Realtors investigated for Hong Kong overseas property sales

[HONG KONG] Hong Kong's securities regulator is investigating whether realtors selling overseas properties are illegally marketing investment plans, according to a lawmaker helping investors who lost money on such deals.

Buyers argued that developments promoting guaranteed rental income are so-called collective investment schemes, which need approval from the Securities and Futures Commission, said James To Kun-Sun, a member of the city's legislature. Individuals who lost money on at least 15 uncompleted UK developments have complained, said Mr To, who met with the agency on March 7.

In a property-obsessed city ranked among the world's priciest for home purchases, investors have taken advantage of a currency tied to a strong US dollar and low borrowing rates to snap up overseas offerings, while developers tout incentives such as fixed returns to lure Asian money.

But there can be misunderstanding among people not familiar with Hong Kong securities law about what approval is needed, said Rolfe Hayden, a partner at law firm Simmons & Simmons LLP.

"It is not so surprising that real estate agencies in Hong Kong would not see any difference between selling a flat in Wan Chai and a resort in Thailand that is centrally managed and offers a guaranteed return," he said, referring to a district in Hong Kong.

Mr To said after his meeting with the regulator that the agency will soon make an announcement on the cases. Ernest Kong, an SFC spokesman, declined to comment.

Existing home prices in the city reached an all-time high in the week ended March 5, according to the Centaline Property Centa-City Leading Index, which tracks sales of secondary homes.

It's not just the SFC that is looking into the issue. From 2014 to 2017, 276 people filed complaints with the police after they suspected they were deceived while investing in overseas property, a police spokeswoman said in an emailed response to queries. The cases are being investigated by the Commercial Crime Bureau and no arrests have been made, she said.

Wooing Buyers

Income guarantees help woo buyers in Hong Kong, many of whom spend their weekends visiting hotel ballrooms filled with salespeople and models of yet-to-be built properties.

The UK, Canada, and Australia are among the most popular choices for Hong Kong investors buying overseas, according to consultancy Savills Plc, which said it doesn't sell income-guaranteed properties.

The regulator did not say which companies it was investigating, Mr To said. Complaints made to the SFC include at least one about a unit of Century 21 Hong Kong Ltd, a franchisee of US-based Century 21 Real Estate LLC, according to investors who asked not to be named because the matter isn't public.

They said they bought UK student accommodation with a guaranteed six per cent return through Century 21 after seeing newspaper advertisements promoting the project. Deposits were lost after the development went into liquidation, the investors said. 

Century 21 Hong Kong did not respond to emails and phone calls seeking comment. Realogy Holdings Corp, the US owner of Century 21, directed questions to the Hong Kong franchisees.

At least one complaint was also made about Sino Gateway Ltd, and a second firm run by the same directors called Hong Kong Homes Ltd, after projects marketed by the firms failed, Mr To said. Representatives for Sino Gateway and Hong Kong Homes could not be reached for comment.

Sino Gateway was a former franchisee partner of Sotheby's International Realty Affiliates LLC, though its relationship with the US-based firm was terminated in August.

"While we were disappointed to learn of the legal matters involving Hong Kong Homes, that company is not now and never was part of our network," Sotheby's International said in an emailed response to queries.

Investment Schemes

Projects where sale-and-leaseback options are wrapped into the deal, as well as the guaranteed rental yields, risk being considered collective investment schemes, said Jeremy Lam, a Hong Kong-based partner and head of the investment funds practice at the law firm Deacons.

Complaints against overseas developments rose to their highest on record last year, according to data from the Estate Agents Authority, prompting the agency to review its oversight of the sector. The EAA plans to introduce rules covering agents selling offshore projects, said spokeswoman Iris Li.

Last month the group, together with the SFC, held a workshop on collective investment schemes in property that was attended by about 200 licensed agents, said Ms Li.

Guidance issued by the SFC in June 2016 about which deals might qualify as a collective investment scheme has put the real estate industry on notice, said Mr Lam, who advises on investment product structuring. Shopping malls, student accommodation, holiday resorts and serviced apartments are more likely to be collective investment schemes, according to the SFC statement.

BLOOMBERG