Loss of 99.3% investment in Landbanking

Overseas landbanking as an investing trend was popular in the late 2000s in Singapore and may now be forgotten by many. 

One can read more about it here. 

My parents are one of the unfortunate investors. Being like most Singaporeans, a free lunch buffet at a nice hotel is attractive, thinking that one has the will power to resist the hard sell tactics. 

I wouldn't go as far as to say this is a scam even though this company is on the MAS investor list but as a general rule of thumb, if something is too good to be true and have to be sold very hard with nice accompaniments, run far far away from it.

Long story short, the land they bought was a Greenbelt land ( basically land designated by policy to be undeveloped and generally used as agricultural land to control urban growth.) 

Investors will make a windfall  if this land is rezoned into productive land use like for residential or commercial purposes. 

There has been cases when such conversion has occured but the problem was, the probability of this happening is extremely, extremely low and it was basically a high risk investment premised on hope. 

Long story short, after 11 years of holding onto this plot of land which they bought at a price of $27,000 from Jardine Smith Singapore, the UK government decided one fine day to compulsorily acquire this land to build a high speed railway line . This project is called HS2. This is a planned high-speed rail network initially set to link London and the West Midlands, with a further phase extending to Manchester and the East Midlands.

Guess what? 

The compensation was a measly $171. From $27,000 to $171. A 99.3% loss of capital. And mind you, this was after 11 years of holding and one would think land would have appreciated.

Lessons to be learnt.

If an investment needs to be hard-sold, the commission or profit margin should be sky high.  If this plot of land is $171 ( actually $342, more of this later) now, it was purchased at $27000 11 years earlier, one can see that the "free" buffet is actually an expensive one.

Sub-divided small plots do not add up in value to large plots. The UK government stated that the valuation of the land is actually further halved compared to if it was valued as a larger piece due to the administrative cost of having to deal with many small land owners. Hence, the original valuation by the UK government was $342 but reduced to $171 due to it being a small parcel of land.

Negotiation is basically futile as the UK government would want the plot owners to engage property agents to negotiate and cost is to be borne by the plot owners. Who in the right mind would do that for $171.

I guess the only upside to this is that the UK government has said they would pay for any necessary , reasonable cost to engage a lawyer to effect the transaction of the compensation but this is still up in the air as they have not replied what reasonable cost means. Imagine trying to get a reimbursement on such fees and they then deem it as unreasonable and one would be effectively out of pocket and wasted time.

One other possibility is to gather all the plot owners together to probably explain to the UK government that the administrative fees are now reduced for them as they are now dealing with a larger land area instead of smaller land parcels but it is nearly impossible due to PDPA issues and the gain is at best another $171.

The Perils of Investing through a very hard selling agent!

The single most important factor for Reit investing

I have probably only broke even or made a little over 6 years of investing in reits on a total basis, meaning including the dividends. This is a bad outcome. We don't have many 6 years of experimenting. 

Upon reflection, i realize that investing in reits is really about trusting the people managing the property portfolio are good at their jobs and most importantly, having as little of the principal-agent problem as possible. 

In my opinion, reits suffer a lot issues related to the principal- agent problem as the underlying properties are rather illiquid and the range of valuation of a property can be very wide and rather subjective. Unit trust ( and for the matter all investments) do have such agent issues too but since the underlying are securities traded on exchanges, there is more transparency in a sense. The more opaque or illiquid the underlying in, the more such agent issues arise.

Principal agent issues related to reits are aplenty with some examples as follow:

• Property is acquired at a high price from sponsor, with rental support given by sponsor to increase the property yield, hence book value is increased. 
• Properties are being bought and sold frequently with transactions being the primary focus as reit managers get acquisition and disposal fees. 
• Reits being the dumping ground of sponsors. 
• Reits managers focus on increasing the asset base as their management fees are a percentage of the assets managed. 

I think it is a given that most, if not all reit investors, invest in reits for their distributions. More specifically , distribution per unit      (DPU).

The effect of sub-par reit managers will certainly tell over time with DPU decreasing. 

Hence, the single most important factor is to select reits whose DPU has shown an increase over time.

Even though i have lost money in reits, i still believe in it as a good asset to have for retirement but being selective is important. 

I have heard many feedback that reits are bad for retirement because of the many rights issues. If one do not have the spare cash, one will be diluted. The Supplementary Retirement Account,especially, gets a lot of flake for this due to the yearly contribution limit. 

But what is the problem with being diluted if the rights-funded acquisition results in an increase in DPU?

In the end, it all boils down to the DPU.

To be clear, reits are leveraged investments and not all rights are for acquisition purposes. In the Great Financial Crisis of 2009, most rights were used to shore up the balance sheet and not for acquisition. Having a large chunk of reits as a percentage in retirement is quite risky.

I have complied the DPU of reits over the years. The DPU is based on date payable. The page can be found here.