Investing in land overseas

Source : Sunday Times - 7 Sep 2008

Singaporeans who want more bang for their buck are including foreign land banking as part of their investment portfolios. Many who do so are attracted by the potential high returns.

On the previous Saturday, for instance, some 300 people turned up for a land banking investment talk by Edgeworth Properties at Conrad Hotel.

There are currently about 10 firms selling foreign raw land here.

Land banking firms typically buy rural land with the intent to re-zone it into commercial or residential use, or both.

These firms in turn invite investors to buy parcels of land. In the case of Edgeworth, investors were told that they can potentially achieve annual net returns of 20 per cent on their investments when the raw land obtains development approvals and they exit their investments. This is expected to take five years or less.

For the current project in Alberta, Canada, that Edgeworth is marketing, the minimum investment required is C$12,900 (S$17,500).

But experts point out that such investments come with high risks as well.

Mr Colin Tan, head of research and consultancy at Chesterton International, cautioned that buying foreign land bank is ‘not for the ordinary man in the street’.

‘Stay clear away from it. You may make some money from it, but probably not much more than from other similarly high-yielding investments which are probably less risky. Exhaust all other investment avenues first before you invest in such land banking schemes,’ he said.

Mr Nicholas Mak, Knight Frank’s director of research and consultancy, said that the investor has to be ‘very, very patient’.

‘Put in money that you can bear to lose without losing any sleep,’ he said.

Before you jump into it, consider the pros and cons.

The pros

Including land banking in an investment portfolio may help to diversify risks, said IPP Financial Advisers’ investment director, Mr Albert Lam.

However, he advised investors to consider land banking as an asset class only if they have a medium to long time horizon and they have already set aside sufficient savings to satisfy their liquidity needs.

‘I would recommend investors to have a diversified portfolio consisting of the traditional asset classes of equities, fixed income, cash or cash equivalents before setting aside a portion in land banking,’ he said.

Mr Leong Sze Hian, president of the Society of Financial Service Professionals, said that such investments should form at most a small component of an investor’s portfolio, say, 5 to 10 per cent.

Another advantage of land banking is that it is a medium- to long-term investment, so consumers may be able to avoid the constant worrying they experience when they invest in financial markets, said Mr Lam.

The cons

Illiquid. The lack of liquidity can be a problem for some investors who may be suddenly strapped for cash. In such a situation, investors will have to find another buyer for the units of land that they are holding.This is subject to available buyers and there is typically an administration fee and a broking fee of, say, 15 per cent of the resale price for the transaction. In the case of Edgeworth, it offers an assurance via an insurance plan that the initial investment sum will be returned within five years if the investor wishes to exit. However, the insurance takes effect only when the title deed is issued, some nine months after the sales and purchase agreement is signed.

No ’sure-win’. Like all investments, there is no free lunch and there is no ’sure-win’ guarantee in land banking. This means that it can turn bad and you may lose everything, said Mr Tan of Chesterton.For example, if you had picked sites in Bangkok, the current political situation would have set everything back by a few more years. And if there are flip-flops in policies depending on the government of the day, you can lose everything or you don’t see returns until your old age.

Mr Tan also highlighted the point that land banking is highly dependent on government policies or directives. There is always a risk of the land not being approved for development. On the other hand, developers can participate actively and hasten the ‘rise’ in values in selective developments.

‘So you are a mere hostage to the situation,’ he said.

Uncertain and potentially long holding periods. The holding period for land banking projects can turn out to be long. This happens when the development proposal does not get approved fast, cautioned Mr Lam. As a result, some projects took more than 10 years to exit.

High tax rate. The projects are typically subject to tax by the respective countries upon exit. Investors have to find out the applicable tax rates in the countries where the land is in. For instance, in Canada, the capital gains tax rate can go up to 40 per cent.

Forex risk. Consumers are subject to foreign exchange risk as most projects are denominated in the local currency where the raw land is.

What consumers should look out for

As with other investments, consumers should do their homework and due diligence. This is not to be taken lightly, particularly when foreign land banking is an activity that is not regulated by the authorities here.

Mr Leong suggested that consumers check on the financial strength, history and track record of the firm.

Other things to look out for include the expertise and the breadth and depth of the company, that is, whether the firm is just selling land or has a wide spectrum of identifying land, developing and managing it.

Mr Lam suggested that investors arm themselves with information on these issues:

Firm’s reputation. Consumers should look for land banking firms that have an established reputation. As the consumers are investing in foreign land, they are unable to assess the land by themselves. They need to rely on the due diligence, foresight and investment experience of the land banking companies.

Land’s location. The location of the land is important. Consumers should apply similar standards of reviewing real estate investments to a land banking investment.

Economic conditions. Additionally, consumers have to be mindful that those who had invested in land banking projects had benefited from the bull run in various asset classes over the five years to 2007. Hence, some projects marketed could have delivered high returns.Such projects rode on the appreciation of the Canadian dollar and the real estate sector. For instance, the Canadian dollar has appreciated about 50 per cent against the US dollar since 2003.

However, the continued strength of developed economies’ currencies and the prospects of real estate are uncertain in the current market climate.

Track record. Some land banking firms may stress that all their projects made returns for their investors. In such cases, you might like to check on the duration it took for the investors to exit. Investors might have waited for a long time before the development approval took place.

Exit strategies. Land banking investors realise profits only when all of the investors collectively exit from the project upon approval of the development proposal. Consumers should check with the land banking firm what plans are in place should the proposal fail to get approval.