Are all real estate investments for real?

Investment in real estate remains one of the most profitable propositions in Malaysia.

Over the years, a few innovative investment products have been developed to capitalise on people’s appetites and confidence in real estate. One such product is land banking. Investors are sold small plots of undeveloped agricultural land with the promise of big returns once rezoning for development takes place and the land value surges.

Last month, I met with an excited client who wanted my second opinion on a real estate investment proposal. It was an invitation to participate in a property development project in the UK. Unlike land banking, this latest investment product provides investor with the opportunity to benefit from capital appreciation once development of the said project is completed and sold.

In other words, investors are given the opportunity to invest and participate in a UK development project similar to the projects managed by developers like YTL or S P Setia in Malaysia.

My client Mr Lim received an attractive brochure with details outlining the developer’s track record, site plan and artist impression of the residential units. However, there was very little information for potential investors to make sound investment decisions.

Despite that, Mr Lim was quite optimistic about the investment. He was blown away by the sales representative’s pitch and was convinced that the proposal ticked all the right boxes. The fact that the company was regulated by the Companies Commission of Malaysia (CCM) was the icing on the cake.

“The sales representative told me that the investment is capital guaranteed and there is a trustee in place. Surely, it won’t be an Edgeworth Properties saga all over again,” remarked Mr Lim.

Indeed, this latest investment scheme promised to be more structured compared to most traditional land banking investments that I was familiar with. The minimum investment of £5,000 is considered modest for a property development investment. The land in question had already been gazetted for development which increased its appeal and lowered any potential complications arising from raw land investing.

I shared my observations with Mr Lim, including the potential ups and downs. First, I shared that the investment offered investors like Mr Lim an opportunity to diversify their wealth from other traditional investments such as shares, local real estate and unit trusts. Secondly, the investment scheme promised at least 18% return on investment per annum for five years.

What about the downside? It is worthwhile to note that all investments, be it in shares, unit trusts, gold and even properties, share a common denominator. In this case, Mr Lim would face a liquidity risk because he has to put the money aside for five years.

There is also risk arising from the management’s capability. In order to overcome this potential shortcoming, investors must do their due diligence and look at the track record of the company’s previous projects to assess if the management company has the capability to deliver what is promised.

Finally, there is the question about location. Is the development project in the right location? The right location, in this instance, would have made the development more attractive and easily sold.

Despite Mr Lim’s confidence, I had my reservations with the investment proposal. I met the sales representative for further details and clarity. My gut feeling was right. Not everything my client perceived to be true is valid. It was only through careful scrutiny, and knowing where to look, was I able to uncover the true picture.

Without wasting any time, I met Mr Lim and informed him that the property development project was not as safe as he thought it was. He needed to re-evaluate the investment proposal.

This is the rationale:

In an ideal situation, a capital guarantee is given by a third party company and not the investment management company. The third party is often a bank. Should an investment scheme fail, or suffer capital loss, the bank would at least be able to offer capital protection.

There was no doubt the UK property development investment plan had ticked all the right boxes and it appeared to be genuine. The sales person, however, conveniently left out the part that the capital guarantee was offered by the property development company itself. That makes the capital guarantee not as safe as it was led to believe.

In Malaysia, every unit trust fund has its own independent trustee that is a separate entity from the unit trust company to safeguard investors’ money. This ensures that should the unit trust company go under, investors’ money is safe and intact with the corporate trustee. In this case, when I asked the sales person further about the trustee’s background, he admitted that the trustee of this scheme was actually the director of the property development company, and not a separate entity from the property development company.

Because of the high commission earned from selling investment schemes, sales people may just pitch to secure investors’ confidence. For this reason, potential investors must learn how to probe and differentiate the facts from the marketing and sales gimmicks.

Edgeworth Properties, a Canadian land banking company, had promised investors the dream of owning lands in Canada through its investment scheme. It was a gloomy day indeed for Malaysian investors when the company went into liquidation in 2012. As a result, Malaysian investors lost a total of RM76.5mil. Life savings were wiped out and retirement plans put on hold.

While not all overseas land banking and property development schemes are scams, the Edgeworth Properties debacle serves as a reminder why one should always be mindful of the risks involved, and don’t take what is said at face value.

If an investment appears to be too good to be true, it normally is caveat emptor: Let the buyer beware. Think twice before you invest. If you choose to take that road, make sure you have done enough homework. Every year, thousands of people lose anywhere from thousands to their life savings in poor investments. If unsure, don’t hesitate to get a second opinion.

Yap Ming Hui ( heads Whitman Independent Advisors, a licensed independent financial advisory firm which has helped people to optimise their wealth and achieve financial freedom since 2000. - By The Star

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