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4 truly awful financial investments

By December 22, 2017 No Comments

As much as we often write about excellent places to put money, there is no shortage of terrible, toxic ones where your money is likely gone forever. Terrible investments can take many forms, and can be based on a whole range of unsavoury circumstances – from outright deception, to the absence of the rule of law. Here we look at some of the very worst.

The Ground Rent scandal

A more likely problem that investors may come across, even buying closer to home in the UK, is the ground rent scandal.

On leasehold properties – and as distinct from freehold – ground rent is charged each year by the landlord, who is the theoretical owner of the property. While this sounds undesirable, it’s not really so bad: most of the apartments in London, for instance, are leasehold. In the generation of our parents and grandparents, ground rent was usually a nominal ‘peppercorn’ sum – perhaps as little as £1 a year.

Over the last couple of decades, this rose to a much higher sum, sometimes in the region of £200-500 a year. This would rise periodically, in line with the retail prices index. While this is an increase, it is not onerous or outrageous. In fact, it is quite standard.

However, some developers started slipping in clauses into their leases which stated that ground rent would double every ten years. At outset, this doesn’t sound like much. But, over the period of the lease (which could be three hundred years) the cost of ground rent would be obscene. A ground rent based on this model, of £250 a year at outset, would be £64,000 per year after eighty years.

Buyers never thought to check such provisions and assumed everything would be above board. But when they tried to resell, the mortgage lenders quickly announced such ground rent conditions as onerous and refused to lend on them. And if the bank won’t lend, the next buyer can’t buy.

The result of this has been up to 100,000 homeowners in England stuck with properties that cannot be sold as the terms of their leases prevent it. The Government is looking at what it can do to regulate this, but the banks (via the Council of Mortgage Lenders) have already published guidelines on what they consider to be acceptable, and state what they will and will not lend against.

The Middle East

 One of the areas that deserves to be high on any list of terrible investments – or at least an area that requires extreme caution – has to be the flagship property developments of the Arabian Gulf.

Dubai and Qatar have brought some real headline developments to the world, from the Pearl in Qatar to the World in Dubai. Everything here is extravagant, high-end, and fit for rambunctious royalty.

Case in point: “The World” in Dubai is the idea of a series of man-made islands, off the coast of Dubai, which resemble the map of the world and each island is shaped and themed as a separate country. The potential in 2003, when the project was conceived, for extravagant mansions and restaurants themed to each national ‘island’ saw investors lining up to buy islands for many millions.

Since then, perhaps predictably, it has been a disaster. The islands of sand have receded through erosion back into the sea, some investors have bailed while others have committed suicide. Then the Global Financial Crisis took its toll, and as yet the ‘World’ is awaiting development.

It would not be difficult to see the lessons in something like this, but there are fundamental questions of supply and demand. The ‘build it and they will come’ approach of the oil-rich Middle East is an outrage to the modesty of basic economics; prime property is built at a rate that far outstrips demand in an economy that is vulnerable to expatriate populations, the economy in the rest of the world, and the price of oil.

Then there is the question of transparency and the rights of investors. The Pearl, which is a similarly extravagant development in Doha (there is something of a recurring theme of extravagance in this part of the world) was plagued with development delays, uncontrolled costs for construction and air-conditioning, and left the investors who had bought off-plan to be nervous and overly dependent on the kindness of strangers to do the right thing.

On top of that, a unilateral alcohol ban suddenly imposed on the project after completion left those residents ‘high and dry’ after the much-hyped restaurant scene started to suffer.

Thailand

Thailand is a popular dream destination for many people and the low cost of living, the beautiful weather, food and easy-going people make it a very popular destination.

But as for owning property there? Think, think twice, and think again.

Land ownership is not possible for non-Thai nationals, and although there are workarounds, the land needs to be bought in the name of either a Thai company (which you can set up yourself) or in the name of a Thai spouse.

There is always a catch like this but the far greatest risk with this is that the legal system can and has been manipulated by corrupt lawyers to enable land to be taken away from the investor. One such story involved a man whose own wife forged his signature in front of the notary and the property which was held in his company’s name was taken off him.

Strong rule of law is important, but being able to speak the language and to have a legal framework which affords you rights is also vitally important.

(Very) alternative investment concepts

APW deals largely, but not exclusively, in bricks and mortar investments. Property value can be owned through property bonds as well, and all of this is legitimate.

Other forms of investment concepts are possible, for instance car parking lots, retirement homes, even burial plots, and as strange as they sound, these have strong economic underpinnings.

However, one such concept that proved to be a total disaster was storage pods.

Storage pods or units are to be found in self-storage areas. The idea was to own the area and lease it to the company who would in return let it to customers, maintain it, and manage it.

This however is a toxic investment that proved to be unsuitable for retail investors. According to experts, such investments are low liquidity, require high borrowing to invest, come with complex and expensive charges, and represent obscure underlying assets.

For a somewhat better range of investment ideas, explore our range of Property investments.