Shipping container scam: how to spot the warning signs
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 West 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 West Australian government, on its ScamNet website, names Pacific Tycoon as "one example of an alleged sea container leasing Ponzi scheme".
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 Money 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.
Five things to ask before investing
Be sure to ask these questions before handing over any money to invest in shipping containers: 1. Is the business registered with the investment watchdog ASIC? If it's not, you may not be protected by Australian law. 2. How long has the company been around? 3. Have you spoken to a financial adviser or another independent expert about the proposal? 4. Is the investment provider able to give you contact details of real clients who have made money using this method? 5. Can you afford to lose money invested in this scheme? Source: Western Australia Department of Commerce