Property hunters

/ The Edge Property |

August 19, 2016 10:00 AM SGT

Singaporean Chew Chuan Tin remembers the first dotcom bubble very well. He had just graduated at the top of his class at National University of Singapore with a first-class honours degree in business administration, majoring in finance. After receiving multiple scholarships, he chose to do his graduate programme at University of California, Berkeley, in 1995. That was when he saw some of his classmates become millionaires overnight just on the strength of their ideas. “

That was the start of the internet boom and a great time to be an entrepreneur,” he recounts.

After completing his graduate studies, Chew became a venture capitalist at Vertex Venture Holdings, a member of Temasek Holdings. He was based in Silicon Valley and invested in software companies and start-ups. “California is a real melting pot — no matter what your background is, if you work hard and have the talent, you can make it in life,” says Chew.

He rode the dotcom bubble all the way to the end. And he saw the carnage in 2000, when many of the start-ups imploded. For venture capitalists, it was the “clearing up stage”, he relates. “There wasn’t much to do then.”

That was when some of his former classmates at UC Berkeley began to interest him in real estate opportunities. Chew and his friends pooled together and invested in a single-family home in Los Angeles, California, sometime in 2000 and 2001. “We just wanted to understand the laws of investing in real estate in the US,” he says.

Chew (right, with Song): The US is a big market. There are different dynamics at play and each economy is different.

From bubble to bubble

Although the investment amount was relatively small, Chew more than doubled his money within a short period. It also gave him a foretaste of the real estate bubble in 2001 to 2006, which followed the dotcom bubble in the US. During that period, Los Angeles and San Diego were among the seven metropolitan areas where housing prices appreciated more than 80%, according to the S&P/Case-Shiller house price indices.

However, following his sole investment in California, Chew did not re-enter the US real estate market until the sub-prime crisis in late 2007 to 2010. This was because he and his wife, who is from China, decided to move to Qingdao in 2005, where she could be close to her family.

They invested in a manufacturing firm that produced honeycomb panels for construction and exported to the US. They also invested in real estate, picking up an apartment and several commercial lots in Qingdao as well as several prime apartments near the CBD in Beijing. “The housing market in China is still seeing strong growth,” says Chew.

The couple decided to move to Singapore in 2007, when their daughter was about to start school. “I wanted to acclimatise her to the Singapore education system,” he says.

Shopping for distressed deals

In 2009, in the midst of the global financial crisis, Chew went back to the US to hunt for property development and investment opportunities. “They were selling properties for 10 cents on the dollar,” he says. “Some properties were being sold below development cost. Whatever you bought, it was cheaper than constructing the project yourself.”

The states with the highest foreclosure rates were Florida, Michigan and Nevada, recalls Chew. He decided to focus on Michigan. It was there that Chew and fellow Singaporean investor, Benjamin Song, crossed paths.

Song, a civil engineer by training, was also a serial entrepreneur. By the time he was hunting for real estate opportunities in the US after the sub-prime crisis, he had already founded two training schools focused on educating the public on leveraging the financial markets for wealth creation. He was also director and fund manager at fund management firm FX1 Capital from 2006 to 2009. There, he had diversified his investment portfolio to include real estate, oil and precious metals.

The two Singaporeans already knew each other through mutual friends. Song was in Michigan as he was eyeing some medical office buildings that were going for a song but had attractive rental yields. However, other funds had snatched them up before he could get his foot in.

Hunting as a pack

“That was when I met [Chew], and we decided to get together and explore more opportunities in Michigan and other states,” says Song.

They had initially looked at acquiring some apartment blocks, a strip mall and even medical centres in cities across Michigan. They were looking at investments in cities across Michigan, except in Detroit. “There was this apocalyptic movie, Vanishing on Seventh Street, and Detroit really did look a little like that after the sub-prime crisis,” says Song.

The duo were shopping for foreclosed properties at auctions, but realised their window of opportunity was limited when big US institutional investors and hedge funds swooped in and bought several hundreds or thousands of foreclosed houses at once. “That forced us out of that business,” concedes Chew.

In 2012, Chew and Song formed a company to invest in US property. They acquired a stake in Northstar Centre, a mixed-use development with commercial and residential components on a 535-acre parcel to the north of Williston, a city in North Dakota. When completed, the two million sq ft development will have 566,000 sq ft of commercial space and 1,500 residential units.

The pair subsequently bought a 50-room hotel in Arizona in partnership with others. They refurbished the hotel, put in a new operator under the Best Western label and succeeded in raising both the occupancy and average room rates. Once the occupancy rate was stabilised, the property was sold.

Iowa — ‘more than just cornfields’

Early this year, Chew and Song started Propspur Holdings, and their maiden project is Highland Meadows, a property development in Urbandale, a residential community in the Des Moines Metropolitan Statistical Area, in Iowa. The first phase of 19 homes co-developed with US developer Kimberley Development is substantially sold. The houses sit on lot sizes ranging from 12,600 to 24,852 sq ft and are priced from US$500,000 ($672,386).

Propspur owns another 100 acres at Highland Meadows, which can be developed into 220 houses with a gross development value of US$110 million. Chew, the company’s CEO, intends to sell the houses over five phases. The total investment by 2018 is estimated to be about US$44 million.

Unlike in Singapore, it takes just four months to construct a house in the US as they are primarily made of wood, says Chew. Starting prices of houses in the second phase will be from US$300,000, as they will be smaller than those in the first phase.

Des Moines was not as badly affected by the US sub-prime crisis as other metropolitan areas, owing to its diversified economy and low housing inventory, according to Chew. However, the low inventory has also sparked a housing boom. “Houses are sold within hours,” he says. “If you don’t have a pre-qualified loan from a bank, you can’t buy a house. So, a lot of young people want to secure a housing loan while interest rates are still low.”

In July, 1,398 homes were sold, according to the Des Moines Area Association of Realtors. While home sales dropped from last July, there was an uptick in sale prices by almost 3% to US$185,000. According to the realtors, yearto- date sales are higher by about 400 homes. While inventory levels have been climbing, interest rates remain low, making purchasing a home more economical than renting.

Des Moines is considered the world’s third-biggest capital for insurance companies to be headquartered. It was ranked 13th in Forbes’ 2015 list of best places for business and careers. It topped the list two years ago.

A lot of tech companies have also moved to Des Moines to take advantage of the affordable cost of living. “If you ask the average American in his 60s, he will say that Iowa has nothing but cornfields,” says Chew. “But the economy in Iowa has transformed since the 1990s.”

According to Chew, there are a lot more skyscrapers being built in the Des Moines CBD in Iowa than in neighbouring Omaha, Nebraska, home of billionaire investor Warren Buffett. “It’s also one of the best places to raise a family, given its quality of life, affordability and good education system,” he says.

In New York, one could spend two to three hours commuting every day. In Des Moines, it is just 20 minutes from the edge of the suburb to the city centre, says Chew. “You save two to three hours every day and that translates to a better quality of life.”

A model house at Highland Meadows in Urbandale, a residential community in Des Moines, Iowa, where homes are priced from US$500,000 in the first phase.

Houses in the first phase of Highland Meadows, where there will be five new phases on a 100-acre plot in the future

‘Pretty opportunistic’

The US is a big country and every state is like an individual country. “It’s like Europe,” says the 43-year-old Chew. “There are different dynamics at play and each economy is different. There are different pockets of growth and we just went after that.”

The 42-year-old Song adds, “We’re pretty opportunistic. At the time, the single-family housing market made the most sense and posed the lowest risk with the highest returns.”

They have also identified several hotel sites in the state of Arizona and a hotel in Nashville, Tennessee. “There hasn’t been any new hotels built in recent years,” says Song, managing director of Propspur. “The existing hotel stock is relatively old and has not been upgraded because banks weren’t lending during the global financial crisis.” He sees opportunity to refurbish old hotels and reposition and sell them.

Apart from the US, the partners behind Propspur are also interested in investing in Asia. “We’re looking at locations that make sense,” says Song. He sees opportunity in Seremban, Negeri Sembilan, and Ayer Keroh, Melaka, where the Kuala Lumpur-Singapore high-speed rail will have stops. In those ventures, Song believes that partnering a Chinese construction company would make the most sense.

Likewise, there are also opportunities in China, adds Song. One investment target is incubation centres in the Hubei province. “Once they are built, the government will rent the premises on a long-term basis and encourage start-ups to take up space at affordable rates,” he says.

Another opportunity is a co-development site in Perth, Australia. The property is located within a five-minute walk of Crown Casino in Burswood and near the Swan River. “We’re working with the building owner on what development would be best,” says Song.

Aim to list company, a future REIT

Propspur has 20 staff, with at least 12 located in the Singapore head office in Suntec City. The rest are in the US. Chew and Song have set their eye on listing their company on the Singapore Exchange.

The company currently has a market capitalisation of $50 million, based on projected profits. The aim is to double the market capitalisation by the time they are ready to list the company, says Chew.

Their goal is to launch a real estate investment trust of commercial properties and hotels within the next decade. “Singapore is a hub for REITs,” says Chew. “And if we become a listed company, it’s easier to sponsor a business trust or REIT.”

Why the name Propspur? “We wanted ‘Prosper’, but it was taken,” says Chew. “So, we decided to choose ‘Propspur’ — for property and prosperity. At least it’s unique and people will remember us.”

This article appeared in The Edge Property pullout, Issue 742 (Aug 22, 2016) of The Edge Singapore.

Tags: