Controversial property clubs under scrutiny

Focus MALAYSIA WEEKLY ISSUE 059

THE WEEK OF JANUARY 18, 2014 – JANUARY 24, 2014

mainstream

By: V Sanjugtha

So-called experts luring potential investors to join questionable property bulk-buying scheme by offering discounts

IF investment in real estate were a game of snakes and ladders, would property investment clubs serve as the snake that makes you slide back to square one, or the ladder that propels you to win the game?

These clubs have come under fire for sparking off excessive speculation in the property market and painting a rosy picture of the investment potential of dodgy property projects.  Some quarters have called on the government to investigate the legitimacy of their operations, categorising them with get-rich-quick schemes, while others want the activities of such clubs to be regulated by the authorities.

Malaysian Institute of Estate Agents (MIEA) president Siva Shanker says the activities of these clubs are creating a demand for property that is not really there.

He says these clubs push property at seemingly discounted prices over market price, emphasising the potential upside using calculations based on maximum return and optimistic economic environments.  The risks of the investment and a situational analysis in an economic downturn are sometimes eliminated in their presentations, he adds.

“Most of them, though not all, are public speakers with questionable knowledge, professionalism, background and qualification in real estate.  Treating a few wounds does not make you a doctor.  Similarly, selling a few houses does not make you an expert.  I’ve been to these talks and their theories, calculations and logic are very basic,” he tells FocusM.

“The government must find a way to regulate them or a lot of people are going to get hurt.  All it takes is a slowdown in our economy and people will start defaulting because they can’t afford the loans in the first place,” Siva adds.

A property agent who declined to be named said other issues of contention with the property investment clubs is that the asset pushed is sub-par, and the property gurus are given commissions to sell these units to their members at a discount.

Swayed by the ease of credit and the purported property potential, some investors had the tendency to spread themselves too thin by taking on more than they can afford with the aim of eventually achieving financial freedom through passive income.  He says some even dreamed of leaving their day jobs, as advocated by some property gurus in their presentations.

He too cautions that an economic downturn would leave many straddled with loans they cannot afford and eventually lead to non-performing loans or fire sales, which could push prices down.

Probe by the authorities

Acting on grouses by the National House Buyers Association, the National Housing Department (NHD) has held discussions with several parties, including Bank Negara Malaysia (BNM), the Police’s Commercial Crime Investigation Department (CCID) and representatives of Companies Commission of Malaysia and the Ministry of Domestic Trade, Cooperatives and Consumerism.

In a statement to FocusM, NHD says its investigations found that the clubs have not breached any laws.

The (CCID) was also called in to investigate the possibility of illegal deposit taking, but the allegations could not be proven.  “Since no complaints have been received, we see no harm for these clubs to continue educating potential house buyers,” the statement reads.

Nevertheless, the government body believes that to a certain extent, the activities of these clubs have fuelled speculation in the housing industry, causing prices to rise.

It appears that the activities of these clubs fall into a legislative twilight zone.  NHD admits that the operations of these clubs are not governed by the Ministry of Urban Wellbeing, Housing and Local Government (MUHLG).  Only housing developers are governed under the Housing Development (Control and Licensing) Act 1966 (Act 118), it adds.

The modus operandi

Property investment clubs claim they merely provide “information and education” on property investment and the onus is on the purchaser to perform thorough due diligence on their personal financial position and the property they are interested in.

“If you do not know the risks involved, you should not be in the property investment game.  It is not fair to blame (property gurus); there is greed in all of us, the question is where do you draw the line,” says Adrian Un, CEo and co-founder of SkyBridge International Sdn. Bhd, a property investment club.

Un did not discount that the purchasers bought to speculate, and this was driving up the prices of houses.  But he opines that most people buy property to make money anyway, so if prices plateau, the property market would not garner as much attention.

Most property investment clubs attract the public via seminar taglines declaring instant riches through property investment.  Some of these clubs present unrealistic figures on potential returns from property investment, enticing the attendees to join their bulk purchasing schemes to achieve “financial freedom” or sign up for a lifetime membership, forking out a fee of around RM3,000.

This membership fee entitles the member to a limited number of seminars and personal consultation with “property gurus”, print materials and insights and consultation via closed group sites on social media.

The operation of these clubs are centred around the premise of bulk buying to gain handsome discounts from developers, a spin-off from the more mature property markets of the US, UK and Australia which focus on marketing property investments acquired below market value (BMV), such as new builds at discount, off-plan, distress sales and other properties.

Some of these clubs in the UK, US and Australia haven been dragged to court in the recent past for misaligned information and overpriced property while some have been reportedly dissolved as their operations fail to comply with the respective country’s Financial Services Act.

Datuk Seri Gavin Teem president and founder of property investment club SwhengTee International Sdn. Bhd, explains that discounts from developers that are passed down could be true discounts or discounts given from inflated prices.  True discounts are from the savings the developer enjoys from engaging bulk investors instead of investing in promotional activities overseas.

Tee explains that en bloc purchases allow the developer to complete construction in a shorter time, which translates to further cost savings and eases the developers’ financial burden as bridging loans will only be disbursed after receiving a certain percentage of sales.

“Also, for a margin of say 30%, the developer faces the hassle of incurring operational cost.  Isn’t it better to make a 20% margin, give us 10% and we face the challenges of disposing of the property for him?  That’s why in bulk purchases, the developer is able to give discount, because he saves a lot.”

Stating the obvious

FocusM spoke to several seminar attendees, and most were nonchalant about the operations of these clubs.  While they did not believe their operations were illegal, they did question their intention as information provided at the introductory seminars was merely stating the obvious.  Further queries were always met with prompts to pay the membership fee to learn more.

The privilege of joining a bulk-buying group is also limited to members only.  This means an interested party would first be required to pay a membership fee before they are presented with property options.  The club’s popularity is often gauged by the portfolio of property it offers, besides the credibility of its speakers.

The lure of the clubs that promote bulk buying is that the property they offer is cheaper per unit than if the purchaser were to buy directly from the developer.  However, the purchase is typically based on a set of analysis predicting handsome returns from resale or potential rents that are high enough to cover the loan repayments.

“Who wouldn’t take up an offer to buy a cheaper price than the next guy … but whatever that they are saying about the potential is true, we would not know until the developments is completed in two years,” explains Jeremy Foo (not his real name), an IT consultant who attended a seminar organised by an investment club several months back.  He declined to name the club.

Harry Tan (not his real name), who had been to the free seminars organised by three property investment clubs, says the information provided was “very basic”, covering a generalised view of the property market followed by the respective club’s success stories and presentation of the credentials and capabilities of the so-called guru.

Tan says at first it appears the club was genuine and had the buyers’ best interest at heart but further into the seminar, it appeared that the aim was to get the attendees to sign up as members for a lifetime fee, circa RM3,000.  However, the fee entitles the member to only a limited number of seminars and an entitlement to on-going consultation and tips for investment via a closed group on Facebook.

“I asked if it was possible to get a 90% loan for a third house and the speaker told me there was a trick to do it, but I have to become a member to find out,” he confides.

Tan, 31, a wireless pre-sales consultant, says the high energy level at these clubs prompt many to get sucked in.  The aim is always to buy low and sell high, emphasising speculation which the property gurus insist is a norm and “not a dirty word”.

Swim coach Louie Lim (not his real name), however, has a different view.  He has attended many property talks and finds them very useful.  He says most of the time the prices of houses based on the speaker’s analysis tally with the market rate based on his own research.

While Lim has yet to make a property purchase, he says there was no pressure to purchase assets on the spot, but options to do so are offered during these talks.  He has attended talks by Milan Doshi, an independent property investment trainer, Adrian Un of SkyBridges, Faizel Ridzuan of WTF University and Dexter Lim of Property Fast Track.  FocusM