Monday, July 7, 2014

Investment Risk - EcoHouse

Just read in today ST that MAS has flagged Ecohouse under its MAS watchlist. Previously Shenton Holding etc was also flagged similarly. The recent action by MAS is triggered by some investors complaining that they could not get back their capital upon the maturity of their contract in the investment of some Brazilian low cost community housing development project. The deal was to promise 20% return per year on a fixed capital outlay over one year that was subsequently extended to three years.

According to the ST report today, EcoHouse said in a February interview: "We do not 'guarantee' the return. Nobody should. Our investment provides a fixed rate of return, paid upon the completion and sale of the property. The contractual worst-case scenario due to our escrow facility is that the investor ends up with land and property in Brazil worth more than they have paid."

I DO NOT think the above statement depict clearly the worst case scenario. Imagine the below:-

1) Brazilian property crash (highly likely after a mega event like world cup 2014), you will end up losing your capital

2) Brazilian currency get devaluated rapidly (think BRIC). Likely if you witness the rapid devaluation of rupees, rupiah recently. You will end up losing your capital.

3) The housing project may be left unfinished. You end up 'stuck' with something that you CANNOT get rid of event at a huge discount Again here you lose your capital.

4) You may incur huge cost if you will to get rid of the unsold project. In this case, you still lose your capital.

So, do not be comforted by such assurances that you have legal claim on the land and property should things turn out awry.

In general, DO NOT invest in something you cannot control or monitor at least transparently.In ecohouse case, they let investors take the risk, if they end up making money, you may get your 20% return. If something go awry, the investors will be left holding the hot potatoes.

Finally, if their low cost community housing project can be so profitable as to guarantee 20% return per annum, why they need to come half way around the globe to get your funding incurring substantial marketing expenses?????

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