Numbers rising despite lack of regulation for such offers of investments and other downside risks, reports GENEVIEVE CUA
SINGAPOREANS’ love affair with property is well known, and that usually refers to condominiums in cities. But now more are latching onto the profit potential of raw land.
Landbanking - the process of buying raw land in the hope of realising a development potential - appears to have taken off among a few thousand investors here who are unfazed by the fact that such offers of investment are unregulated.
Walton International, which markets land in Canada, has been in Singapore since 1996 and now has some 7,000 Singapore investors. That is roughly a quarter of its investor base of 29,000. A more recent entrant is Profitable Plots which is marketing land in the UK. The Profitable Plots spokesman could not be reached.
But could investors be biting off more than they can chew? A recent report in a Canadian newspaper suggested that there was little urban development potential in one of the projects, New Tecumseth, marketed by Walton International mostly to Asians. The report asked: ‘Are the Asians - who are paying almost triple current property values for a stake in the area - being sold the equivalent of ’swamp land in Florida’? Or do they know something we don’t?’
The report quoted New Tecumseth mayor Mike MacEachern saying that he was stumped by the sudden interest in the town. ‘It’s all very unusual . . . And I’m concerned about the expectations of those who are investing in this land and what they expect the returns might be,’ he told The Star. New Tecumseth is located more than 50 km from the Toronto City centre.
According to the article, about half of at least 30 farm properties bought by Walton and related companies have been syndicated for resale to Asian investors, for a price almost three times Walton’s original purchase price.
Walton’s brochure describes it as one of the largest landbanking firms in North America, focusing on the purchase of ’strategically located raw land in the path of development of major North American cities’. It manages some 25,000 acres in Canada and the US.
Walton senior vice-president for administration (Asia) Kent Britton said: ‘Having been in the business for 27 years, we’re experts in picking growth . . . We’re in areas where people may look at it and say there is no growth there. That’s our expertise.’
He says the firm commissioned Canadian auditing firm Meyers Norris Penny to conduct an independent audit of the rates of return of various properties. The audit found annual rates of return ranging between 3.69 and 45.93 per cent on completed projects. ‘We never had a negative performing project,’ he says.
Long maturity
The holding period for the projects ranged from 31 months to 14 years. Of the 13 projects calculated, eight had a holding period of five years or less.
One project is in fact maturing - NorthPoint Commercial, where clients are expected to realise a return of between 25 and 45 per cent on a four-year holding period. Out of 181 clients, 123 are Singaporeans.
A second project with a near-exit is South Ellerslie, with an expected return of 24 per cent. Nine Singaporeans are expected to benefit from this.
Mr Britton says the firm engages in research prior to acquiring land, including a study of the political, economic and social factors that may affect the area. It engages engineers to work with the municipalities to achieve the best use of the land in a phase called ‘pre-development’. Once permission for rezoning is given, developers are expected to buy the land - and hence, profit is realised.
Depending on the property, the minimum investment by individuals can start from roughly C$10,000 (S$13,900). Based on a put agreement investors can sell the land back to Walton at the original purchase price in five years. A unit of land can be a quarter of an acre. Walton offered a financing scheme as well at a fairly prohibitive interest rate of 11.75 per cent a year. But this is understood to have been withdrawn.
There are a number of risks apart from the fact that dealing with an unregulated party means that the investment falls into a grey area should there be any dispute. Be prepared, for instance, for a holding period of eight to 10 years or longer. There is also currency risk and illiquidity. There is a tax impact as well, as profits are subject to a withholding tax of between 21 and 25 per cent on a tiered basis. And, of course, a risk that the area cannot be redeveloped.
Says Mr Britton: ‘The risk in landbanking is time. The timing which the consultant provides to clients is the estimated timeline of the project based on stages of conceptual planning . . . Contrary to the volatile nature of the housing market, raw property value increases steadily with time (and boosted by other factors such as concept planning approval and nearby development).’
Financial advisers are lukewarm or even downright cold to the idea of landbanking. Adviser Benny Ong of LPA says: ‘Investors need to consider the risks. You can invest money elsewhere that can generate a return over a shorter period.’
Providend’s Christopher Tan says: ‘Landbanking does not have a track record to show in terms of risk and return. I’m not saying it’s a no-no, but it’s not in line with our investment philosophy. We’re asset allocators; we need something diversified with a risk return profile that can be modelled into the portfolio. I’m not interested in something that can earn 15 to 20 per cent if it swings the risk out of a client’s comfort level.’
Source : Business Times - 26 Jul 2006
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