Mr Getty Goh has a Masters in Real Estate from the National University of Singapore (NUS) and he is the CEO of CoAssets.com, South East Asia’s first crowdfunding website. Mr Goh is also a director with Ascendant Assets Pte Ltd, a real estate research consultancy and think tank. Dr Seh Huan Kiat has a PhD from Massachusetts Institute of Technology (MIT) and he is the CTO of CoAssets.com. The views expressed are their own.
Singaporeans are avid investors and we are always on a constant look out for ways to grow our money. As a result, many of us are quite receptive to new and alternative ways to investing.
In the past few years, there has been an influx of “alternative” real estate investments, ranging from land banking, buying foreclosed properties, social housing projects, etc. While some are legitimate projects that have given investors good returns, some are dubious deals and those who had invested are considered lucky if they had gotten a portion of their original investment back.
As the co-founder of South East Asia’s first real estate crowd funding platform, I have come across a wide variety of deals that want to advertise on CoAssets to reach out to funders. Hence, I would like to share some pointers that consumers can look out for when they do their due diligence. While this is not a fool-proof (or exhaustive) checklist, these are some things my team and I look out for when we analyse whether a deal is worthwhile.
Pointer 1: Excessively high returns
In the past few years, we have come across deals that offer returns as high as 20% per annum. There are currently some deals from US that are promising as high as 50% guaranteed returns over 2 years. While such returns may look very attractive, the question is whether they are realistic.
To give you some perspective, let’s take a look at the returns from some of the best performing hedge funds in 2013. Hedge funds are financial instruments that accredited investors’ have access to and they not only give high returns, they are also highly risky. Based on data of the top 30 hedge funds compiled by Bloomberg, the best performing fund was Glenview Capital Management (based in the US) that generates returns of more than 84.2%. Of the top 30, only 9 funds made returns of more than 30.0%, while 20 funds made between 20.0% to 29.9% (http://www.businessinsider.sg/30-most-successful-hedge-funds-of-2013-2014-1/#.U2Gh7Mdy7_s).
Hedge funds are managed by professional investors who have access to the latest market information as well as trading technology and they are known to give one of the highest investment returns. Yet some of these overseas property projects are offering returns comparable to what many of the top performing hedge funds are giving. In other words, while it is possible for property developments to give high returns, anything more than 20% per annum should warrant much deeper scrutiny. After all, promising high returns is one thing, whether the developer can deliver on that promise is another thing altogether.
Pointer 2: Excessively large sums of money raised
In assessing the viability of a project, another thing we look for is the amount of funds raised. Some people may feel that supporting small projects, which are looking for investments of S$1million to S$2million, is risky. They would rather go for large projects that are looking to raise multimillion-dollars. Contrary to what they think, we believe that big overseas projects do not necessarily mean that they are better and more secure in this context. What do I mean?
Typically, banks and financial institutions prefer supporting multimillion-dollar deals rather than small projects, as the fees from the big deals commensurate with the effort. To illustrate, assuming a financial institution makes 5% from project financing, they would only make S$50,000 from a S$1million deal. In comparison, the financial institution would make S$1.5million, for the same amount of work, from a S$30million deal. In other words, if there was a viable multimillion-dollar property deal around, many of the banks and financial institution would be very keen to be a part of it and there would be little chance for regular retail investors to be a part of it.
Hence, to me, it would appear strange if these “established” companies would want to raise large amounts of funds directly from retail investors, instead of going through financial institutions. From the business stand point, even if these developers have to pay the banks/financial institutions as much as 20% to 25% (which is on par with what they are offering retail consumers as mentioned earlier), would it not be easier for the developers to deal with a single entity (i.e. bank or financial institutions), instead of having to manage hordes of retail investors?
Just as we do not expect big private developers like Far East to raise huge sums of money from retail consumers for their overseas projects, it is very telling if an overseas developer comes to Singapore to raise multimillion-dollar sums. If that happens, it suggests that they are not able to find and convince savvy financial institutions to invest in them, and that could be a potential red flag to watch out for.
Pointer 3: Personal credibility of the developer
While we are generally more apprehensive towards developers trying to raise funds for large-scale projects from consumers, we truly believe that there is a viable market for credible aspiring developers looking to raise no more than S$5million.
With reference to my earlier point, there is currently limited avenue for these developers to raise sums that are less than S$5million, as many banks are not prepared to finance them due to the thin margin. Even if these financial institutions are prepared to give financial support, the interest rates for such loans could be as high as 30%, which makes it a prohibitive option.
As an alternative, these aspiring developers could turn to wealthy individuals for the funding they need. However, in most cases, these wealthy individuals would not be too comfortable with the huge financial risks of putting several millions in a single development. Hence, based on what we understand of the real estate development space, there is presently a gap in the market that CoAssets hopes to fill.
From the risk perspective, if you think about it, it is also less risky to finance “bite-sized” amounts of less than S$5million. This is because many of these aspiring developers may have personal assets that could be sold to repay funders.
From another perspective, these aspiring developers (especially those with a good professional track record) also know that it would be more worthwhile for them in the long run to maintain a good reputation by paying off the funders in the event the project does not materialise as planned, rather than defaulting on S$1million or S$2milion.
To illustrate, one of the first few Thai developers that wanted to advertise on CoAssets was working on a boutique condominium project that was worth more than S$10million. He wanted to advertise on CoAssets to reach out to potential funders as well as potential buyers. Unlike what most people were used to, his project was not one of those “flashy” multimillion projects in exotic locations like Brazil or Germany that offered 20% returns.
However, upon deeper research, we found that one of the partners of the Thai development company was a director of a property fund that was listed on the London Stock Exchange and this development was a private project for him to better understand the Thailand real estate market. This was a huge plus point for the development, as it meant that the developer’s professional credibility was at stake and if something went wrong with the project, the developer would have the means as well as the motivation to ensure that the stakeholders would not be short-changed.
In conclusion, these are just some pointers you can consider the next time you are assessing the viability of an overseas development. In reality, it is never easy to differentiate a “scam” from a genuine deal, as the situation is never so straightforward. Detailed due diligence can be time and very resource consuming, and even then, the professionals do not get it right all the time.
Ultimately, investors should maintain a healthy scepticism, always do their own research to double-check the facts presented and only invest monies they can afford to lose. This is simply because all forms of investing, including property investing, carries risks. As the common saying goes, “There is no free lunch in this world”. More often than not, when the deal seems to good to be true, it often is.