Bond, Home Buyers' Bond, Real Estate Management
Bond and more. Since all these spin-off potentials are very much based on a single piece
of land or the same parcel of assets, the upside momentum as well as leverage of
investment are therefore tremendous -- a continuous and diversified funding and
investment opportunity for both issuers and investors respectively.
For further detailed publications and
technical releases, please click
here to request for download.
