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Samuel Chu began developing his basic understanding of the Hong Kong property market at the age of three as he joined his father collecting the rent from tenants.
Now, this former banker is running Phoenix Property Investors, one of the largest property funds in Asia with about $5 billion in assets under management, managing money for some of the world’s largest sovereign wealth and endowment funds.
In an interview with FinanceAsia, Chu, the son-in-law of Anthony Lo of Great Eagle Holdings, a property developer in Hong Kong, talks about leveraging his experiences as a student and family connections and why he is betting on the hospitality and Japanese office markets.
Taking a relatively conservative view, the US-educated investor also explains why he is shying away from the co-office space trend epitomised by WeWork, one of his firm's tenants in Hong Kong.
The following transcript has been edited for brevity and clarity.
Q How did you first get into property investment?
A After my career with Deutsche Bank in the early 90s, I decided to leave Frankfurt and started my own business venture in property. I first started to be a professional investor in 1991 when I was managing a property portfolio for a Southeast Asian? family. At that time, I managed my client’s money mainly in Hong Kong’s property market. A few years later I expanded overseas, taking stakes in bad loans in New York and Houston from Resolution Trust Corporation in 1993.
Luckily I sold all my positions before the market crash in 1997 because the risk was much higher than return, and speculations in the Hong Kong market were rampant.
Q What are the major trends in the property market across Asia?
A We are pretty bullish about Japan but we are deal specific. In Japan we like the hotel business, in part due to rising demand from Chinese tourists. On the other hand, the Japanese government is spending huge efforts to promote the tourism business before the Tokyo 2020 Olympics.
Japan has exhibited healthy growth in inbound tourists in recent years, rising at a double-digit pace in the past seven to eight years. Before 2020, the government aims to attract 40 million tourists per year, up from 25 million in 2017. According to the government project, the number of inbound tourists could reach 60 million in 2030 – supporting our positive view on the hospitality sector.
On the structural side, the country’s push to become one of the world’s largest casino gaming markets is also very encouraging, as it will drive not only demand for five-star hotels but for business-class accommodation as well.
In terms of office space, we like grade-A and grade-B offices in Osaka and grade-B in Tokyo as the yield on Japanese office space generates the highest return globally. On a cash-on-cash basis, the return in Japan can reach 6% to 7%. Government Pension Investment Fund of Japan and Japan Post – the country’s sovereign funds with trillions of dollars – are starting to look into property as well.
(Japan attracted a record 28.7 million tourists last year, up 19.3% from the previous year and the sixth consecutive yearly increase, according to government figures.)
We also like office space in Shanghai and we see some deal-specific opportunities in Australia, where we think there is a credit dislocation.
Q How do you see the rise in co-working space in Asia?
A First off, we are not venture capitalist but for us the business model of co-working is not entirely proven yet. Of course, it has been attractive to small companies and startups looking for communal office space and short-term leasing space.
I have met the founder of WeWork a few times in New York but we are not interested in taking a minority stake. Currently WeWork is one of our major tenants in Tower 535, a commercial building in Wan Chai. In terms of investing in the co-working companies, I think we are still conservative at this stage.
Q How about the property market in Hong Kong?
A As you know, the high property prices in Hong Kong reflect a supply-demand imbalance. After the 1997-1998 Asian financial crisis, the government has been reluctant to provide a steady supply, resulting in a big pile of pent-up demand in the market ...
The annual supply was about 50,000 units in 1997, compared with only 20,000 units in past few years. The core problem is that the supply of both public and private housing hasn't picked up ... in the past 20 years as population growth has been rising.
Q What’s your view on Chinese property market?
A We like the office space in decentralised locations of Shanghai. In the prime location, such as Lujiazui in Shanghai, the average rent per day is about Rmb13 ($2) per square metre, while the rate at the less central locations is half that at Rmb6 to Rmb8 per square meet. I think there is a lot of demand for the affordable office space in Shanghai, where the subway system is efficient and convenient to carry millions of people every day.
Two factors support our conviction. First, there is real demand for office space in decentralised areas, driven by demand from companies in technology and financial services, as well as co-working startups like WeWork and Kr Space. Second, the supply is expected to peak this year, which will drive the rent higher in the near future.
For China, we invest mostly in the tier-1 and tier-2 mainland cities as there is a strong buying interest even during tough market conditions.
Q What’s your investment cycle?
A We review over 1,000 investment opportunities across the region each year, but we only invest in roughly six deals. Our investment cycle is eight years and can be extended for another one or two years.
Q Can you explain your investment style and track record?
A We first started in 2002. We have three strategies: an opportunistic fund, a “core plus” fund and a debt fund. Our opportunistic fund focuses on special situation deals that can generate at least an internal rate of return of 20%. Since last year, we see a growing demand in the private debt market, that’s how we started to launch a debt fund with an internal rate of return of 15% to 16%.
We now have offices in seven locations, including Singapore and Tokyo.
Q Are you looking to raise new funds?
A We are in the process to close our sixth fund. We can’t disclose too much at this stage as we are regulated by the US Securities and Exchange.
