Making a case for investing in land

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Business Times - 01 Oct 2011

Making a case for investing in land


Land-banking firm Walton says it's not like scam-tainted firms and has never lost clients' money. By Felda Chay

IT'S been a year since landbanking firms in Singapore were brought to their knees following a widely publicised scandal where one company lost its clients' money, and land investment firm Walton International Group Inc was no exception. The company, which received a flurry of calls from worried investors seeking reassurance in the immediate aftermath of the industry fiasco, has had to deal with the suspicion shrouding investments in raw land since. Type 'Walton International' into the Google search engine, for instance, and phrases such as 'Walton International scam' and 'Walton International complaints' appear.

But Walton is not like them, said the group's chief executive Bill Doherty to Singapore media, in reference to the company that had gone under with its investors' money. 'We have never lost our clients' money.' This is a point that he, and Walton's top management, reiterated numerous times during a three-day visit made in early September to the company's headquarters in Calgary, Canada, which was paid for by the company.

Lands that Walton has bought with its investors, for instance, have been sold to developers who see potential in the plots. Its investors have also been duly rewarded with returns on their investments.

According to Walton, the annualised total return for projects it exited from late 1998 to end 2010 amounted to between 5.2 per cent and as high as over 50 per cent. These numbers were audited by PricewaterhouseCoopers according to generally accepted standards in Canada.

Walton markets land in Canada and the United States, and has been in Singapore since 1996. Some 18,000 of its 74,000 investors are located here. The group is owned by Mr Doherty's family, and was established under the Walton name in 1986.

Mr Doherty said that scandals involving raw land investment firms have popped up not just in Singapore, but also in Canada. The company now has to grapple with the belief that anything which sounds too good to be true, is too good to be true; if such investments were so lucrative, companies would be better served by keeping these deals to themselves.

Not true, said Mr Doherty. Land investment firms partner investors to buy land because it allows them to free up capital and purchase more and bigger plots, widening their reach. So it makes sense to bring in investors who are willing to plough their money into land.

'We have a strong cash position,' said Mr Doherty. Walton said that it has seen a 196 per cent jump in the amount of cash held in 2010 from 2008, though it did not give figures on the actual amount of cash it is sitting on.

Unlike some of its now-defunct peers, Walton does not promise investors a handsome yearly dividend on their land investments. Instead, returns are paid out when its investors exit a project. 'The system of paying a yearly dividend doesn't make sense because holding land doesn't pay you an income. It doesn't,' said Mr Doherty. 'It is not a cash-flowing, income-producing asset, so it makes no sense.'

Scandals aside, critics of raw land investment have pointed out that it is an unlicensed product in Singapore and therefore does not fall under the purview of the Monetary Authority of Singapore (MAS). This means that investors may have few avenues through which to seek recourse, raising the risk factor of raw land investment.

Raw land investment is also an illiquid venture. Walton's investors have had to sit on their investments for as long as 19 years - the longest they had to wait to see returns from the pre-development projects they put money in. Even the shortest wait took about two years. On average, Walton's investors have had to wait about seven years before their investments bore fruit. There is also the worry that key assumptions of the land investment firm do not hold: In other words, the purchased land may never undergo development.

Mr Doherty acknowledged that the investment is illiquid, but believes that the firm's value proposition is its track record in delivering returns. 'Our track record is this: No one has ever lost money when investing with Walton if they had stuck with our programme. Our returns, on average, are 15 per cent compound after fees,' said Mr Doherty.

On raw land investment being an unlicensed product, Leslie Fryers, Walton's executive vice-president of law, said: 'There is no legal requirement for us to be licensed in Singapore.'

Also, investing in land 'is like buying a house, a piece of property', she said.

'We've certainly had legal opinions delivered to us that there is no requirement from MAS for a regulation on our product.

'It's our land that we are selling and we control it and we have very, very disciplined, very focused procedures to ensure that the purchase and sale agreements are properly registered and titled back to investors.' She added that the group gives client regular updates on their investments. Still, Walton would consider licensing its product 'if that is the way Singapore would like the product to be sold', said Ms Fryers. 'We already have the necessary processes in place both in Canada and the United States. It wouldn't worry us but from our perspective, it is certainly cleaner for the purchaser to have a direct ownership of the land as opposed to having an interest in an entity which has registration ownership of the land'.

The group also tries to minimise the risk of its land investments never undergoing development. Key to its investment strategy is strong research into the development potential of the ground it is eyeing, which takes years to complete. This involves looking into 'anything related to urbanisation', said Walton's executive vice-president of land research and acquisitions, Sean Cooney.

'Market statistics, political analysis, environment analysis, financial analysis. You name it, we are researching it. It is a very comprehensive view. The job is done on the ground in the truck. You can read any spreadsheet, you can read any headline, but if you're not in your truck looking at how the market is growing on a day-to-day measurement, you are completely oblivious to that market,' said Mr Cooney.

Thorough research

People and groups that Walton talks to as part of its research include landowners, bankers, real estate brokers, engineering companies and law firms, basically 'any group that is an active participant in development', said Mr Cooney. 'If you talk to enough people over a period of time, usually two years, you then get a sense of the long-term vision of growth in that area'.

Walton has spent between two-four years researching each piece of land it purchased, a process that has cost the company up to US$2 million annually, said Mr Cooney. It is such a lengthy process because the firm tries to talk to every single individual living around the area it is keen to own, to ensure that everyone's plans are in sync. 'If you buy one piece of dirt you need to understand what all the neighbours want to do over the long term with their lands,' said Mr Cooney. 'You buy land in a community context you need to understand everyone in the community.'

Once the research team gives its nod of approval, the decision on whether to plough money into a plot falls on the shoulders of Walton's executive buying committee, which has the final say on a purchase. The additional check and balance is meant to ensure that the land can be planned and will be developed eventually.

There were times - and more often than Mr Cooney likes - when the committee decides not to go ahead with a purchase despite the research team's endorsement. According to him, 20 per cent of the pieces of land brought to the buying committee do not get the green light for purchase. He believes that these land parcels ultimately failed to gain approval because of Walton's very stringent standards.

'And that in itself reduces the risk of our investment,' said Mr Cooney. 'It protects Walton, it protects the investors, it protects the various entitles through which we hold these investments under.'

feldac@sph.com.sg

My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
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