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Alternative Investments: Tank Containers

29 May 2006 Errol Rudman, FS Group

Tank containers as investment medium has existed for more than 20 years and is still a very successful method of augmenting the offshore portion of an income portfolio. All rental income received can legally be left offshore without affecting the foreign investment allowance. On a cash purchase, the income would be tax free for the first eight years, depending on exchange rates.

The returns have proven to be cyclical in nature and ruled by the laws of supply and demand, as well as the price of stainless steel.

Returns
In 1995 the average price of a tank container was around $33 000 and the income was in the region of $3 500 per annum. In 2002 the price of a tank container bottomed at around $15 000 and generated an annual income of around $1 600 per annum. At current pricing of $27 000 per tank container, the annual income ranges between $1 800 - $2 500.

Upward curve
As can be seen from the above figures, the industry is in an upward curve and when the price of tank containers increases so does the income. Tank containers are generally leased on longer time periods, ranging from 15 years, which means that any increase or decrease in income takes time to filter through to the investor as tank containers come off hire and new lease contracts are negotiated at either an increased or decreased rate.

Demand and sustainability
The global tank container population grow to approximately 150 000 in 2005. The major users of tank containers are international chemical, food and beverage companies in mainly Europe, the UK, Asia and the Americas. It is estimated that currently only 22% of goods, which should be transported in tank containers, are transported via this medium. The balance of goods is transported in 44-gallon drums, which are not considered environmentally friendly. There is a drive to convert from drums to tank containers. For every 1% of cargo converted from drums to tank containers, a demand is created for approximately 4 000 tank containers.

Fees
Although there are basically three ways in which management companies pool the tank containers (read more about this on https://www.fanews.co.za/ and click on Investments), they have one operational procedure in common. They all use lease managers and tank operators to reach the end user of the tank container. Over and above the 5%-7% management fee charged by the management company, the lease manager or operator charges a further fee, upwards of 15% for their services.

In some instances the management company also owns one or more lease managers, further increasing profitability to the overall group of companies. In these instances a golden opportunity exists for the management company to offer reduced fees to the investor and thereby increase the return on investment to the investor.

Beware unscrupulous marketers
Unfortunately this ownership of the whole management process can also lead to unscrupulous marketing tactics. For example, overall management fees can be reduced for a limited period of time where after it is again increased. Here multiple pools and varying degrees of returns are payable to the investors in the different pools. When reducing the overall management fee it has the effect of increasing returns and these increased returns are then used when quoting returns to the potential new investor.

A few months or even a few years later, the management fees are increased and the returns reduce substantially to no longer make this investment attractive to the current owner or to a potential new investor. This leads to the current owner selling his tank container and a new investor acquiring this container at a vastly reduced price, bearing in mind that the life span of a container is in excess of 20 years. The only winners here are the investor acquiring the second-hand container and the management company receiving a higher management fee for more tanks under management. The original investor will never even know why his returns declined to this extent and why returns in a new pool now again seem very attractive.

Good advice
Before investing in tank containers, always ensure that you know the structure of the company with whom you will be investing and call for past performance on the previous pools. If the discrepancy in returns is too big and the new returns seem too good to be true, they usually are.

Certain management companies offer add-on products for the reinvestment of the offshore rentals received. Although very attractive on the surface, there are many pitfalls and this generally involves a high-risk environment. Such reinvestments should rather be considered in conjunction with a reputable asset manager as opposed to taking advice from so called advisers who dont do a formal needs analysis as prescribed by the FSB.

Errol Rudman, FS Group

 

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