Unregulated overseas property investmentsFebruary 18th, 2013 by Dan Woodruff, Certified Financial Planner with Woodruff Financial Planning
Have you ever been approached to invest in a foreign development, which offered fantastic ‘guaranteed’ returns? Often these are unregulated overseas property investments. In our view these should come with some serious health warnings. Thankfully, the Financial Conduct Authority is now trying to do something about these investments. This article is for you if you are tempted to invest in unregulated overseas property investments.
- What are unregulated overseas property investments?
- The risks with unregulated overseas property investments
- The Regulator’s stance on these investments
- Harlequin property
What are unregulated overseas property investments?
These investment schemes are usually promoted by slick sales practices. They often offer the allure of an untapped overseas market, with the promise that if you get in early you can reap the benefits of lower prices now, selling for a high rate of gain later. There are many risks associated with such schemes.
Most of these schemes focus on developing property abroad, although there are many types of scheme which can involve quite exotic investments such as plantations.
The risks of unregulated overseas property investments
Since the schemes are not regulated, you will not be able to call on the safeguards guaranteed to you by regulated schemes. See our article on how your regulated investments are protected. This means that you have little chance of getting your money back if something goes wrong with an unregulated investment. Of course you can sue the provider, but it is likely that if something goes wrong they will be out of business, and worse, abroad. This would also be an expensive process.
We feel that all clients should have the protection provided by regulation, and so do not recommend unregulated investment schemes.
The fact that your investment is overseas will mean additional risks. For example, you will not get to see the investment since if could be on the other side of the world. The investment will be subject to a wide variety of variables such as overseas legislation, tax, political uncertainty, currency fluctuations and even the weather (think hurricane season!). Unregulated overseas property investments can mean big gains, but can also lead to large or total losses.
In our view it is nearly impossible for us to advise clients on such schemes since we cannot undertake the due diligence necessary. We advise clients to avoid such schemes.
The fact that your investment involves property could make it sound stable. However, it is usually the case that the scheme involves buying ‘off-plan’, which means that you invest to pay for the developers to build the properties. This involves greater risk, and the project could run into unexpected costs, which cause delays. If the developer runs out of money, where will this leave your investment?
The Regulator’s stance on unregulated overseas property investments
The UK Regulator, the Financial Conduct Authority, has recently taken the step of warning advisers and investors about these unregulated overseas property investments. They warn that many financial advisers have been recommending that these investments be funded through regulated pension schemes such as SIPPs. This makes the investments sound safer and more legitimate, but this is not the case. In fact many SIPP providers refuse to deal with such investments. If you have dealt with a financial adviser over such transactions it is possible that they will not have performed their duties in the way expected by the Regulator, and could face sanctions.
The provider most in the news recently has been Harlequin property, since they are now subject to an investigation by the Serious Fraud Office and Essex Police. Harlequin property has now gone into administration, blaming the poor publicity. Harlequin property operates a number of different unregulated overseas property investments, mainly in the Caribbean and Brazil. We have had experience of approaches from local Harlequin agents, who made claims to us which we would never be allowed to make as Regulated advisers.
The premise of the scheme was this. You would invest in a large hotel complex in the Caribbean while it was still in the development phase. You could do this by putting down a small deposit, with a further 30% payment to come later. Harlequin could find you a US mortgage lender, which would guarantee you a loan. You would then pay the loan from the proceeds of the rental received (less Harlequin’s share), and Harlequin would even guarantee to pay the loan repayments for a period. The rent received would be guaranteed by Harlequin.
We questioned whether you would want to invest British pounds in a Caribbean property, which had not been built. The money for this could come from a loan from a US bank, paid in dollars. The income would be subject to rules of another country you did not have any knowledge of, and tax in this region. The property would be split into many parts with you owning a small proportion and no control. We questioned whether you would actually be able to sell your stake at a later date. We were also concerned over what liabilities you would have if the scheme ran into delays (and the rental income did not materialise), or the bookings did not fill up all the rooms. We questioned why the owners not simply borrow the funds necessary from a bank?
The way that these schemes were promoted raised alarm bells. The promoters we met were unregulated, and inexperienced in investments and risk. The sales agents would make outrageous claims about the safety of the investments, and the guarantees involved. In our view they potentially gave financial advice to consumers without any reference to the procedures regulated financial advisers must follow, probably without realising they were doing anything wrong. They would focus on the glamour of the locations rather than the details of what could go wrong, and would back this up with recommendations from former footballers. Would you take financial advice from a footballer?
We were approached by some people to ask us if these seemed like suitable investments. Our advice was to steer well clear, given that there were so many aspects which could go wrong and would mean you would not get your money back. Of course, we could be wrong but these investments seemed too risky for the average amateur investor, and should really only be for the very experienced and wealthy investors who could afford to lose a small proportion of their wealth to such a speculative scheme.
Our approach has been validated by the FCA’s recent stance, and reports in the press to say that Harlequin seems to be failing to meet some of its obligations, and the developments have been hit by delays.
Photo credit: Flickr> openDemocracy
Tags: fca, financial conduct authority, financial services authority, financial services compensation scheme, fsa, fscs, harlequin property, invest abroad, investing abroad, overseas property investments, serious fraud office, unregulated investments, unregulated overseas property investments