Are high returns and ‘fuss-free’ investments too good to be true?

/ The Edge Property |

September 16, 2015 12:00 PM SGT

Guarantees of high returns and ‘fuss-free’ investments have ensnared an increasing number of investors in Singapore in recent years. Will enhanced advertisement guidelines be enough? Can more be done to rein in marketing agents flogging questionable overseas projects?

Enhanced guidelines for property investment advertisements and investment seminars introduced by the Advertising Standards Authority of Singapore Council took effect from Aug 12. The ASAS Council said it had observed an increase in advertisements, including those of investments in overseas properties that promise high or guaranteed returns, but that they often lack sufficient warnings against any financial, legal or regulatory risks.

Between January 2013 and May 2015, ASAS had received 41 “feedback cases” about advertisements by companies that offer training as well as tips on investing in financial instruments and properties. Of particular concern was investment in overseas properties. Of the 41 cases, 12 had involved advertisements on overseas property investment that contained non-substantiated claims.

The enhanced guidelines will go some way towards protecting investors. However, for those who had fallen prey to such advertisements, the measures by ASAS may have come a little too late.

A year ago, many of the investors in Singapore who bought rooms in the Ibis budget hotels in Knutsford and Warrington Lymm, near Manchester in the UK, figured they were onto a good thing. They were lured by advertisements claiming “guaranteed 24% nett return over three years” and “109% guaranteed buyback”.

One such investor, who only wants to be known as “Nick”, saw the advertisement on Ibis Warrington Lymm on July 13, and attended the property seminar that Saturday together with his wife. The returns dangled that day were even sweeter than what was advertised, with offers of 9% return a year and 115% buyback at the end of three years.

The price of a hotel room at Ibis Warrington Lymm was £94,500, which translated into about $200,000 then. “What convinced us to buy were the high returns, the assurance that it was a completed project and, more importantly, because of DWG [Dennis Wee Group], which we thought was a very reputable marketing agency,” says Nick.

He signed the option to purchase and paid the booking fee of $4,000 (£2,000) on July 13. As the advertisement had said, “Meet the developer”, Nick asked who the developer was.

He was introduced to Lee Bramzell, founder and director of Shepherd Cox, who made a presentation on the project that day. “They should have just told us the developer couldn’t make it, but here is the marketing agent from the UK,” says Nick. “Instead, DWG introduced Shepherd Cox as the developer.”

He and many of the other investors were therefore taken aback a month later when Hotel Options (Lymm) Ltd was listed as the vendor on the sale and purchase agreement. “We asked our DWG agent who Hotel Options was, and we were told that it is a company linked to Shepherd Cox that had been set up to operate the hotel,” says Nick. Taking the agent’s word for it, he signed the agreement and paid the remaining £92,500. He recalls that it was on National Day, Aug 9 last year.

Alarm bells didn’t set off then because he started receiving the promised monthly rental return of 9% (£708) over the next few months.

A strong start Another Singaporean investor, Mr Goh, had also purchased a room at Ibis Warrington Lymm. He remembers the exact date that he received his first rental payment as it was on his wife’s birthday, Oct 2, 2014. At the end of the same month, he received the second payment, which was due for November.

“I thought it was such a good investment, and that my hotel room was doing very well,” says the 52-year-old Goh. “I didn’t suspect anything.” Instead, he had imagined that he and his two sons, aged 21 and 19, could visit London on a father-son bonding trip and drive to Manchester and Liverpool to watch football matches. Goh figured that even if things went bad, he would still be the owner of a hotel room, even if it is a budget hotel on the M6 motorway to Manchester.

Goh remembers receiving his monthly payments for December and January. But there was no payment in February. In March, as no payment was forthcoming, he called the agent from DWG. She referred him to DWG’s legal department, “which is basically just one person, Anil Dube [the legal counsel of DWG]”, recalls Goh.

Before he could contact Dube, however, he received an email from the UK legal practitioners specialising in corporate recovery and insolvency, Begbies Traynor, informing him that Hotel Options (Lymm) had been put into administration. The notice was dated March 13, and the company had been put into administration the day before. “When things like that happen, there’s nothing much you can do, but sit down and weigh your options,” he says philosophically.

Dubious or ill-conceived plan? It was only upon perusing the administrator’s statement of proposals filed by Begbies Traynor on May 5 that the investors of Ibis Lymm learnt what transpired before they came into the picture. Hotel Options (Lymm) was set up on June 6, 2013 by four shareholders in the UK, each holding 25 shares in the company worth £1 each. The same shareholders had also set up another company, Hotel Options (Knutsford), on June 5, 2013.

The shareholders of both companies purchased two existing hotel buildings and proceeded to refurbish them. They then acquired a franchise from Accor Group to run the properties as Ibis Budget Knutsford and Ibis Budget Warrington Lymm Services, according to a press release by Accor in April 2014.

The shareholders of Hotel Options (Lymm) and Hotel Options (Knutsford) engaged Shepherd Cox as the marketing agent to sell the individual rooms of both hotel properties. The rooms were sold primarily to investors in Singapore and the Far East. They would then be leased back to the hotel management company, which in turn would manage the properties and generate an investment return for the individual hotel room investors, according to the administrator’s report.

Shepherd Cox was to receive a commission for the sale of the rooms, and upon achieving a certain sales target within a specified time period, it would have the right to purchase the Ibis hotel at Knutsford, according to legal practitioners Marshall Peters, the administrator for Hotel Options (Knutsford).

For the property at Lymm, if Shepherd Cox achieved a certain level of sales within a specific time frame, the hotel would be transferred to an associate company of Shepherd Cox called SCX Lymm Ltd that was set up for that purpose. Shepherfd Cox had raised the required finance to complete the purchase.

However, sometime in November 2014, a dispute arose between Shepherd Cox and the shareholders of Hotel Options (Knutsford) and (Lymm), mainly over the payment of commissions and whether the minimum sales target had been achieved within the stipulated time frame, according to the administrator’s report. Consequently, Shepherd Cox took legal action against both Hotel Options (Knutsford) and (Lymm).

At Ibis Budget Knutsford, of a total of 32 rooms, 30 were purchased by investors in Singapore and two by UK investors. The price they paid per room was £82,500 and the same 8% rental yield was promised, with annual gross rental of £6,600 and monthly rental of £550, according to the administrator’s statement of proposals filed on March 27.

When Hotel Options (Knutsford) was unable to pay its debts, a decision was taken to appoint an administrator and a notice of its intention to do so was filed in court on Jan 22. Clive Morris of Marshall Peters Ltd was appointed the administrator of the company on Feb 5.

Unachievable promised returns According to Marshall Peters’ report in March, while Hotel Ibis Knutsford was viable as a going concern, it was unable to generate enough revenue to cover the monthly rental payments due to the investors. The administrator there fore approached the investors to consent to a waiver of their rental payments during the administration period.

Subsequently, when Hotel Options (Lymm) was put into administration in March, the same request was made to investors to waive their entitled rent during the eight-week administration period. The Ibis Budget Lymm has 61 rooms, of which 29 were purchased by 21 investors from Singapore and 32 by those from Taiwan. Most of the investors in Singapore had agreed to the waiver.

Similar to the Ibis Knutsford, while the Ibis Lymm could generate a “tiny profit” and break even operationally, this was insufficient to meet the promised rental returns due to the individual investors based on the 8% rental yield, which would translate into about £40,000 a month ,“which would render profitable trade impossible”, according to the administrators. According to an investor who only wants to be known as Mr Tan, the investors were told that they could buy the freehold title if they wanted to. Tan and his wife were the biggest investors of the two Ibis budget hotels, having purchased two rooms at Knutsford and four at Lymm for a total of over $1 million.

Tan, along with the other Singaporean investors at Ibis Knutsford, was keen to purchase the freehold title of the property. Buying the freehold title meant that they could appoint their own hotel management company. They were even willing to negotiate with Accor Group to have the contract renewed so the hotel could continue operating under the Ibis Budget brand.

Many hours were spent speaking to the administrators, according to Tan. He was told that the freehold title for the Ibis Knutsford would cost £20,000, while the freehold title for the hotel at Lymm was about £40,000. The Singaporean investors therefore submitted a bid of £21,000 for the freehold title of the Knutsford property.

“We thought we would get the freehold title, but at the eleventh hour, we were told by the administrator that Shepherd Cox has the freehold title for Knutsford and has since taken hold of the freehold title for Lymm as well,” says Tan. The investors, meanwhile, own a 978-year leasehold title on the individual hotel rooms.

Ibis budget hotel in Knutsford

Two cities, different outcomes The investors of Ibis Lymm in Singapore also learnt that Taiwanese investors in the same property appeared to have got a better deal, thanks to their agent. The investors in Taiwan had continued to receive their 8% return, as Shepherd Cox and the “intermediary in Taiwan” had deposited £60,000 “to cover potential rental costs”, according to the administrator’s report. In the final progress report, another £20,000 was deposited with the instructed solicitors by the Taiwan intermediary. “The Taiwanese creditors had difficulty providing the waiver due to translation issues, and the fact that there are no analogous proceedings to an administration in Taiwan,” said administrator Begbies Traynor in its final progress report on July 3.

The Taiwan intermediary, Joe Yang, CEO of Soufun Taiwan, said as none of the investors in Taiwan spoke English, he had to represent them. Yang had marketed the Ibis Lymm hotel to the investors in Taiwan, and his firm is said to be the leading firm when it comes to marketing overseas property. Soufun has been able to continue paying the investors in Taiwan, as the company had taken out a £100,000 insurance policy to protect its investors in case problems arose with the transactions, explains Yang. He is also negotiating with Shepherd Cox to keep the same rental guarantee of 8% for his Taiwanese investors.

The investors in Singapore were naturally disappointed that DWG had not protected them in the same way. In fact, according to an investor who wants to be known as Jeanette, they received their title deeds from the Land Registry only after repeated emails and calls. “If you are a real estate agent and I sign my sale and purchase agreement, you should make sure that I get my title deed and that I get the returns I signed up for,” she says. “Now, all I’m interested in is getting my capital back.”

Unfortunately, it looks like she and her fellow investors might have simply paid too much. “I asked Shepherd Cox how they arrived at the price of £94,500, and Lee [Bramzell] said they calculated it based on the projected room rates multiplied by the number of days and the number of years and used a present value model to arrive at the price of the room,” recounts an investor who only wants to be known as Peter. “I’m still holding on to two rooms [in Ibis Lymm], but I wonder how much they are worth today.”

Ibis budget hotel in Warrington Lymm

Investments gone wrong The investors in Ibis Lymm aren’t the only ones who feel that they have been wronged. In April, a group of 30 Singaporean investors were reported to be suing British law firms Scott Fowler Solicitors and Graham & Rosen, alleging that the firms did not inform them about the risks of their investments. They are working with British law firm Lucas Law to recover about £8 million ($16 million) in losses.

Two hundred investors, including the 30 Singaporeans, had invested with British developer Key Homes. The Singaporean investors had paid an average deposit of £40,000 for units in seven unfinished hotel and student hostel projects built by the now insolvent developer. The projects were in various cities, including London, Leicester and Birmingham.

Several investors of Key Homes had turned to Zahid Alauddin, managing partner of Kingfields Solicitors, who specialises in real estate conveyance of UK properties. While he did not represent the investors in the Key Homes projects, nevertheless, he lent them his shoulder to cry on when they came to his office. “Because I’m not a litigator, I could only provide them with moral support and eventually they found a lawyer who is a litigator to help them,” he says.

According to a property adviser who declines to be named, one of the flaws of some of these investment schemes is that investors are asked to pay a huge deposit upfront, sometimes up to 80%.

Deposits made by investors should be held in an escrow account until completion, adds the property adviser. But in some of these schemes, investors’ down payments are often released to the developer immediately instead of being held in the escrow account.

More enforcement needed? In March last year, the Council for Estate Agencies (CEA) had issued consumer tips on buying foreign properties, as well practice guidelines for estate agents and salespersons marketing overseas properties.

Can CEA do more to help investors of foreign property investments that have turned sour? “CEA does not have jurisdiction over foreign countries’ regulatory frameworks and practices governing foreign developers as well as the development and sale of foreign properties,” says Heng Whoo Kiat, CEA’s deputy director (licensing), in response to email queries. “To help mitigate the risks in purchasing a foreign property, CEA would advise consumers to purchase foreign properties through a local estate agent.”

From 2013 to the present, CEA received a total of 14 complaints on the purchase of foreign properties, says Heng. This is in comparison with an average of 800 complaints received each year. The nature of complaints included developers going into liquidation, development not carried out according to schedule, and consumers being unable to get their deposits back from the developers after deciding to withdraw from the purchase.

Over the same time period, the Consumers Association of Singapore (CASE) received 23 complaints regarding overseas property investments. Most of the complaints involved those who were unable to get back their promised returns or payouts.

Under the Estate Agents Act, salespersons marketing foreign properties in Singapore are required to comply with the Act and its regulations, which includes performing due diligence on the foreign developer and the property, as provided for in CEA’s Practice Guidelines. If an estate agent is found to have breached any of the provisions, CEA can take action against the agent. This could take the form of a financial penalty of up to $75,000. The estate agent’s licence or the salesperson’s registration could also be revoked or suspended.

While due diligence by estate agents could help reduce risks to a limited extent, it would not ensure that the foreign property transaction would be risk-free, cautions CEA. “Foreign developers could go into insolvency for various reasons,” adds Heng. “Scams by foreign developers, if any, may not be easy to detect.”

Scams, including property-related ones, are essentially cheating offences punishable under the Penal Code with imprisonment or a fine, or both, according to CEA. And cheating offences come under the purview of the police.

Different investment schemes A number of failed investment schemes have surfaced over the past two years. Besides Key Homes, there was also EcoHouse, supposedly a Brazilian developer endorsed by the local government to build social housing. The scheme promised returns of 20% per annum, and 1,500 Singaporean investors sank a total of $70 million into the venture.

An increasing number of people from the UK are trying to market creative schemes in Singapore, offering investments in parking spaces, hospital beds and even burial sites, observes a lawyer who declines to be named.

One especially interesting non-property- related investment scheme that surfaced early this year was called “Sure Win 4 U”. It was a scheme by a Malaysian company to get investments to fund “professional gamblers”. The guaranteed returns and bonuses were to be funded by their casino winnings. About 150 people had lodged police reports after the company’s representatives became uncontactable. The investors were reported to be a mix of locals and mainland Chinese who had invested a total of $50 million, with amounts ranging from $40,000 to $8 million.

Why are more people falling for such investment schemes? Some are of the view that the property cooling measures in Singapore are partly to blame. Designed to protect investors from speculating in property, they have instead driven investors to look offshore.

Nick, for one, had invested in several properties in Singapore over the years. However his investment appetite was curbed by the property cooling measures, he says. Last year, he not only invested in a hotel room at Ibis Lymm, but also purchased a unit in a student accommodation project in the UK.

“There is still a lot of liquidity in the market,” says a property consultant. “These are investors who have $100,000 to $200,000 sitting idle in the bank. As they can’t buy a property in Singapore with that amount, they invest in such overseas schemes in the hope of higher returns.”

Shrinking property transaction volumes in the residential market and across all sectors have also spurred real estate agencies to look at marketing overseas properties in order to supplement their incomes. Encouraged by the successful sales in some of the earlier projects that had been launched in Singapore, even more UK developers of student accommodation, budget hotels and buy-to-let schemes are finding Asian markets, and especially Singapore, fertile ground to launch their projects. These developers dangle commissions of 9% to 12% to local agents in Singapore for properties sold, says a UK property adviser. “Some of these local real estate agents could be enticed by such high commissions,” he says.

Putting money to work So, how can investors avoid getting caught in risky investments? One lawyer says they should remember the old adage: If it sounds too good to be true, it probably is. What worries him is that the majority of the investors who fall prey to such schemes tend to be “the mums and dads”. He adds: “They are not necessarily the high-net-worth investors, but they work very hard for their money, and it’s sitting in their account doing nothing. When they see 8% to 10% returns, they want to put their money to work. There’s nothing wrong with that.”

An investor who only wants to be known as Mr Wang bought two units at Ibis Lymm. He had heard about the investment from a friend who had purchased two rooms at Ibis Knutsford and then went on to buy a unit at Ibis Lymm as well. The $400,000 that Wang invested in the hotel rooms had been savings put aside for his retirement and his children’s university education. “And we need the money,” he sighs. “It’s been a burden.”

Another investor, Mr Fu, who bought two rooms at Ibis Lymm, agrees. “A lot of us had sleepless nights,” he admits. “And so, we have been communicating with each other.” The amount invested, $400,000, may not sound like a lot, but it’s not a small sum either. “We have to answer to our families,” Fu says. “We thought we could get a brighter future, but it has turned out to be something opposite.”

Some investors have found solace in banding together. This was the case for some investors of Ibis Lymm. “It’s a bit like AA [Alcoholics Anonymous] or when you have cancer and you want to get together with other cancer patients,” says Goh.

Mr Koh believes he was most likely the last investor from Singapore to participate in the Ibis Lymm scheme. The whole experience has made him more vigilant, and since then, he has begun to scrutinise property advertisements, especially those offering high guaranteed returns. “We have spent a lot of time trying to rescue our investments and to find out the truth,” says Koh. “I don’t want other investors to go through what we did.”

This article appeared in the City & Country of Issue 691 (Aug 24) of The Edge Singapore.

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