Yahoo carried an item guest contributed by Mr Getty Goh, "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".
Read it at: http://sg.finance.yahoo.com/news/spot-overseas-property-scams-131730522.html
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?