Tuesday, July 15, 2008

Walton Landbanking

Walton & Landbanking - A Worthwhile Investment?

Investing in Landbanks like Walton is a risky proposition at best due to the lack of independent studies of the viability of the such investments. That is why they have to offer high returns (like doubling your money - again, no independent verification by independent third parties on such returns). You won't find any such information on their website as they claim that they don't want their competitors to know what they are doing (sic).

I attended the Walton Singapore talk under another friend's name recently, and was very disappointed that the Walton seminar revealed nothing new that would make make me want to plonk $10,000 for a unit of their "prime raw (agricultural) land".

CIMB-GK Singapore Head of Research, Song Seng Wen, who gave a general talk about the investment climate at this Walton seminar, disappointed the audience by not opening the floor for questions and answers. The main reason many people, like me, attended the Walton seminar was to find out his opinions about land banking or Walton. Anybody knows Song's personal views on landbank, please share it with us (you smart readers can probably hazard an educated guess!).

After the talk, the doors were closed and the audience (most of them young Singaporeans who probably have never experienced a bad investment yet) were herded like sheep into four cocktail reception areas where they were subjected to hard sell by sales people.

If you would like to know more about land banking, be sure not to attend such seminars. Ask your sales rep to meet you at your local MacDonalds or Starbucks joint so you can walk away if you are feeling uncomfortable about the investment.

Reasons why I won't be investing in Landbanking:

Lack of Regulation

This type of investment is not regulated by the Monetary Authority of Singapore (MAS) so if anything happens to your investment, there is no recourse from government agencies. This leaves you with only the expensive option of suing the landbank company or making a complaint with the Consumer Association of Singapore (CASE). [NOTE: CASE will only take legal action if there are 20 or more complaints by the public.]

If you had invested in Timeshares or in Sunshine Empire, you would know what as hassle it is to go this route. Please don't get me wrong, I am not saying land banking is a scam or fraud but the risk could be great - that is why they have to cite examples of previous high returns on investing in landbanking. If it is a risk-less or low risk investment, there is not need for them to give you high returns.

Lack of Transparency

As there are no independent bodies or published reports, it is difficult to say if you are getting a fair deal i.e. are you paying a high premium for your "prime land"?. If the land sold to you is expensive, your profits may be very low or nothing at all. There are also no published data on whether investors made or loss money in such land bank investments.

Lack of Exit Plan

Although these landbanks, say that the land purchase are usually sold in 6-8 years (past returns are no guarantee of future returns), they are unwilling to give any guarantees - even for a longer time period of 10 years or so. The paucity of independent reports make it difficult for you to determine when you can realize your profits from your land bank investment.

Why choose something you may not be able to sell in a foreseeable future when there are so many viable opportunities available elsewhere e.g. stocks, Singapore property etc
.? Also, don't expect your Singapore banker to accept your landbank purchase as a security for bank loans.

Factors that that can delay the realization of profits are:
  1. you've purchased the landbank at a high price and there are no buyers for a long time
  2. the area you have purchased is not longer favored by developers
  3. a long recession put all development plans in the area on hold for a long, long time
  4. the launch of too many landbank properties (at least one project is launched by Walton every month)
  5. de-population due to lack of economic growth in the region or competition from other regions with higher growth rates.
Remember America, Canada and even UK are very big countries, unlike Singapore. There will always be land for expansion when land prices go up.

Long Holding Period

Your money is tied up for a long time. If you need the money back urgently, you may have difficulty selling it. As we have found out in timeshare investing, other buyers may not share your enthusiasm in such unfamiliar investments.

Land banking is hot at the moment, but there is not guarantee is will be as hot in the future. If it is so hot, why do these promoters have to go half way across the world to sell their properties? The local (American) people will snap them up if they are a sure win preposition. Certainly mutual funds and REITS will invest heavily in landbanking companies if it is such a good deal.

Hard Selling Tactics

Any investment that requires hard selling by very experienced and often aggressive salespeople usually means that high commissions are involved. High commissions put a cap on the profit you can make eventually.

Hard selling also means that it is not easy to sell such products over the long run if it is not a basic need.
It is very hard for a buyer to do due diligence when the sales people are telling you that the property is going fast and you need to make a decision quickly before the land bank is "sold out".

Also note that if you have bought two landbank properties from two sales persons in the same company at different times, you will have to liaise with the 2nd agent on any follow up matters related to the first landbank purchase. The first agent won't follow up or keep you informed about the first landbank investment you bought from him or her.

Status of the Company

In the end, whether your land bank investment succeeds or fails depends on the company's financial health and how responsible the company in handling their investment portfolio. If the company made a bad investment decision, you'll end up having to pay for the landbanker's mistakes.

If these land bank promoters buy too much land and are unable to sell them quickly, they will soon have liquidity problems leading to bankruptcy. There have been cases where some landbanking companies in UK have closed down and Singapore investors have yet to get any of their money back.

In November 2006, UK landbanking company, Land Heritage (UK) closed down after an investigation by the Financial Services Authority. Its 700 investors were not refunded.

The people who say that land prices will always go up are the same kind of people who said that stocks & property always go up. There are always market cycles. This means there is an opportunity cost (loss) if you invest at a wrong time.

How Risky is Investing in Raw Land?

According to Jordon E Goodman in his best selling book "Mastering Your Money Type", Jordon says that investing in raw land is a high risk investment in the same category as Futures, Options, Warrants, Small Cap Growth Stocks, Junk Bonds, Hedge Funds, Venture Capital and other exotic speculative investment vehicles.

Capital Gains Tax
The Canadian govt imposes a 26% capital gains tax when the property is sold.

Should You Invest in Landbanking?

Yes, if you are a speculator with lots of money and don't mind taking a big hit for the opportunity of doubling up your money.

No, to others. Stay cool while others are losing their heads - invest in things you really understand and have more control of (Warren Buffet). You'll probably sleep nights better too.

Is this the right time to buy landbank property in the USA because of the depressed property prices due to the Sub-Prime Crisis?

It depends how much Walton or any other landbank promoter had paid for the property and the kind of premium you are paying for it. These promoters, being smart business people, are certainly not going to be revealing that kind of price sensitive information to you!

Finally, Here are some advice from Property Professionals:

Colliers International managing director Dennis Yeo said investors should do their research before putting their money into the investment. He said: 'The potential of the land is Walton's selling point. But the risks for investors who want to make a profit within the five years is whether there is a resale market for individual plots especially when the company may already have ample lots for sale.'

'The key question is how much the land is worth. Do you have enough information to tell you that the land is actually worth what the company is trying to sell you?' he added. Still, Mr Yeo said the scheme will work if every investor stays in it together, developers are interested to buy every single plot and the land eventually appreciates in value.

Property consultant Chesterton International associate director Nicholas Mak said although it is good to diversify, 'risks may arise from a lack of comprehensive information on that part of the world'. (The Asian Pacific Post, 4 Dec 2003)

Now that is a lot of "if's" and "but's" which all translates to risk and the probable time horizon for a happy exit from this investment.

So invest wisely, especially if you are nearing your retirement age. Don't let get-rich (quick or slow) "new age" investment schemes endanger your financial health.

Post Article Comment - Nov 2009:

Much has happened since this article was written in July 2008. We're seen the Sub Prime crisis snowball into a full blown Credit Crisis (of Oct 2008) resulting in the collapse (and trillion $ bailouts) of banking and insurance giants in the US and Europe. It was the worst financial crisis since the '20s Great Depression resulting in slumping property prices and the depreciation of the US dollar right into 2009 and possibly beyond. Who says property prices goes up all the time? Even if property prices goes up, you can still lose if the US dollar loses its real purchasing power viz a viz other currencies including the SGD.

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Bank Negara Raids Walton's Malaysian offices

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1 comment:

Unknown said...

Walton is wildly profitable for Walton and its sales reps. The return for investors is questionable, completely unknown and the timelines are 15 to 20 years or more given the inflated prices Walton paid in 2006 to 2008 before the market changed in the US.

Proceed with extreme caution.

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