Knowledge and timing the key

By E Jacqui Chan of The Edge Malaysia
Sunday, 24 April 2011 00:00

‘Buy based on what you know, not what you see’

In 2009, Thomas Ong and Edmond Liau took a few friends to the site of the yet-to-be-developed commercial project Equine Boulevard in Seri Kembangan to explore its investment potential.

Ong and Liau, who are in their forties, head a group of 70 investors that focuses on bulk acquisition and leasing of shop units. The duo are also directors of several property investment companies that were set up for each property the group acquired.

One look at the bare 13-acre tract, with not a crane in sight, and the undeveloped surroundings would have put most people off investing in the project.

But Ong and Liau, with a few other investors, went ahead and acquired 29 units in the project for RM43 million. The remaining 89 units were taken up by the rest of the investors in the group.

“What people did not know at the time was that IOI Properties Bhd and Hap Seng Consolidated had brought parcels of land there. Giant hypermarket was coming in and Tesco was also considering the location. These are major developments that will change the area,” says Ong.
Since then, Giant has opened its doors in the area, Tesco will follow soon and both Hap Seng and IOI are in various stages of executing their projects D’alpinia and Sierra 16 respectively.

Do not buy based on what you see, says Ong, but on what you know.

“You need to know what is going to happen in the area two or three years after the development is completed. If you base your decision solely on what you see, you might lose out on a good investment.”

The group acquired 73 units in One South, which is located along the KL-Seremban hiighway, serves a floating population
It is a strategy that has served Ong and Liau well. Together with the group, they have amassed a commercial property portfolio worth more than RM300 million, which includes One South in Seri Kembangan, PJ 21 in Petaling Jaya, Puchong Gateway in Puchong and Melaka Boulevard.

The group acquired 73 units in One South for RM105 million from the developer Hua Yang Bhd in January this year.

Getting the best returns
Born with an entrepreneurial spirit, Ong has set up a few small businesses, including a children development centre and a music school, over the past 15 years.

“Keeping the businesses going requires a lot of time and effort. Eventually, I realised that property investment gives by far the best returns for the effort you put in. So about five years ago, I called it a day and turned my attention to property investment,” he says.

But it was different for Liau, who owns a trading company.

“I bought a few units here and there over the years but I wanted to invest on a bigger scale. Then at the right time, Ong came along,” he says.

With the know-how and the right people, property investment can be a very lucrative business, he adds.

It took Ong another three years before he started investing on a bigger scale as he took his time to observe and understand the market.

“I started off with a few units of shoplots. I had to make sure I had got it right before I could even think of pumping in big money,” he explains. Even after his small investments began to pay off, things did not go as smoothly as he expected.

In the commercial property market, corner lots and units with good frontage are the preferred choice of investors because the returns are higher. Unfortunately, this made it hard for the duo to get prime units.

“Sometimes, developers are reluctant to sell all the prime lots to just one or two buyers. There was a project where we wanted to buy three corner units but the developer started asking questions. After much negotiation, we ended up with an entire lot,” says Ong.

That was when the duo realised they needed to build a team of value investors to enable them to buy en bloc.

Tenant control was another key reason why Ong and Liau decided to focus on en-bloc acquisitions.
When there is no control over the environment, it takes a longer period of trial and error before a commercial development matures, observes Ong.

“You will get situations like an F&B outlet spending hundreds of thousands of ringgit on renovations only to have a mechanic shop open next to it. Or a business might fail to take off because there are too many similar shops in the development. Things like that can affect the business, which in turn affects your returns.”

Ong stresses that there is no secret to property investment — it is a matter of knowledge and timing. A large portion of their time is spent on research.

“We do mostly what the man in the street does. We read the newspapers, track the developments closely and attend launches. We also rely on our network of friends and associates for information,” says Ong.

However, for every project you buy into, holding power is crucial, he adds.

“From the point of vacant possession to maturity, you will need to hold the property for a period of time. The more properties you own, the more holding power you will need.”

To ensure there is enough capital to hold the properties, Ong and Liau sell off a few units to make some immediate profit.

“These days, most properties in the Klang Valley enjoy capital appreciation almost immediately after they are sold. So, we use the profit to increase our holding ability or we invest it elsewhere,” says Ong.

To enjoy good capital appreciation, Ong and Liau seek out “uncut diamonds”.

“This is where timing comes in. You have to buy just in time for the area to turn around. Buying in places like Desa Park City means paying a premium and you may not be able to enjoy high capital appreciation,” reasons Ong.

Some of the duo’s earlier buys have given them handsome returns. Units in Neo Cyber in Cyberjaya were bought for RM420,000 each upon launch and sold at RM650,000, representing a capital appreciation of 54%, while units in Puchong Gateway along Lebuhraya Damansara-Puchong were bought for RM818,000 each and sold for RM1.35 million — a capital appreciation of 65%.

The group expects Equine Boulevard in Seri Kembangan to yield a capital appreciation of more than 60% when completed
Ong estimates their properties at Equine Boulevard developed by Equine Capital Bhd, which were acquired for about RM1.10 million, will yield a capital appreciation of more than 60%, considering that the recently launched Phase 4 were fully sold for RM1.9 million.

He recalls friends telling him that it was risky to invest in Puchong Gateway as it was a project by first-time developer Newfields Property Management Sdn Bhd.

“You have to consider that Puchong Gateway is a large project of 52 acres which will be developed in phases. The developer has much more to lose than me if the project fails. You can be sure it will do its best,” says Ong.

While he agrees that there are risks involved, Ong believes these are mitigated by what Liau and he know about the area.

Talking about shoplots, Ong says he categorises these as “adik” and “abang”.

Adik are shoplots located within a housing estate, typically built in one or two rows, while abang are those located on a main road that connects the suburbs to the towns.

Adik mostly cater for the residents in the area, which means smaller capital appreciation and finding tenants might take longer. However, says Ong, these are good for passive income as tenants are likely to stay longer once they have established a loyal clientele.

“Abang, on the other hand, serve a floating population. Two examples would be Bandar Puteri Puchong and One South, both of which are located along the highway. Most (of Abang) are also within integrated developments which will help sustain them. Investments in this category will generate bigger returns,” he explains.

As for rental yields, Ong and Liau do a simple survey of prevailing rental rates for properties surrounding the new project to get an idea of what rents will be like upon its completion.

Units in Puchong Gateway are generating 8% rental yield
“As long as we can get 7% based on what people are paying today, we are confident that we should be able to achieve at least 8% when our properties are ready,” says Ong, adding that the units they kept at Puchong Gateway are generating 8% rental yield.

“We buy uncut diamonds and in two years’ time, when they are completed, people will see the cut diamond and the value goes up. We have started receiving leasing enquiries for our properties, including from a few big retail and F&B players.”

Venturing into Melaka
In a move to diversify their portfolio, Ong and Liau are venturing into hotel investment and they are doing this in an unlikely location — Melaka. This is in addition to the 72 units acquired for RM90 million last year in Melaka Boulevard, the city’s first street mall.

“When we told people we were venturing into Melaka, 9 out of 10 said it was a wrong move,” says Melaka boy Liau.

Research showed that the number of tourists to Melaka was increasing year by year and new infrastructure was being put in place.

“We saw the potential there. A lot of tourists are visiting Melaka and most families do not like to go to budget hotels. At the same time, they do not want to spend too much on accommodation. Ours will be a business-class hotel that bridges the gap between the budget and five-star hotels,” says Liau.

Ong makes a comparison with Puchong. “Back then, people didn’t want to touch Puchong. Suddenly, the place is transformed and those people are asking what happened and how it bypassed them.”

The hotel is located next to Melaka Boulevard and is part of a 4-storey shoplot that was abandoned for a period of time due to poor accessibility.

“Things have changed since then. The government has built a highway across from it and is building a new promenade. The government has also cleaned up the river. Also, across the road is the Hard Rock Hotel, which is still under construction,” says Ong.

The hotel is scheduled to undergo a facelift soon, with plans to create a Peranakan concept. The ground floor is reserved for F&B outlets while the upper floors will house the hotel.

“We are looking to bring in some high-end F&B players,” says Liau.

However, the duo have no plans to manage the hotel themselves. Says Ong: “Hotel management requires a whole different set of skills. It’s better for us to concentrate on our core skill, which is investing, and outsource the management of the hotel.”

What the future holds
After more than two years in the business, Ong and Liau have reached a point where developers come knocking on their door to promote developments.

“We don’t want to expand too much. When a good opportunity presents itself, we will go for it but we are not hungry for projects,” Liau comments.

Ong and Liau run their business with just a handful of employees, and investors are gathered informally.

“We find investors through our network of friends, by sharing our knowledge [with them]. I believe that the secret to making money is to tell people your secret,” says Ong.

He also notes the danger of becoming overconfident as one becomes more successful, saying there is no room for error in property investment.

“One mistake will drag down your entire portfolio. Sometimes, it’s good to step back and take a fresh look at things. See where you can improve rather than ploughing ahead just because you can.”

Currently, Ong and Liau have no plans to invest overseas, preferring to focus on Malaysia. Nor do they wish to expand into the residential property and office markets.

“There are plenty of opportunities here. It’s a matter of whether you can see the opportunity. I think the difference is the strategy. There is really no bad time to invest or make money. Sometimes, bad times, like the recent financial crisis, can offer you many opportunities,” says Ong.

The office and residential property markets are different animals that require different strategies, which is not something they are keen on, he adds.

“With residential, you have to worry about whether the tenants will take care of the property, but in commercial, it is in the best interests of the tenant to take care of the premises.”

For now, with their investment projects running on schedule for completion, the duo are looking forward to spending more time with their families.

“My eldest daughter is already talking about getting her driver’s licence and my wife is complaining that I see more of Liau than her,” laughs Ong.

“We do not want to have the biggest property investment portfolio in the country. We earn enough, and time with our family is more important than anything else,” concludes Liau.

Article taken from http://www.theedgeproperty.com/news-a-views/7001-cityacountry-cover-story-knowledge-and-timing-the-key.html