Overseas property debacles leave Hong Kong investors out of pocket
It’s a case of buyer beware when considering the purchase of an overseas home. Hong Kong has few protections in place when it comes to regulating agents promoting overseas property investment
When Liao Yiching spent years of savings on a property in Memphis, Tennessee, she’d planned to renovate it and sell it on for a small profit.
Six months and thousands of US dollars later, Liao has a house with still-incomplete renovations and a contractor that keeps disappearing.
Liao spent US$158,000 (HK$1.23 million) buying and renovating the Memphis property in March on the advice of her friend Sam Van Horebeek, a director at East-West Property Advisors, a Hong Kong-based firm that connects Chinese buyers with US realtors.
Horebeek introduced Liao to a contractor, Charles Alexander, president of Tennessee-based Heritage Properties. After the project was already heavily delayed, Alexander demanded the third and final payment, which was supposed to be paid on completion according to their contract. Liao paid the final amount to Alexander, who then “disappeared”, leaving the renovation unfinished. Other contractors have quoted Liao US$30,000 to complete the project, meaning she’s unlikely to make a profit when she sells it.
Liao later discovered that another company managed by Alexander had bought the house four days before her, around the time she had expressed interest in buying it, and sold it on to her at a US$16,000 markup.
“I was very shocked,” said Liao, who is considering legal action against Alexander. “So they made a profit from the purchase and now he’s run away with the money.”
Van Horebeek confirmed that Alexander had bought the property, and said he had taken US$4,500 as the sales fee. He said it was not common for contractors to buy properties and sell to clients — although it was common for another intermediary to do so — and “one way or the other” this would have been communicated to Liao beforehand.
Alexander did not return the Post’s requests for comment.
Liao is one of an estimated 514,000 Hongkongers to have invested in properties overseas — a number that has been on the rise, according to IP Global. Both the Hong Kong Consumer Council and the Estate Agents Authority (EAA) report an increase this year in complaints from buyers of overseas real estate.
However, there appears to be little recourse in Hong Kong, where local laws do not regulate agencies like East-West, which exclusively market and sell properties abroad.
The EAA said it is not able to enforce its regulatory regime in other countries or territories.
“I am left on my own,” Liao said, adding that she felt East-West had failed her.
“I’m very vulnerable,” she said. “In Hong Kong here, I am not protected.”
Horebeek said he said had warned Liao against paying the entire renovation cost before completion and contacted local lawyers and renovation firms in an attempt to help.
“I feel sad about this case,” he told the Post.
The push for a law change
Legislative Council member James To Kun-sun has been fighting for 10 years to get agents promoting overseas property to be covered by the same rules as agents selling local property.
It’s an offence under the Securities and Futures Ordinance to market collective investment schemes to the Hong Kong public unless the scheme has been authorised by the Securities and Futures Commission (SFC).
But the legislation allows for a number of exceptions, and may have “considerable regulatory limitations” when it comes to overseas properties, SFC subsidiary Investment Education Centre said. The SFC has only conducted a handful of successful prosecutions against property schemes since the ordinance was enacted in 2002, including one believed to have involved an overseas property scheme, according to its website.
To said there remains a “loose interpretation” of what the SFC regulations cover for property developments.
“Sometimes, I would blame the SFC,” he said, saying the commission could do more to enforce their regulations and crack down on fraudulent property agencies. “They must be more proactive.”
The Consumer Council published a warning in Chinese about overseas properties last month, saying “if there are any problems or disputes, Hong Kong’s regulatory bodies may be powerless to regulate foreign transactions.”
To said at the very least, Hong Kong laws should protect its citizens, who are being sold foreign properties by the city’s unlicensed and unregulated agencies.
“But the government still says: ‘no, it’s not right to do it,’” he said. “So that’s a clash of principle.”
The EAA said it will continue to closely monitor the situation surrounding overseas properties and “adopt appropriate measures, such as enhancing consumer education.”
David Ho, managing director at legal firm Christine Lee & Co in London, believes developers in places like the UK specifically target Hong Kong buyers for off-plan projects and then take advantage of them.
“You’d be hard-pressed to find a UK born and bred person to buy off-plan like that because of the risks, but it is common and well-managed in Hong Kong, Taiwan, even China,” he said. “I have Hong Kong clients who come to UK later and find out it’s only a piece of grassland — they haven’t even started on it.”
Show us the money
To’s latest case involves Manchester-based Angelgate, run by developer Pinnacle Alliance.
The Angelgate project kicked off in early 2015, but slow progress and a lack of communication left some members of a 150-strong group of buyers mainly from Hong Kong, Singapore and the UK believing they had been scammed.
In March 2016, Pinnacle informed investors it had fired its contractor, PHD1 Construction, which later fell into administration. By August, the developer told buyers the project had been “seriously undervalued” by around £14 million (HK$140.04 million), requiring additional funding to be completed. The developer gave Angelgate investors two options: contribute more money to complete the project, or handle the construction themselves.
“This situation is not ideal, and we wholeheartedly apologise to our buyers,” a Pinnacle spokesperson said. “Unfortunately, we were badly let down by PHD1 who provided us with build costs that were not realistic and then went into administration.”
Pinnacle said they are still “entirely committed” to completing Angelgate, but investors are concerned the developer misspent buyers’ money, and through their lawyers, have demanded to see a breakdown of the finances. According to a solicitor’s update from Pinnacle, a total of £13.2 million went to commissions and fees, with £7.9 million spent on “overheads, running costs and profits.”
Any profit payouts “shouldn’t be allowed” until the buildings are completed, said investor Eddy Lau, who along with his wife Candy Choi, invested £290,000 — 80 per cent of the total they are due to pay — in two Angelgate properties.
Lau is unsure if the money was handled inappropriately, but said the buyers “need to know where the money has been spent.”
He believed it was a breach of contract as the developers wouldn’t be able to deliver the project on time and at the agreed cost.
To said he has “very great suspicion” about the way Pinnacle has spent buyers’ money, when investors have reported no substantial construction work on the project site.
An Angelgate investor who did not want to reveal her full name said an estimated £32 million (HK$330 million) had been paid in deposit money from the buyers in the steering committee.
She said buyers had filed reports with local police and fraud action groups, but since Pinnacle claims Angelgate is still being built, an investigation can’t be launched.
The Angelgate project was a scam and investors felt helpless, she said.
Pinnacle says it has not and will not make any profit from Angelgate, and that the £7.9 million amount was spent on sales commissions and overheads related to sales of individual flats. The developer maintains that it has a solid track record, saying they have paid out £5.3 million to investors in their other developments.
“[Angelgate] is in no way a scam, we have just been badly let down by our construction company,” a spokesperson said.
The role of local agents
Pinnacle is one of many developers who advertise their properties in Hong Kong, and even have an office in Tsim Sha Tsui. Their developments have been marketed by local real estate agencies, with many Hong Kong buyers saying they learned about Angelgate through Hong Kong Homes.
Hong Kong Homes’ executive director Samson Law said it “came as a shock” when they realised buyers’ deposits had been spent “without much progress.”
“HKH has suspended sales of overseas projects,” Law told the Post, although he would not clarify the length of the suspension and whether problems with Angelgate directly led to the suspension.
In 2014, Hong Kong Homes also marketed Absolute Living Development projects, which Law said he has since reported to the police in the hope that some of the lost deposit funds would be recovered.
Earlier this month, Sotheby’s International Realty, a New Jersey-based real estate agency franchise, terminated its agreement with Hong Kong partner Sino Gateway, also owned by Law, citing disappointment about “legal matters involving Hong Kong Homes.”
“I am extremely sorry the chain of events have caused disappointment to Sotheby’s International Realty,” Law said in an email.
To said Hong Kong Homes may have been “too aggressive or negligent” in marketing certain properties because high commissions allowed them to turn a blind eye to risky projects.
Educating Hong Kong investors
Hong Kong buyers might be going overseas without being fully informed. Over 40 per cent of Hongkongers said a lack of understanding of laws and markets in foreign countries would prevent them from investing in properties abroad, according to an IP Global study in February. Other concerns include the language barrier and costs of foreign transactions.
“Hong Kong investors are extremely smart and shrewd generally speaking, but there did seem to be some lack of understanding in some of these markets,” said IP Global director Jonathan Gordon.
In 2012, the SFC set up the Investor Education Centre to provide investors resources on on all types of investments, including property. Despite the education measures, the centre’s general manager David Kneebone said he hadn’t seen a decrease in the problems people were experiencing.
“There are still unrealistic expectations from some Hong Kong investors,” Kneebone said. “When people are making exuberant offers, it’s easy to get excited by them and not do all the homework that you should do. If it seems too good to be true, it probably is.”