Court battle and legal nightmare for Singaporean property investors after Malaysian developer went bust; Beware of pitfalls in overseas property markets

Court battle after developer went bust

Tuesday, Jun 03, 2014

Rachael Boon

The Straits Times

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Buying a home in Johor Baru was the beginning of a nightmare for a corporate trainer who wants to be known only as Mr Ahmad.

He is one of a group of Singaporeans who bought double-storey terrace houses in Jalan Permata in 1998 for around RM330,000 or more. These were 100 per cent paid up and the buyers received vacant possession.

The developer of the 136-unit Taman Permata went bust in 2000 and the developer’s bank won a court order from the High Court in Johor Baru to auction off its property four years ago. It also ruled that the houses were part of an abandoned project. The owners tried to appeal against the court’s decision, but were unsuccessful.

The bank wanted buyers to pay another 15 per cent on top of what they paid for their houses to obtain their title deeds.

The court application to auction the houses took eight years, during which buyers tried to intervene, but it was approved in 2012.

Mr Ahmad and nine others were not prepared to give up and continued to pursue the matter by lodging a police report the same year. They also obtained an injunction in July last year to stop the bank from auctioning off the 10 houses.

They are currently suing the bank and other parties to redeem their houses. The case is ongoing.

Mr Ahmad says: “The fact is, the processes and laws governing home ownership are very different from Singapore’s. I’d discourage people from putting their money in there because the way things are going there, you’re very much left at the mercy of others, such as commercial companies or banks.”

He learnt that Malaysians were trapped in similar situations, through news reports and the Malaysian National House Buyers Association. “Unfortunately in our case, we did not check the background of the developer and were not aware of procedures at that time. The developer came to Singapore to launch at Junction 8 mall so we thought it must be reputable back then.”

He warns: “Don’t get too caught up in the excitement. It sounds affordable but don’t be so easily taken in. It’s a very expensive and painful lesson, and I hope other Singaporeans will be careful.”Still waiting for refund of deposit

Even as you sign on the dotted line for your foreign property, nothing is necessarily guaranteed as some Singaporean buyers have found out the hard way.

Retiree Lin Weiliang and a few other Singaporeans were all set to buy units at Kool Residence on Bangkok’s Sukhumvit Soi 39, which is in a glitzy area.

Mr Lin, 57, visited the site and later signed a sales and purchase agreement in October 2007, making an initial payment of the equivalent of $53,139 at exchange rates at the time, for a studio unit.

The project was marketed in Singapore by L&A Group and the agreement showed that the developer was Arion Assets.

Kool Residence was slated to be completed by the end of 2008, but there was no news.

Mr Lin found it suspicious and wrote to the marketing agent and developer. He eventually heard from the agent that the property had been sold to another owner.

“We went and chased after them. After a lot of to- and fro-ing, they (the Thai agent) promised to refund us, in an e-mail in 2010,” he says.

Mr Lin has not received a refund of his deposit since, while a fellow buyer, a businessman who wants to be known only as Mr Goh, managed to get back his deposit after years of chasing L&A and the Thai agent, a company called Harrison.

Mr Goh, 62, says: “I went up to Harrison, it has a very nice office and they claimed to have cash problems, but promised me they will pay me.”

He was persistent, flying back and forth each time he was told he would get his refund. He waited in the office for hours.

This went on for a few years and finally, in February 2012, he recovered his deposit in full. So at least his foreign property nightmare ended without financial loss – if you don’t count all the flights.

Mr Goh says: “We thought it’ll be okay but didn’t know it’ll turn out that the Singapore representative would ignore us. In the first place, something is wrong with the system. Why allow them (agents) to advertise in places such as Marriott Hotel back then?

“It looked so nice and the presentation was so good. We wanted them to reveal the other buyers’ names. I think there were about nine or 11 but they didn’t want to. They didn’t do the right thing.”

Mr Lin says: “It’s been so many years already. I’m not very hopeful about getting back my money. Even if I can’t get it back, at least our story is heard by others.

“The local agent told us the matter had nothing to do with them as they were only the marketing agent. But they should have at least arranged for us to meet the Bangkok counterparts.”

He has learnt not to depend solely on marketing agents, and there are various risks when buying property in a country where you don’t speak the same language.

“The property was affordable and in a nice address, the launch was grand, which gives you the added confidence. In hindsight, it’s important for you to go to the country and talk to the developer. The marketing agent can’t do very much.”

rachaelb@sph.com.sg
This article was first published on June 01, 2014. 
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Beware of pitfalls in overseas property markets

By Yasmine Yahya
The Straits Times | Tuesday, Jun 03, 2014

It’s no surprise that alarm bells are starting to ring over the huge amounts Singaporeans are pouring into property overseas.

An estimated $2 billion was invested last year alone as local investors looked for returns in foreign fields that promised more than the increasingly regulated market here.

The Monetary Authority of Singapore (MAS) has warned potential buyers to take note of the risks before taking the plunge into real estate overseas.

The Council for Estate Agencies also recently published an online guide highlighting the main pitfalls.

And indeed, there are pitfalls in every step of the property-buying process if you are dabbling in an unfamiliar market. Budgeting

Many Singaporeans who have turned overseas for real estate investments are doing so because cooling measures introduced over the past few years have made it more expensive to buy properties here.

But eager buyers can be easy prey to the glitzy adverts and marketing material that promise big discounts, fee waivers and high or guaranteed returns.

The CEA warns in its online guide that this is a common pitfall.

In some cases, it notes, discounts in the purchase price and guaranteed returns or rental rates have already been factored into the final price and costs a buyer has to pay.

Buyers should ask for evidence of high returns, such as investment reports from independent and credible sources.

They should also ensure that these guaranteed returns and any fee waivers or financial incentives are included in the final sale and purchase agreement.

Some buyers forget to take into account other miscellaneous costs.

United Overseas Bank’s head of secured loans, Ms Chia Siew Cheng, says: “When doing their sums, buyers should consider the different taxes applicable such as capital gains, income or inheritance tax, as well as property maintenance and miscellaneous costs, including fire insurance and tax consultant fees.

“If they are renting out the property, buyers should also consider the fees required to appoint a good property management agent.” Furthermore, they should note the potential shortfall between rental income and expenses when planning their cash flow, she says.

Investors should also be aware that the required down payment on overseas properties may be up to 20 per cent or even higher in some countries, Ms Chia notes.

Although the balance sum is payable only upon completion of the property in certain countries, buyers should ensure that they are eligible for a loan if they decide to hold on to the property.

The total debt servicing ratio framework, which caps a consumer’s total debt obligations to 60 per cent of his monthly income, applies to overseas property purchases as well, so buyers should assess their eligibility for a loan before making a commitment, she adds.

Alternatively, they should ensure that they have sufficient cash to make full repayment.

Choosing the right agent and developer

Marketing material and showrooms are designed to attract buyers but they may not reveal much about the developers behind the project.

Before making a bet on a property, buyers should do their research on the people behind the development, says Ms Linda Lee, DBS Bank’s executive director of deposits and secured lending.

“Study the track record of the property developer by checking on the previous projects developed. Ascertain if those projects had been completed by the stipulated timeline and with the promised quality.”

ECG Holdings chief executive Eric Cheng agrees, saying that Internet forums are a good starting point for investors to find feedback from other buyers about any developer’s past projects.

But investors should dig deeper too. Sometimes, Mr Cheng warns, the developer you are buying the unit from might not even be the project’s actual developer.

“In some markets, such as the Philippines, the developer of the project might sell the units to 10 different sub-developers who would then sell the units on to the market, so you might not be buying from the original source,” he says.

To find out the actual owner of the site, he advises asking to see a copy of the caveat from the agent.

Choosing the right agency is also important, he adds.

Some agencies tie up with foreign partners to market a project. Buyers find that once they have signed a sale and purchase agreement, a foreign agency then takes over as their new point of contact.

“I have heard of cases where, three years after the purchase, the partnership agreement between the local and the foreign agencies has lapsed and the foreign agency has in fact shut down so the buyer is left without representation at all,” Mr Cheng says.

In such cases, the buyers would have to hire lawyers to represent them, which would incur more costs.

To avoid that situation, he says it may be best to go with an agency that has its own staff in the foreign market.Foreign exchange, interest rate and other financial risks

Here is a quirk of buying property: Buyers often visit showrooms on weekends but financial markets are open only from Mondays to Fridays.

What this means, Mr Cheng says, is that buyers often calculate their purchases using slightly outdated foreign exchange rates. “If let’s say there is a big movement in the forex rate when the market opens, the price of the unit could shoot up by as much as $20,000,” he says.

And these forex rates could also work against the investor after he has bought his unit.

If he buys a home in Malaysia and its value appreciates by 50 per cent over five years, but the value of the ringgit depreciates against the Singdollar by 60 per cent over the same period, he will effectively make a 10 per cent loss on his investment if he sells.

DBS’ Ms Lee notes: “If the buyer takes a loan in his local currency, he would be less affected by foreign exchange fluctuations.”

Borrowers should be prudent and take potential interest rate increases into account when establishing their budget, she adds.

As interest rates rise, the mortgage repayments on their home will also increase. If this has not been factored in at the point of purchase, the buyer will find himself over-extended.Understanding foreign rules

Simply put, different markets have different rules and these can change.

The CEA notes that in Singapore, the lease period is commonly defined as 99-year leasehold or freehold. Other markets might define these periods differently.

Taxes also vary from country to country. Some markets levy taxes on foreigners buying a property, some on the sale of the property. In Malaysia and Hong Kong, for example, investors have to pay a capital gains tax on the profit they make from any sale.

There might also be property taxes for owner occupation or when the property is rented out.

Stamp duties, withholding tax and estate duty might be imposed as well.

There might also be restrictions on ownership, Mr Cheng says.

“In Thailand, for example, foreigners can buy only 49 per cent of the units in a given project so your choices can be limited,” he notes.

“In Australia, buying is easy but when you want to sell, you can sell only to locals because foreigners are not allowed to buy resale homes.”

The CEA guide also notes that buyers should pay careful attention to any restrictions on the use of the property they plan to invest in.

Some properties, for example, are solely meant for student accommodation so the buyers would not be able to use them for their own stay – unless they are students.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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