Today’s Straits Times report entitled “200 lose $6m in British land deals” which apparently these individuals in Singapore were sold plots of land zoned as “greenbelt” – which means no development is allowed.
When MAS was asked about the fiasco, this was what the spokeperson said:
“Land-banking investments involve investors acquiring direct interests in real estate rather than in securities related to real estate and, as such, fall outside the scope of the SFA and FAA.” – Spokesman for Monetary Authority of Singapore referring to Securities & Futures Act (SFA) and Financial Advisers Act (FAA).
Because MAS only regulates products defined as “securities” under legislation, anything that are not “securities” are unregulated. I have pointed out this loophole countless times in my blog like a tape recorder that this is a major loophole. For instance, what is the difference in buying 100 bottles of wine compared with buying a collective investment scheme unit trust that buys a portfolio consisting of a diversified range of wines? The difference is that the latter has to be regulated by MAS while the former is unregulated. Many companies have taken advantage of this loophole by ensuring that they do not give an impression that the investments are securitized.
For real estate like raw land, how will it become a security? From what I see, the only way which a real estate can become a security defined under the SFA is that it becomes a collective investment scheme (CIS). A CIS or a unit trust is a fund which allows investors to pool their monies together. The unit trust would than buys the raw land. Individual investors will have no claim on specific plot of land as their claim is based on the number of units issued to them from the fund manager. The fund manager will be able to buy and sell the underlying raw land without seeking permission from individual unit trust holders. Unit trusts holder minimum investment amount will also be reduced significantly. However, the catch is that since this is a CIS it will be regulated by MAS.
Since raw land can potentially requires large capital and leverage is generally not available (unlike commercial properties), some innovative scheme has to be developed to reduce the capital size required and at the same time allowing the land banking company to make investment decision for all investors. I have seen how one land banking gets around this but I am not referring to Land International Far East. One of my client bought raw land in United States via the Singapore office. I have seen the documents. What the land banking company did was to specifically spell out the exact location of the land and the physical dimension of the land. The specified plot of land is placed into a trust. In the trust deed, it appoints the client (settlor) to be the Trustee. The primary beneficiary of the trust is the settlor himself. However, the Trustee would give the reserve power of investment (the power of attorney) to the land banking company so that the company can continue to make investment decisions. Also to avoid complication, the Trust Deed permits secondary beneficiaries in case the primary beneficiary (the client) dies. In this way, it avoids probate and those messing things which can cause problems. If it sounds expensive to you, no it isn’t very expensive as the plot of land only cost US$20,000 inclusive of the trust. But since the Trustee is the client himself, there is no need to engage any third party professional trustee to manage the trust. Therefore, there is no trustee setup fee or annual fee (or perhaps it was already embedded into the cost of the land?) Actually there is nothing to manage since the power of attorney is given to the land banking company. By doing this it achieve the two objectives: (1) The land banking company is able to make investment decisions for all investors since all investors give the power of attorney to the company and (2) lower minimum investment sum that can be achieved by issuing small plots of land. These are also the two advantages of a CIS. As it can be seen, that this totally avoids giving the impression that the land is a “security” and thus remains unregulated by MAS.
As more and more innovative alternative investments emerges and if the definition of “securities” are not updated, there will be more and more investment products in Singapore that will not be regulated.
But before anyone thinks that regulated products are safe, I am sorry to say that this is not so. For example, advise on futures contracts and leverage foreign exchange trading is a regulated activity under the Financial Advisers Act. Yet, you can see seminars and personal coaching conducted by companies and individuals on FX and CFDs who do not hold the necessary financial advisory license. Why? Go figure.
So, what is the lesson here? Do your own diligent. If you do not know how to do your own research, you can always engage someone who can. Although I refuse to recommend unregulated products, the fact of life is everyone is always getting prospected all the time by other salespersons. Hence, they still need someone with an independent opinion on whether the investment is worth the risk.
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