Peter Churchouse is the founder of Portwood Capital, a leading real estate investment company. With more than three decades of experience in real estate investment and research he is widely considered one of the world’s foremost authorities on Asian real estate markets. He is also author of The Churchouse Letter, his financial newsletter which provides investment and wealth building strategies. In this 8-part series, he highlights key rules he feels investors should follow when purchasing real estate. This is Part 8 of the series.
How do you make a REAL fortune in real estate?
How do you go from a ‘pretty good deal’ to attaining full blown life-altering prosperity?
As Baron Rothschild, the 18th century British nobleman and member of one of the wealthiest, long lasting and powerful dynasties in modern history said: “the time to buy is when there’s blood in the streets.”
This is really just the essence of contrarian investing…. whether you’re talking stocks, bonds, or other assets.
But make no mistake, it’s difficult. To buy when all appears doomed, and when everyone is capitulating takes nerves of steel. If it were easy, everyone would do it! But sometimes it is just a case of following as many rules as you can, closing your eyes, and going for it.
Nobody knows when the market bottoms out. Until after it happens. Some are short and sharp “V” shaped. Others are long and painful “U” shaped.
In early 2003 Hong Kong was at the centre of a global pandemic. ‘Severe Acute Respiratory Syndrome’ or ‘SARS’ had turned the city into a ghost town. Restaurants and bars were empty. People sent their families back overseas. Everyone wore surgical masks. The slightest cough in public was met with icy glares. The property market continued to sag lower, down 20% from the year earlier. And bear in mind this was already down 45% from the 1997 bubble peak.
On one night during SARS the Peninsula Hotel, Hong Kong's most famous five star establishments, had a grand total of one guest.
At the splendid new Hong Kong international airport you could have fired a shotgun down the departure lounge with little risk of hitting anyone. Cathay Pacific Airway, Hong Kong's national carrier saw its "bums on seats" globally fall from more than 35,000 to around 7,000 per day. My employer, a US investment bank, saw fit to ban all personnel from Hong Kong entering offices in the US or UK. Only essential meetings were held and people suspended the habit of shaking hands on introduction.
This was a dire situation.
Given the mayhem in the markets I started to buy up some properties in the centre of the city.
We also started to buy up some industrial property at well below replacement cost to develop a small business we saw as having great potential. In some cases we bought before the bottom of the market and in others, as the recovery gathered momentum.
All of those investments have proved very attractive, most producing returns in multiples of the original purchase price. Depending on levels of debt applied, the returns on equity invested have been multiples again higher.
CASE STUDY: A Specific SARS Example...
In mid-late 2003 I came across a very interesting real estate opportunity. This was a chance to buy a whole house in the middle of Hong Kong's famous art and antique district. There are very few whole houses anyway in the central part of Hong Kong and here was one for sale.
It was a small site, with a house that had been built in 1989 - not old given that many buildings in the area are 50 years old and more. The house was a complete tip. It was a mess of an order that one rarely sees. The ground floor was being used as a storehouse for urns of salted and oiled vegetables and food from
China. It stank. The floor was swimming in spilt oil and unmentionable liquids. The rest of the building was a rabbit warren of rooms, corridors and stairways populated by what looked like a fairly large group of senior citizens.
On my second visit I took my son along. His only comment was
“I would love to know where the rats live”.
I loved it.
The location was great. I had my Feng Shui advisor check the place out as there was a coffin shop nearby, and traditionally Chinese do not like to reside near anything related to ‘death’ (Rules Number 4 and 10!). But there were no problems, the place had great Feng Shui.
The ability to buy a whole house like this was and still is extremely rare in Hong Kong. I had never seen one before. The land lease was excellent. It was granted in the 19th century for 999 years and still had about 867 years to run. We would get vacant possession. And I could easily see huge renovation potential and value add possibilities.
We even managed to negotiate a decent discount on what I thought was already a pretty low price. The transaction took some time to complete as the owner had some difficulty in locating the old family documents and title certificates. But I was in no hurry.
Eventually, many months later the keys were handed over and our architect team launched into a complete strip, gut and refurbishment of the entire building (Rule Number 5). From a labyrinth of rooms the team created a unique residential property that became a landmark in the area.
The annual rent it generated was over 20% of the purchase price. And we sold it recently for 7 times our original "blood on the streets" purchase price.
This concludes the 8th and final part of the series. As I said at the start, these rules are by no means comprehensive. And I make no claim to know-it-all. I’ve just been at this for more time than most! I know that if you make an effort to follow even a couple of the rules that I’ve outlined in this series, you will be in a better position to successfully invest in property. If you have any questions or comments, I’d love to hear from you. You’ll find my details here.
In the meantime, good investing! I hope that these few rules and examples have provided you with some insight or new ways of approaching property investing.
CEO, Portwood Capital
Author of The Churchouse Letter