Vital lessons from a dead investment scam

As scams go, land banking was probably one of the most blatant to spring from the property boom. We warned readers about these schemes back in May 2006. The good news is that the Financial Services Authority forced Britain's biggest landbanking group, Mayfair-based UK Land Investments (UKLI), into liquidation earlier this month. The bad news is that its victims will almost certainly be left out of pocket.

The concept is straightforward. A land banking company buys, say, ten acres of land for £100,000. It then sells each acre for a grossly inflated price £20,000, perhaps, all based on the promise that the area in question will be granted planning permission, sending the value soaring.

That should have set alarm bells ringing, and many local protesters did try to warn would-be investors off. The Guardian cites one sign, put up on plots being sold by one land banker near Milton Keynes: "If this land is so valuable, then why does the owner want to sell it so cheaply and quickly?" Yet since 2002 at least 4,500 people paid a total of £69m for plots of land from UKLI. The plots some of which sold for as much as £15,000 have since been valued at as little as £500. None was ever granted planning permission.

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The trouble is, those who bought the plots have no comeback. The FSA had UKLI shut down by arguing that it was acting as a collective investment scheme, which is not allowed to operate without FSA authorisation. But the flipside is that, because it wasn't regulated, investors are unable to claim compensation from the Financial Services Compensation Scheme. They are, of course, free to sell the land on, but there's little chance they'll recoup the sums they invested, especially as UKLI has few assets for creditors to go after.

It'll be little consolation for victims to realise that, with the FSA cracking down and the British property boom over, land banking is unlikely to claim many more victims. But you can guarantee that there are other scams just around the corner. It's yet another illustration of that vital investment rule: "if it sounds too good to be true, it is".