Land investment

A friend who just sought my advice today on land investing in US. Hawaii islands. My first instinctive analysis is that it is a bad investment. There were too many risks involved in this investment I had to rule it a bad 1.


1. Foreign exchange risk:
a. USD has a larger probability of decline with the Obama administration increasing the money supply, excessive printing and liquidity in the market. By printing to repay ever increasing deficit and mismanagement of the states, companies and excessive risk taking by the companies in US, it makes investment in US risky, both in terms of politically and economically.
2. Potential Risk of losing your capital:
a. Note when they say guaranteed returns, it doesn’t mean guaranteed capital. It just means they will pay you at least 12% on 9.6kUSD for 2.5 years, which means 1.15kUSD after 1 year, 1.15k USD after 2years, and 575USD after 2.5 years. And no mention of capital being returned unless they get the sales required.
b. Your entry is before the approval of plans, which also means there could be a few contingent situations which might occur.
i. Plan is not approved. It is getting increasingly difficult to enter US as a foreign company because of the lack of respect for contracts. Citing GM as an example where bond holders are being forced to become equity owners and not being able to claim their stake on the GM assets. The government could choose to let fail or force people into situations which they are unwilling to. What happens to your investment amount if plan is not approved.
ii. The builder for the land development goes into bankruptcy while in the midst of developing. Where does your money end up with?
iii. Does your investment returns rely on the sales of the properties? If it does, then who are the end buyers? Who are they targeting given the current situation in the US economy? How are these people going to pay? And how are you getting your money? In a lump sum or in stacked amounts periodically?
c. When they mention that the leftover properties would be taken by Redhill, they did not mention the price they would be taken at. Given it is “underwritten” by Redhill, the likely situation it will come at a cost, and should be at a discount to what is being offered to the market of 300k. Would that mean lower profitability and possibility of losing some parts of your capital due to the low application rate for the properties?

3. Business risk
a. Is there saturation of the resort industry in Hawaii? If it is so lucrative, why isn’t there private equity investment and instead looking for retail clients to invest?
b. According to a report by the Hawaii govt, http://hawaii.gov/dbedt/info/visitor-stats/visitor-research/2007-annual-research.pdf , the growth in 2004 (8%), 2005 (9.6%). 2006 (4.9%). Given most of the economies have been improving or has already been hitting new highs in 2006, there should be more growth in 2006 as compared to the other years. But looking at the statistics shows otherwise.
c. Note that most of the visitors go to O’ahu and not the main Hawaii island for holiday. 4.8m out of a 7.49m air travels were to O’ahu and not the place you investing in. And the names of those resorts which they list in the ppt are mainly located at the Northwest of the islands, meaning on O’ahu area. And not the south east which is the area you investing in.
d. Look at the market which they are attracting in the same report. 2007, 66% of the visitors’ expenditure are from their own citizens. Would they still be able to spend so lavishly with 9.6% unemployment, with underemployment by working lesser hours, salaries cut, inability to refinance their loan which they had drawn out their equity? Their discretionary spending would be severely dampened with more stringent credit facilities and worries about their own retirement especially with their 401k which is their retirement account for most of them being wiped out with this stock market crash.
e. Note the sales of the properties are to the local people. And who determines market price 700k. It doesn’t mean a unit of resort was on sale there for 700k means it is worth 700k. When a person sells a unit, it is just a supply of one. When a developer sells a property, there are more units, and the estimated price could also be overpriced.
f. http://www.zillow.com/local-info/CA-Hawaiian-Gardens-home-value/r_21778/ look at the overpriced properties during the peak from 2001 to 2007. There is a possibility that property development would be dampened by market demand for such properties for the following reasons:
i. What is the main business in Hawaii islands? Answer is tourism. And who is the visiting majority? Americans. What is the possibility of such a trend coming back to live in 30 months time such that you can reap returns at end of 30 months?