Executive Summary

Executive Summary

Investment in property is a long established and accepted strategy for Australians to build wealth. Heralded as a smart way to increase wealth, 'land banking' is a particular form of investment whereby an investor or company purchases a block of undeveloped land in the expectation of selling it in the future when its value has increased significantly. Investors with reputable property development companies generally purchase an off-the-plan development—a house and land package, or an apartment. Such companies may hold land until it increases in value before proceeding to the development stage. Not all schemes, however, are reputable.

In the context of this inquiry, concerns were raised about the number of Australians who have lost their investments at the hands of unscrupulous companies securing funds for highly speculative land banking schemes.

While some Australians were aware that they may have already lost their life savings, the committee is concerned that an unknown number of Australians are currently holding similar investments without realising that they may be worthless.

The committee found that inexperienced investors were persuaded to invest in risky property investments at great personal cost.  In the specific cases examined during this inquiry, the areas chosen for land banking were often located on the outskirts of cities in anticipation of future urban development and rapid increases in land values. Investors were given the impression that the investment would be realisable over the short to medium term, when in fact there was little likelihood that the land would be rezoned or developed for several decades. As a result, investors were left with a share of land with little prospect of being developed and hence, unlikely to increase in value.

Although investors may still hold some limited value in property, there were land banking schemes of even greater concern involving the offer of 'options'. In this regard, the evidence shows clearly that some investors were unaware that they were purchasing an option to exercise a future purchase and had no claim on any physical asset. The committee found that they did not understand the difference between an option and a land purchase and in some cases did not have sufficient funds to exercise their option in the future. Worryingly, these types of schemes were targeted at inexperienced investors who did not have sufficient funds to purchase a property themselves and generally were not financially literate. In other words, the promoters were selling high risk investments to people who had very limited funds and little understanding of the financial arrangements into which they were entering.

It became evident to the committee that the spruikers of such schemes were able to entice vulnerable retail investors to sign up to deals without alerting them to the inherent risks of land banking in general or their particular land banking scheme.

During this inquiry, the committee became increasingly concerned about the promotion and marketing of land banking schemes associated with two companies in particular—21st Century Group and Market First. Both companies engaged in practices prejudicial to investors' interests. The committee was particularly troubled by the spruikers of such schemes, who:

The committee also found that investments made in the form of 'options' are not required to be held in trust in the same way that land sales are. In such cases, the company selling the option was at liberty to spend the money raised without any regard to the interests of the investors who had provided it.  

This inquiry into land banking also drew attention to the practice of investors with limited funds in superannuation using most of these funds to invest in land banking schemes through a self-managed superannuation fund (SMSF).

The problems associated with the marketing of property investment, evident in recent land banking schemes, have plagued the industry for decades. These schemes have highlighted the urgent need for reform and a much improved regulatory regime for the provision of advice on property investment. The committee identified two ways to implement this regime:

The committee prefers the first option. It endorses the principle that if two investment products are functionally similar, they should be regulated in the same way. In this regard, the committee considers that the functionally similar nature of advice about property and other investment types, as well as the effect of the regulatory framework for financial services on the property spruiking sector, more than justifies the extension of the Corporations Act to advice on investment property.

The extension of the Corporations Act to advice on property investment would provide the licensing, disclosure and conduct obligations the committee considers is required, and eliminate the regulatory gap between property investment advice and financial product advice. The committee recognises that there may need to be appropriate exemptions for particular services associated with property investment and adjustments to the educational and training requirements to make them more appropriate for people providing property investment.

The committee made the following recommendations. They are listed in order of priority with the most important recommendation first.

Recommendation 1                                                                         paragraph 8.56-8.57

The committee recommends that the government, in consultation with the states and territories, should strengthen the regulatory framework of the property investment industry to bring it into line with regulations applicable to the financial investment industry. Specific areas include:

In respect of the last recommendation, the committee suggests that the independent industry-established standards setting body for financial advisers could set the educational and training requirements for property investment advisers and the code of ethics to which they would subscribe.

Recommendation 2                                                                                     paragraph 8.77

Having regard to recommendation one, the committee recommends that Consumer Affairs Australia and New Zealand, in its review of the Australian Consumer Law, give serious consideration to:

Recommendation 3                                                                                     paragraph 8.63

The committee recommends that Consumer Affairs Ministers consider the terms of the reference for the review of the Australian Consumer Law with a view to inserting a specific reference to advice on property investment in term of reference no. 1.

Recommendation 4                                                                                     paragraph 6.26

The committee recommends that state and territory governments consider requiring that moneys paid to purchase an option in a land banking scheme be held in trust consistent with the requirements for off-the-plan agreements.

Recommendation 5                                                                                 paragraph 8.104

The committee recommends that ASIC, the ACCC and state and territory regulators have a stronger focus on providing up-to-date and accessible information alerting consumers to risks arising from the activities of spruikers as part of their efforts to improve the financial literacy of Australians and to encourage the early reporting of concerns about property investment seminars and schemes.

Recommendation 6                                                                                     paragraph 8.90

The committee recommends that the Australian Government give due consideration to:

Recommendation 7                                                                                     paragraph 5.22

The committee recommends that the Victorian Legal Services Commissioner and Legal Services Board (and, where appropriate, other state and territory legal professional bodies) investigate thoroughly the conduct of lawyers involved in providing advice to investors in the land banking schemes considered in this report, as well as those lawyers who provided advice, and controlled trust accounts, for the operators of the schemes.

Recommendation 8                                                                                   paragraph 5.23

The committee recommends that Consumer Affairs Victoria investigate whether Market First and/or other parties, including lawyers, breached the requirements in the Sale of Land Act 1962 (Vic) in regards to off-the-plan contracts of sale for the Foscari and Veneziane developments.

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