Buying land parcels overseas is risky, so investors must do proper due diligence
It sounds like a sure-fire winner - buy cheap land overseas and cash in big time once developers come calling - but big losses can also come with the territory, as many Singaporeans can attest.
The uncertainty and high risks of such investments seem obvious, yet many investors here come a cropper when their investments in overseas land turn sour.
Singapore's consumer watchdog has received 11 complaints this year about firms selling such land and 14 last year. There were only four each in 2008 and 2007.
Landbanking, as the process is called, involves firms buying large plots and subdividing them into smaller parcels, making it easier to sell to investors as they can be priced at affordable levels.
Some plots in Britain can be picked up for as little as $10,000 each.
Landbanking firms tell investors they can buy undeveloped plots, usually rural land overseas, and sell later for a profit. Investors are often told the land is on the outskirts of a city where urban development is likely.
When development plans are drawn up, investors can then sell their plots to developers who are willing to pay higher prices to secure the land.
To make the deal attractive, some landbanking firms promise regular payouts over a fixed period or a buy-back guarantee. Some offer the flexibility of allowing investors to switch their plots to ones that have already received development approval so they can enjoy faster gains.
It looks a winner, yet the pitfalls are plenty.
Recently, the case of 200 investors made headlines when their investments in plots in Britain headed south.
They had bought plots at various times near places like Swindon and Gatwick since 2006. Each plot cost $15,000.
In all, these purchases, which were done through local firm Land International (Far East), amounted to an estimated $6 million.
Initially, the investors received quarterly payouts of 8 per cent a year from 2007. But these dried up when the parent firm of Land International (Far East), Land International, was closed by the British government in 2008 following an insolvency probe.
Investors later learnt that the plots had been zoned as 'green belt' or protected land, on which no development is allowed.
In Singapore earlier this month, 40 disgruntled investors turned up at Speakers' Corner in Hong Lim Park to share their woes on their investments which included landbanking.
Many had invested in Singapore-based investment firm Profitable Group and have yet to see any returns. An unhappy Mr H. Yeo, 35, had invested £13,000 (S$27,000) in 2008 in land in the Philippines through Profitable Group. He claimed he was due to get his returns last year but they have not materialised.
Since late last year, the firm has been on the Monetary Authority of Singapore (MAS) Investor Alert list. The list includes entities that may be conducting activities regulated by MAS without authorisation.
The executive director of the Consumers' Association of Singapore (Case), Mr Seah Seng Choon, warned that buying overseas land is a 'very high risk' activity and consumers should be extremely careful. Simply, if you cannot stomach such high risks, do not get involved.
'No one can be sure of getting back their money in such a venture. It is a very high risk, particularly when the business offering such investment is unknown and has no track records,' he said.
Case has been fielding complaints about landbanking for the past four years but it does not have the authority to deal with them.
Despite the bad publicity, some people have profited from their landbanking investments, usually after a long wait.
For instance, Indonesian investor Ludwina Ismail, 52, made total gains of 14 per cent after buying a half acre (0.2ha) of Canadian land in Calgary from Canadian-based landbanking firm Walton International, in early 2005.
She managed to exit after a two-year wait, but that was because the land she bought for C$33,000 (S$44,000) was a resale deal from an earlier investor who had bought it five years ago.
As with all investments, landbanking investors must do proper due diligence. Here are some considerations.
These are high as the land may not appreciate in value for a long time. There are no guarantees on how soon developers will buy over the land. For instance, investor Molly Tan, 40, was given an estimate of five years by the landbanking firm but she ended up waiting 10 years before making her exit with some gains. So be prepared to stay invested for a number of years.
The long gestation period means the money invested may be stuck for several years while generating no returns, which makes the investment very illiquid. Investors are also subject to exchange rate movements as the plots are on foreign land and bought with foreign currency.
Bear in mind there is a tax impact as well, as profits are subject to withholding tax of about 25 per cent on a tiered basis. Of course, there is always a risk that the land is never developed. And reselling the land, if possible, may result in losses.
In the event of company closures, consumers may be left with nothing. This was what happened in 2006 when Britain landbanking firm Land Heritage (UK) closed after an investigation. Its 700 investors were not refunded.
A key risk is that the firms soliciting landbanking investments are not regulated here so they do not have to adhere to strict investment rules such as those laid down by the MAS, said Case's Mr Seah.
Besides the lack of regulation on such investments, the absence of a track record is another big hurdle, said Mr Chris Firth, chief executive of wealth management firm dollarDex.
'Retail investors may find it hard to get independent inform-ation, and even if they do, they may not have the expertise to properly assess the opportunity and particularly the risks. If things go wrong, they may not be able to call on regulators,' added Mr Firth.
2 Background checks on the land
Before embarking on such a venture, Case urges consumers to get as much information on the land on offer as possible, such as its condition, leasehold, restriction of use and so on.
'Ask the embassy about the conditions and requirements of foreigners owning the land in their country. Also, check up the relevant laws that apply to ownership of land and find out the taxes or levies that apply to land ownership,' suggested Case's Mr Seah.
Another tip is to find out if the offer for that plot of land is a credible one.
You should also assess the likelihood of the land value rising.
dollarDex's Mr Firth advised investors to find out the mark-up on the offered plots.
For example, a piece of British land without planning permission could fetch as little as £15,000. The same plot with planning permission could be worth £150,000, or sometimes even more.
Small investors may end up paying a price somewhere between these two, yet have a small - or unknown - chance of seeing planning permission granted, he said.
'Potentially, that means a big loss if permission is not granted. Moreover, very small plots of land could be very hard to sell in isolation if collective sales efforts peter out.'
Sometimes, land that has good potential for planning permission may already have a vendor's lien on it.
When a landbanking firm buys the plot, it could come with a condition that the firm must pay some money to the seller if the land is on-sold within a specific number of years.
'Such a lien could wipe out any potential profit for the small investor, depending on the mark-up,' added Mr Firth.
3 Background checks on the firm
Do not let a professional-looking website or a formal-sounding name sway you from authenticating the firm.
If it is foreign or has a foreign parent, ensure it is valid by checking with the embassy to ensure the scheme is not a scam.
Find out the paid-up capital and date of existence of the landbanking firm. There should be a proper contractual agreement that spells out its obligations. One important consideration is the title deeds.
You should also determine if the firm is regulated in the country that it is operating in.
Imagine the worst-case scenario and find out what recourse options are available if you want to exit later. If that happens, what are the applicable laws in the event of disputes?
4 Resolution process
If a dispute arises, the process can be costly.
It may be necessary to engage foreign lawyers to deal with the matter and in some countries, it may take years before a case is resolved.
You should research the credibility of the country's legal processes and the integrity of people involved in the legal process.
Furthermore, as these are overseas land plots, consumers must factor in travelling and accommodation costs to deal with any dispute.
Source: Sunday Times, 27 Jun 2010