By Getty Goh (guest contributor)
Recently, a mainstream newspaper wrote about how some dodgy foreign property investment schemes were recently sold in Singapore. Being a co-founder of CoAssets, Singapore and South East Asia’s first real estate bulk purchase and crowdsourcing portal, I have come across my fair share of dodgy investments. Hence, I thought it would be useful for me to share some of the tools I use to help me discern whether a deal is genuine or a scam.
Looking through the news article, the deal was eerily similar to something that I came across just a few weeks ago. Some of the similarities are (1) the project is located south of Batam and (2) more than 1,300 units were sold for $70 million.
The business model of CoAssets has been likened to that of SouFun, a Chinese listed company that provides targeted ad solutions for property developers by aggregating demand (i.e. bulk purchase). Hence, we were approached to get aggregate bulk buyers for this Indonesian project. After careful consideration, we turned the collaboration down and we found two key red flags that made us cautious.
Red Flag #1: The numbers did not add up
One of the main things that made my team wary was that the projected numbers did not add up. In another news article, it was reported that the developer was planning to sell 900 units at US$90,000 (about S$117,000). There were different units and the smallest unit was about 60 square meters (about 646 square feet). Of the 900 units, 200 were already sold at a special pre-launch price of about US$30,000 (about S$39,000), which meant that a deep discount of about 66% had been given to the group of early buyers.
Developers are after all in the business of making money through the selling of properties; hence the question we wanted to answer was whether a discount of 66% was reasonable.
When it comes to development, one key component is construction cost. To find out how much it costs to build a residential property in Indonesia, construction cost estimates for 2013Q3 from Rider Levett Bucknall (RLB), an internationally renowned quantity-surveying firm, were used.
Based on the report, the estimated construction cost for Jakarta was between RP6,161,000 per sq m (about S$62.36psf) and RP9,839,000 (about S$99.62psf). Due to the lack of more precise data for the Batam region, construction cost for Jakarta was used as an indication. Based on the estimated cost, purely for construction, it would cost between S$40,000 and S$64,000 to build the smallest 60 square meter villa. Hence, at the special price of US$30,000, the developer may not be breaking even.
Compounding to the risk, the number of people who received the special 66% discount was also unclear. The project could still be viable if the developer gave the special 66% discount to just a handful of close business associates. However, if it gave it to all 200 buyers, the total amount collected would unlikely be enough to cover the construction cost for the 200 units.
Red Flag #2: The developer did not seem to have the financial strength
Developments are generally hefty financial undertakings and many developers do it with some form of construction loans from banks. While developers may not reveal the true financial situation to the retail property buyers, they will have to show their financial reports to banks in order to secure construction loans. Hence, developers that can secure bank financing at the construction stage tend to be in a good financial position and are more secure. Conversely, developers who do not have some form of bank financing during the construction stage are not viewed to be as attractive.
The 900 units in the Batam development falls under the latter category. That is not to say that all projects that do not have bank financing during the construction stage are doomed to fail. However, for this specific case, the amount needed to build all 900 hundred units is at least S$36 million (assuming all 900 units are 60 square meter units that cost S$40,000 each to construct). When we did an ACRA check on the Singapore company, we found that the company had only a paid up capital of S$300,000 and the key appointment holders of the company stayed in public flats.
What is your financial recourse?
When it comes to overseas property deals, a key aspect that investors should look at is financial recourse – if things go awry, who will be financially responsible to make the investors whole. Based on HDB’s website, it states that “Under the Housing & Development Act, so long as one of the flat owners of the HDB flat is a Singapore Citizen, the HDB flat (of any type) will not vest in the Official Assignee (“OA”) in the event of bankruptcy of any or all of the flat owners and the flat owners would not be compelled to dispose of their flat.” This means that investors would have limited recourse should the development fail to materialise, as the directors’ assets could not be sold to repay the debtors.
More troubling is that the amount raised from the presale is about S$7.8 million. It is still significantly less than the S$36 million needed for the project, bearing in mind that this is just a low end estimate as things like land cost, developer profits and other miscellaneous charges have not been factored in. A S$300,000 company is unlikely to have the type of financial muscle to deliver on a S$36 million project. And without bank financing, it is hard to fathom how they will be able to deliver on their promise.
Based on the two factors highlighted above, the CoAssets team concluded that the deal was too risky and we were not prepared to endorse it. At this juncture, I must emphasize that not all projects that fail are scams. Even good developments with solid management behind them have some risks of failing, as real estate development is, by nature, a risky endeavour.
To us, genuine business failures are realistic plans that go awry due to a sudden change of market conditions. On the other hand, scams are “fantastic promises” made by those who do not intend to keep them – this means that the plan is unrealistic at the onset.
To conclude, the Indonesian case study that I have cited in this article could be a genuine deal. The developer could also have the financial muscle to take on a multi-million project and be profitable selling their villa units at S$39,000. However, I think that it is always more prudent to err on the side of caution. Even if I am wrong and this turns out to be the next big financial deal, the market is not short of genuine good deals, all we have to do is look and do our due diligence.
I also must qualify that this article just provides a brief analysis on two of the more important red flags. There are many other considerations that have not been listed and a more detailed write-up will be beyond the scope of this article. However, if you are currently looking at a deal that seems too good to be true and would like to get a second opinion, you can drop me an email at SecondOpinion@CoAssets.com. While it is not part of CoAsset’s core business, we hope to add more value to you by highlighting some of the blind spots that you might have missed.
Ultimately, let me end off with this adage, “if it seems too good to be true, it often is”. This statement is pretty much applicable to everything in life, overseas property scams included.
Mr Getty Goh is the co-founder of CoAssets, a spinoff company from Ascendant Assets Pte Ltd, and Singapore and South East Asia’s first real estate bulk purchase and crowd funding site. For any queries, please drop him an email at Enquiries@CoAssets.com. Posted courtesy of www.Propwise.sg, a Singapore property blog dedicated to helping you understand the real estate market and make better decisions. Click here to get your free Property Beginner’s and Buyer’s Guide.