Value hunting in Singapore

/ The Edge Property |

December 9, 2016 10:30 AM SGT

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Hongkong-born Samuel Chu’s initiation into the real-estate business began half a century ago when he was five. He recalls accompanying his father on his rounds to collect rent from tenants. “At that time, I think I was more interested in the ice-cream he would buy me after the rounds than in the rent collection,” he says.

The property investor in Chu has long since surfaced. He is managing partner and chief investment officer of Phoenix Property Investors, a firm he co-founded in 2002. The Hong Kong-based private-equity real-estate firm manages a portfolio of assets worth US$6.7 billion ($9.5 billion) today, mainly in Hong Kong and other key cities in North Asia such as Beijing, Shanghai, Seoul, Taipei and Tokyo. In Southeast Asia, Phoenix has investments in Jakarta, Manila and Singapore.

It takes great discipline to be a value investor, Chu points out. One has to actively look for opportunities and refrain from doing anything until the right deal comes along that meets all the criteria. “We are very selective,” he adds. “Historically, we look at more than 1,000 deals a year, and we do just six.”

A classic example is in Singapore, where the group had been scouting for opportunities since 2006 but made its first investment only in late 2014. “The Singapore market was still quite slow in 2006,” says Chu. “We missed quite a few deals in the office space because our pricing was just a few percentage points [below the winning bid].”

Shophouses in Tanjong Pagar

Phoenix’s maiden purchase in Singapore was a row of six adjoining conservation shophouses at 48 to 56 Peck Seah Street for $42.8 million. The price translates into $2,155 psf based on a gross floor area (GFA) of 19,860 sq ft. The shophouses sit on a combined land area of 8,213 sq ft, with a 99-year lease from 1994.

The shophouses were put up for sale by tender in October 2014, with CBRE as the marketing agent. The guide price then was $49 million, or $2,467 psf, based on GFA. “It is rare to find six adjacent shophouses on the market for sale,” says Sammi Lim, director of investment properties at CBRE, who marketed the properties and brokered the sale. The vendor was Japanese shipping company K-Line, which had occupied the shophouses since 1997. It was moving out of the premises, so the shophouses were sold with vacant possession.

Subsequent to the purchase, Phoenix spent $2 million refurbishing the shophouses — the façade was restored, the internal spaces upgraded and the air-conditioning replaced.

Today, the shophouses are 82% occupied, with a yield of around 3%. Tenants include Turkish café-bar Fat Prince and the flagship store of Kohler, featuring its latest kitchen fittings and sanitaryware. “We like the Tanjong Pagar area, which is being gentrified, especially with the $3.2 billion Tanjong Pagar Centre as a catalyst,” says Chu.

Phoenix continues to look at every shophouse put on the market for sale.

Initial investment — Mongkok shophouses

It is apt that Phoenix’s first investment in Singapore is shophouses. After all, says Chu, when the company was established in 2002, its initial investment was also shophouses in Mongkok, in the west of Kowloon Peninsula in Hong Kong.

That was 14 years ago, and the Hong Kong economy and real-estate market were still in the doldrums after the 1997/98 Asian financial crisis, the 9/11 attacks and the dotcom crash. Property prices in Hong Kong dropped 50% from 1998 to 2002, recalls Chu.

It was during a round of golf with Benjamin Lee, now his partner and co-founder at Phoenix that Chu mentioned that he was going to look at properties after the game. At the time, Lee was managing his own private-equity firm.

Chu recalls Lee’s initial reaction: “He said, ‘You are crazy; it’s double-digit unemployment rate, negative GDP growth and sentiment is so bad, and you are going to buy property?’” Nevertheless, Lee knew Chu had always been interested in property and even went along to view the properties after their golf game.

Mongkok was undergoing gentrification 15 years ago. There were two million sq ft of hotels, retail shophouses and offices coming off the ground, recounts Chu. They were due for completion in two years, but poor sentiment meant that there were few takers, he adds. Chu felt, however, that there was an arbitrage opportunity, as just two blocks away was Sai Yeung Choi Street, where properties were trading at five to 10 times more. Lee shared Chu’s view and decided to be a co-investor in that first deal.

A few weeks later, Chu saw another retail investment opportunity in Mongkok. That marked the start of Phoenix, with Chu as a one-person investment firm. Lee lent his expertise and raised US$12 million for the first fund. Besides Lee and Chu, who was the biggest investor, some of the initial investors in the fund were their friends.

SARS and outsized returns

After Phoenix’s initial purchases in Mongkok in 2002, the market plunged further the following year, owing to the Severe Acute Respiratory Syndrome (SARS) outbreak. But Chu continued to make bids during the crisis. In fact, one of the biggest deals he did then was the purchase of a building that was negotiated during the outbreak. The deal took four months to be completed because the seller was a family, and some of its members were residing in San Francisco and unwilling to fly to Hong Kong during the epidemic.

The building was originally a restaurant complex, but after acquiring it, Chu had the floor plan reconfigured into a quality commercial building. The elevators were relocated, GFA was added and the lifts and interior spaces were upgraded. A Japanese designer was consulted on the makeover of the façade.

When the refurbishments were completed, Phoenix received an offer it could not refuse. Standard Chartered Bank wanted to buy the entire building. “We bought it for about HK$72 million then, and we sold it for HK$383 million in less than two years,” recalls Chu. “With leverage, we made eight times return on our money.”

For the US$12 million fund as a whole, the profit was US$50 million after two years, which was four times the return on investment. “Had sentiment been good, we would not have found such great deals on the ground,” says Chu. “No one has a crystal ball. You always try to pick the bottom and sell at the top.”

Chu’s foray into the retail sector in Mongkok was no mere accident or stroke of luck. From 1991 to 2002, he ran his own investment and advisory firm, focusing on real estate as well as public and private equities. The money he made was then reinvested into property and other businesses.

Retail origins

One of his investments at the time was cosmetics retailer Sa Sa International Holdings, founded by Simon Kwok Siu-ming in 1978, with the first outlet occupying just 40 sq ft. When Chu invested in the firm and joined the company as CEO in 1995, Sa Sa had five shops. He expanded the business in Asia and took the company public. It was listed on the Hong Kong Stock Exchange in 1997 and, today, it has more than 280 stores and counters across Asia. Chu exited the firm in 1998.

He remembers opening the first Sa Sa shop in Wisma Atria in Singapore. It was on Aug 30, 1997. The date was seared in his memory because it was the eve of the death of Princess Diana.

By the time the Asian financial crisis hit, Chu had already exited his investments in Hong Kong — he sold his last property there in September 1997. “During the Asian financial crisis, the best place to be was at the golf course — I was a much better golfer then,” he says. “I was looking at opportunities, but did not see any good ones. I was fortunate in that I was disciplined enough to stay on the sidelines.”

It was only in 2002 that he revisited the real-estate market by investing in shophouses in Mongkok. Lee joined Chu at Phoenix as co-founder and managing partner in 2004. That led to their foray into Japan. “I knew Japan very well,” says Chu. “I was an exchange student in the country and my family spent some time there.” It marked the inception of the second fund.

Today, Phoenix has seven offices across Asia, five opportunity funds and a core fund. A credit fund will be launched next. Investors in Phoenix’s funds include institutional investors such as pension funds, family offices and university endowments.

Incidentally, Sa Sa International’s Kwok, current chairman and CEO of the firm, is also an investor in Phoenix and owns several apartments at its 106-unit residential tower, Gramercy, at Mid-Levels, Hong Kong.

Global nomad and family ties

Not only is Chu a successful property investor in his own right, but he is the son-in-law of property tycoon Antony Lo Hong-sui, eldest son of Great Eagle Holdings’ founder Lo Yingshek. Incidentally, Great Eagle had teamed up with Singapore’s CapitaLand to put in a bid of just over $2 billion for the Central Boulevard white site. IOI Properties emerged as the winner with a bid of $2.57 billion in early November.

Chu emphasises that neither Great Eagle nor the Lo family are investors in Phoenix. “They are my in-laws,” he says. “We talk about property, but I do not ask them to invest.”

Prior to founding his own firm in 1991, Chu was a banker with First National Bank of Chicago and Bankers Trust and, later on, Deutsche Morgan Grenfell Capital Management. He obtained a degree in finance and international management from Georgetown University and an MBA in finance from Booth School of Business at the University of Chicago.

While he was with Bankers Trust, he was posted to London, New York, Frankfurt and Tokyo. When he was working with Deutsche Bank, he was relocated back to Hong Kong. In 1991, he was asked to move to Deutsche Bank’s headquarters in Frankfurt. “I felt that Frankfurt was too quiet for me,” says Chu. That was when he decided to stay in Hong Kong, where he started his own investment advisory firm and began investing in property.

Chu has always had an affinity with Hong Kong and the real-estate market. Although he was born there in 1961, his father had relocated the family to New York, following the 1967 riots in the former British colony. Growing up in New York in the 1970s was tough. “There was a certain amount of discrimination,” says Chu. “I had always wanted to have my own business and I thought it was best to return to my roots.”

Opportunities in crises

While he may have sat out the Asian financial crisis, Chu has invested during most other major crises, including the savings and loan (S&L) crisis in the US in the 1980s and 1990s. When the Resolution Trust Corp, a US government-owned asset management company, started to liquidate assets, many investors who purchased properties then made huge profits. Chu was one of them.

Chu, along with some of his friends, invested in Houston, which was one of the cities worst hit by the S&L crisis, as it came in the wake of a spectacular boom-bust cycle in the 1980s in the oil, real-estate and banking sectors. According to Chu, he and his friends bought 600 apartments in Houston as well as office buildings for a fraction of their market value, as these were distressed assets. “We did very well in those deals,” he says.

Phoenix did equally well by investing in the aftermath of the 2008/09 global financial crisis. In 2010, the firm assembled 244 apartment units for redevelopment into the 25-storey Tower 535. Located at Causeway Bay, Hong Kong, and designed by Skidmore, Owings & Merrill, Tower 535 was completed in 2015. It has a total GFA of 229,393 sq ft, with a retail podium on the first four levels and Grade-A office space on the other 21 floors, with the top two floors occupied by upscale F&B outlets.

Today, the building boasts tenants such as Amazon and WeWork. Founded in 2010 in the US, WeWork is now an international chain of co-working space operators. According to Chu, WeWork has taken up eight levels at Tower 535. In late September, WeWork announced that it had signed a corporate deal with HSBC, with the bank renting 300 hot desks for its digital and transformation teams at WeWork in Tower 535.

The 25-storey Tower 535 was completed last year, and anchor tenants include WeWork and Amazon. Source: Phoenix Property Investors

Residential play

Besides investing in retail and commercial properties as well as mixed-use complexes, Phoenix also develops residential projects. One of its recently completed higher-end residential projects is The Morgan at Mid-Levels in Hong Kong. It was completed in September and handover of the 111 units started in November. Units sold range from a two-bedroom duplex of 936 sq ft (HK36,407 psf) to a 1,360 sq ft, four-bedroom mountain-view residence, which hit a high of HK$41,919 psf. The project is 88% sold, with total sales of HK$3.4 billion.

The entrance and clubhouse of The Morgan, an upscale 111-unit residential development at Mid-Levels.

Even with the hike in buyer’s stamp duty in Hong Kong in early November, Phoenix continues to chalk up sales at The Morgan. “We sold three units last weekend,” says Chu. “After viewing the completed property, people were willing to buy because of the design.” The site was purchased through an amalgamation of units in 2011.

In Taiwan, Phoenix is involved in luxury residential projects such as The Master Collection of 28 villas, designed by world-famous architects such as Seattle-based Jim Olson, New York-based Richard Meier, Annabelle Selldorf and Calvin Tsao of Tsao & McKown. The Master Collection features villas of 6,372 to 13,718 sq ft, and is located in Great Taipei New Town District.

Chu sees value emerging in the Singapore residential market. “We have looked at every single bulk purchase opportunity in town, but we still haven’t seen one that has met our criteria.” The search therefore continues, as “Singapore is looking more and more interesting, and we are starting to see good value”.