Ship­ping con­tainer warn­ing

Warn­ing bells should sound when big prom­ises are made about the re­turns from ship­ping con­tain­ers

Money Magazine Australia - - CON­TENTS - STORY NI­COLA FIELD

Is the hum­ble ship­ping con­tainer a sea­wor­thy in­vest­ment or could it go the way of the Ti­tanic? Web­sites tout­ing “buy a ship­ping con­tainer” have gen­er­ated con­sid­er­able in­ter­est among in­vestors de­spite a num­ber of au­thor­i­ties, in­clud­ing Canada’s fi­nan­cial mar­ket reg­u­la­tor and the West­ern Aus­tralian gov­ern­ment, is­su­ing warn­ings about some of these schemes. Even with­out the of­fi­cial cau­tions, the deals of­fered on ship­ping con­tain­ers is a text­book ex­am­ple of how some ba­sic on­line re­search should set the alarm bells ring­ing.

How it works

One of the most promi­nent providers of ship­ping con­tainer in­vest­ments is the Hong Kong-reg­is­tered com­pany Pa­cific Ty­coon. Un­der its sale and lease­back ar­range­ment, an in­vestor pays Pa­cific Ty­coon $US4100 ($5540) to buy a con­tainer, which is then leased back to the com­pany and sub-let to the ship­ping in­dus­try. Aus­tralian in­vestors can se­lect a fixed-lease op­tion with promised an­nual re­turns of 12% plus in­sur­ance cover for lost or dam­aged con­tain­ers. Af­ter five years in­vestors can re­ceive their ini­tial pur­chase price back.

On the face of it, this deal ticks a lot of boxes. The prob­lem is that the prom­ise of high re­turns cou­pled with low risk de­fies one of the fun­da­men­tal rules of in­vest­ing – the risk/re­ward trade-off, which sees high re­turns go­ing hand in hand with in­creased risk. More wor­ry­ingly, the West­ern Aus­tralian gov­ern­ment, on its ScamNet web­site, names Pa­cific Ty­coon as “one ex­am­ple of an al­leged sea con­tainer leas­ing Ponzi scheme”.

Warn­ing signs

In a Ponzi scheme, a dodgy op­er­a­tor pays re­turns to in­vestors out of money chipped in by new in­vestors rather than from le­git­i­mate prof­its. Un­less more in­vestors con­tin­u­ally come on board, it be­comes harder for the op­er­a­tor to keep up reg­u­lar pay­ments, and the first time the hap­less in­vestor may recog­nise they’ve been scammed is when the pay­ments fail to ma­te­ri­alise.

Ponzi schemes are il­le­gal in Aus­tralia, but some con­tainer schemes are not based in Aus­tralia. This alone should raise a red flag. If any­thing goes wrong – for ex­am­ple, if the scheme turns out to be a web-based fraud by over­seas crim­i­nals – au­thor­i­ties in Aus­tralia may not be able to track down ei­ther the mas­ter­minds or your money. Put sim­ply, in­vestors are on their own. When tried to con­tact the Syd­ney phone num­ber listed on the Pa­cific Ty­coon web­site (there is no street ad­dress), all we got was a recorded mes­sage.

So does the deal stack up? An im­por­tant point to note is that Pa­cific Ty­coon is sell­ing con­tain­ers, which are a phys­i­cal as­set rather than a fi­nan­cial prod­uct, so it is not re­quired to pro­vide a prod­uct dis­clo­sure doc­u­ment un­der Aus­tralian law. This be­ing the case, in­vestors need to do plenty of home­work be­fore hand­ing over any cash, and some ba­sic on­line searches re­veal why it’s worth be­ing highly scep­ti­cal about what’s on of­fer.

Check the num­bers

To be­gin with, those 12% an­nual re­turns should raise eye­brows. The Pa­cific Ty­coon web­site jus­ti­fies the high re­turn, stat­ing “de­mand for con­tain­ers has his­tor­i­cally out­weighed the sup­ply” and there is “mas­sive de­mand” and “re­stricted sup­ply”.

How­ever, the ship­ping con­tainer in­dus­try is highly cycli­cal and has been plagued by ex­cess ca­pac­ity since the GFC of 2008-09. Ac­cord­ing to one in­dus­try re­port, more than 1.5 mil­lion TEUs (the in­dus­try term for the ca­pac­ity of a 20-foot con­tainer) is sit­ting idle. The col­lapse of South Korea’s Han­jin Ship­ping, the world’s sev­enth-largest con­tainer car­rier, in Septem­ber 2016 speaks vol­umes about the state of the mar­ket, and it’s en­tirely at odds with the op­ti­mistic view pro­moted by Pa­cific Ty­coon.

A de­pre­ci­at­ing as­set

But wait, there’s more. Pa­cific Ty­coon’s web­site claims that “much like the rent-and-earn model on a prop­erty in­vest­ment, your cap­i­tal is pre­served in the phys­i­cal value of your con­tainer”. Com­par­ing a ship­ping con­tainer to a bricks and mor­tar prop­erty is draw­ing a very long bow in­deed.

Prop­erty has a habit of ris­ing in value over time. Ship­ping con­tain­ers lead a tough life both at sea and on land. They get pretty bashed around and, ac­cord­ing to In­ter­na­tional Con­tainer In­sur­ance, a new ship­ping con­tainer has a life ex­pectancy of 20 years, though with no main­te­nance and fre­quent use (needed to earn strong re­turns) this life span can drop by as much as 14 years.

Closer to home, the Aus­tralian Tax Of­fice sets a (prime cost) de­pre­ci­a­tion rate of 15% an­nu­ally for ship­ping con­tain­ers, so af­ter five years your con­tainer will have lost 75% of its value on pa­per at least. It raises the ques­tion of how Pa­cific Ty­coon can af­ford to re­turn an in­vestor’s up­front cap­i­tal af­ter five years when the con­tainer is likely to have de­te­ri­o­rated and fallen in value?

Con­sider re­li­able al­ter­na­tives

An­other fac­tor to con­sider is that nei­ther Pa­cific Ty­coon nor any other ship­ping con­tainer in­vest­ment firm is listed as a mem­ber of the In­sti­tute of In­ter­na­tional Con­tainer Les­sors. This seems odd given that Pa­cific Ty­coon claims to be “a ma­jor player” in the con­tainer rental and in­vest­ment in­dus­try.

The bot­tom line is that there ap­pear to be plenty of ques­tion­able aspects to ship­ping con­tainer in­vest­ment schemes. If you re­ally have a han­ker­ing to add ship­ping con­tain­ers to your port­fo­lio, con­sider buy­ing shares in a rep­utable Aus­tralian com­pany such as Toll Hold­ings, which op­er­ates port and mar­itime ser­vices. It could save you from a sea of worry if a ship­ping con­tainer in­vest­ment scheme turns out to be a scam.

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