Last Updated on 16, October 2014
Monetary Authority of Singapore (MAS) sends shockwave to the land banking industry in Singapore by issuing a consultation paper entitled “MAS Proposes Stronger Safeguards for Investors” to regulate the largely unregulated industry. It is quite a surprised to everyone since it is assumed the authority does not want to regulate land banking in Singapore. What is land banking?
The Land banking in Singapore offers investors the opportunity to invest in real estate at different phases of development. Two main products which I have seen in land banking offered to Singapore residents are the investment of raw land in a foreign country in hope of obtaining favorable zoning permits for development and the investment in the development of property. Countries which investors invest in are typically in Canada and United States. In recent times, I have seen Brazilian properties as well. Typically returns promised are quite extraordinary even after factoring in taxes and commissions.
A number of companies that does land banking in Singapore have collapsed either due to fraud or financial difficulties. I recall that I was approached to distribute a land banking product in 2009 for a company called Edgeworth which eventually collapsed around 2013. Fortunately, due to various reasons, I did not distribute it.
In the most recent case reported by the media is EcoHouse Group which sold Brazilian properties and it has been placed on MAS Alert List. Of course, to be on MAS Alert List does not mean it has broken any regulatory law and that is why MAS has decided to regulate investments that have characteristics of a collective investment schemes.
Land banking in Singapore proposed to be classified as collective investment schemes
Although the Monetary Authority of Singapore does not use the word ‘land banking’, the example provided were obviously referring to land banking. I reproduced the example in the consultation paper:
3.16 Arrangements in which investors are offered fractional interests in undeveloped land, and are required to use the scheme operator’s services in obtaining planning permission for or disposing of the land as a whole (or both) are likely to be a CIS. This is because individual investors do not have day-to-day control over the planning or disposal process and the purpose or effect of arrangement would appear to be to enable investors, as owners of parts of the land, to receive profits arising from the scheme operator’s services in obtaining planning permission or arranging disposal in respect of the land as a whole.
Some of the operators in Singapore do not sell raw lands. Instead, they invite investors to co-invest as developers in condominiums and housing projects. Under the proposed amendment to the Securities and Futures Act, such schemes will be classified as collective investment schemes.
What will happen when land banking is classified as a collective investment scheme?
Once it is classified as a collective investment scheme, land banking companies in Singapore have to comply with the Code on Collective Investment Schemes and managed by a licensed fund manager who is fit and proper.
Licensed fund manager who manages retail schemes are required to have a $1 million in base capital. This will immediately cause many land banking companies in Singapore to go out of business. Moreover, such licensed fund manager would need to obtain Capital Market Services License which is an extremely difficult license to obtain.
But the main reason why the land banking industry in Singapore will go out of business is because the Code of Collective Investment Scheme requires these schemes to have at least one dealing day a month. Typical land banking investment is a long term investment which can span across many years.
Only the strongest land banking companies will survive
From what I see, only the strongest land banking companies will survive in Singapore. They will have the resources to meet the necessary regulation. As for the monthly dealing problem, this is still possible by using derivatives. Of course, counterparties like the investment banks will only work with reputable and established land banking companies.
However, existing land banking salespersons will be in for a rule shock because they have to be converted to become financial advisers. They will have to sit for all the examinations, get themselves to become Appointed Representatives, attend endless training (which would take up 90% of their working time) and spent 50% on endless paper work such as FNA, Risk Profiling, CKA, AML, PEP, FATCA and the dreaded BSC to be turn on in 2015. Did I mention a failed CKA is only for one month? Wait a minute, 90% + 50% = 140%. Did I get my arithmetic right? It just means they have to work overtime. How about time to do prospecting and sales? Don’t have.
Implication for existing and potential land banking investments
Potential land banking investors should wait and see. Once the regulation is in place, majority of the land banking companies in Singapore will no longer be around. Players which will remain are likely to be legitimate operators. You likely can buy (regulated and legitimate) land banking products from any independent financial advisers.
For existing land banking investors, you can only hope the operator you bought your product from will continue to function since redemption can only be made through the same operator. In contrast, the direct owner of a real estate can always sell his property independent of the operator through any licensed real estate salespersons.
That is why it is always better to stick with traditional real estate.
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