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UCL Connect: In conversation with Darrin Woo event re-cap and Q&A
A real estate investment firm founder and director of family office Woo Hon Fai Group, Darrin’s wide-ranging career has been characterised by his strategic planning, determined execution and ability to see potential in overlooked opportunities.
The fascinating UCL Connect event, led by Professor Christoph Lindner, is available to watch back. By popular demand, Darrin has also provided answers to some of the questions that couldn't be covered:
What are some current market challenges and how is your company managing them?
One of the greatest challenges, in my opinion, is the housing crisis across the globe. Since the global financial crisis in 2008, average home prices in tier 1 cities like London, New York, San Francisco and Hong Kong have risen so much that they have become unaffordable for many families, while affordable social housing continues to be in short supply. Therefore, some are forced to become homeless not because they don’t have jobs, but because their income is insufficient to pay for all their needs, so they prioritize necessities like education, food and even telecommunications over housing. Public social housing policies reform is needed in order to tackle the housing crisis. There is much to learn from Singapore, a country ranked third most densely populated in the world, with a population density of 7,810 people per square kilometres according to the Singapore Department of Statistics in 2020. It has one of the highest homeownership rates with over 78% thanks to the HDB (Housing Development Board) scheme and grants. The success lies in Singapore’s long-term vision, as well as its political will and financial strength. Few countries in the world are in such an enviable position.
Why did you choose to study at UCL?
I wanted to attend a full-spectrum university offering a range of comprehensive undergraduate programs in arts and science, with a long history and an excellent academic track record. Another deciding factor was I wanted it to be in central London. UCL was the only one that checked all the boxes and offered an undergraduate degree in Town & Country Planning.
Hong Kong and its Mass Transit Railway (MTR) is synonymous for leading the way on Land Value Capture. The English planning system has toyed with this and faltered with now a clunky 106 and CIL regime with an Infrastructure Levy proposal expected in the planning bill this summer.
What do you think works from your own experience when it comes to Land Value Capture as an investor and developer?
I think your question is about equity - how can the public benefit from the use of public resources by the State, whether through fiscal tools such as infrastructure spending or policy tools such as the granting of planning permissions? MTR Corporation is a unique example - it is a publicly listed company whose largest shareholder is the HKSAR government. This creates a situation where on the one hand, as a free-market enterprise MTRC’s goal is to maximise shareholder value. On the other, the government needs to consider public good whose interest may not always align with shareholders. In addition to rail operations, MTRC generates profits from property development through its de facto development rights along its railway lines. It pays a “Land Premium” to the government to convert those rights to land based on the land’s market value without the railway. In 2018, 14% of its revenue came from property-related activities while 55% came from transport operations. The so-called “Rail Plus Property” business model has been highly profitable and successful - the public enjoys excellent railway services and one of the lowest train fares in the world, in part subsidised by the profits generated by its property-related activities. The government receives sizable annual dividend payments and land premium.
The English system has its own merits, and its faltering has as much to do with flaws in its design and implementation as to the lack of cross-party political support between the Conservatives and Labour government. Also, Transport for London, operator of the London Underground, is a government body whose goals are different from MTRC. London Underground’s latest railway services, the Cross Rail linking Heathrow on the West to Strafford on the East, passes through mostly developed areas so any increase in land value will benefit existing private landowners.
As an investor, I champion a simple, open and transparent mechanism that encourages fair competition in the auction of government land. Land purchase is already subject to stamp duty and property tax is levied on an annual basis. Developers’ profits are also subject to corporation tax. While these taxes are not designed to capture land value increases, they do capture profits generated from developments. Developers risk their own capital and should be incentivised for such risk-taking activities. What I think Hong Kong can learn from the English system is the requirement for developers to contribute to local areas via the building of parks, affordable housing and community facilities as a condition in the granting of planning permission under Section 106 planning obligations requirements
When redeveloping, have you considered environmental factors such as retaining buildings to reduce the amount of embodied carbon use, operational carbon, etc. I am always surprised that flats within Hong Kong are all serviced by individual a/c which are very power-hungry. Have these wider environmental implications been considered?
I think Environmental, Social and Corporate Governance, otherwise known as ESG, is becoming increasingly relevant. It is true that redevelopment creates a tremendous amount of industrial waste and the carbon footprint is immense. Yet redevelopment is a natural social and economic progression. There needs to be a balance between the pursuit of economic profits and environmental costs such actions may incur. Real estate developers are increasingly adopting greener construction practices laid out by various certification bodies such as Leadership in Energy and Environmental Design (LEED) and BEAM Plus so the industry is certainly heading in the right direction.
Technological innovations over the years have greatly improved energy efficiency. For example, the introduction of split-air type air-conditioners has greatly reduced power consumption compared with traditional window-type units. The reason individual air conditioners remain popular, especially in residential properties, is due to many factors, including regulations, practicality, maintenance and costs. Other green innovations such as CO2 absorbing concrete, electrochromatic window glazing and solar power generation will all help reduce carbon emissions in the long run.
What effect has COVID-19 had on the industry and how is it expected to recover? Is it the ideal time to invest in real estate, considering what is at stake financially?
The pandemic has negatively impacted real estate markets in all segments across the globe. Take Hong Kong for example, rent and capital values of retail properties in prime shopping areas have plummeted due to lock-down restrictions and the collapse of tourism. Hotel industry is equally affected with occupancy rates dropping to lows not seen since SARS. Demand for office space has been affected due weak demand. The only bright spot is in the residential sector where prices have been stable throughout the pandemic, as shown by the Centaline Centa-City Index (CCL). There are currently early signs of a recovery in the retail and hospitality sectors as the economy slowly reopens.
Market timing is not my specialty, so I am not in a position to say if this is a good time to invest in real estate. Having said that, macro factors including low interest rates, an abundance of capital, strong employment, limited supply, strong demand, inflationary environment are all supportive to real estate prices. Debt financing is an effective way to enhance returns, especially given the current low interest rate environment. The key is to ensure there is sufficient capital to cushion any sudden rise in interest rate and/or drop in valuation.
In reference to the particular renovation project you spoke about: was the old building demolished or just renovated?
The building underwent major alternations, including the installation of an elevator, removal of the mezzanine floor to create a double-height entrance lobby, reconfiguration of staircase and upgrading of floor-to-ceiling glazing. The works required a full A&A submission to the Buildings Department so it was above and beyond a standard renovation, but the building was never torn down, if that’s what you meant by demolition.
In reference to the particular renovation project you spoke about: did you face any challenges raising finances? How did you go about it?
Raising capital is always a necessity in real estate, whether from investors or financial institutions. Before any financing was raised, we had to put in our own equity as well as raising funds from friends and family. But it was not enough so we had to look for more investors. We reached out to a broad range of prospective investors including high-net-worth individuals, family offices and institutional investors. Over the course of meeting those investors, we learned a great deal about how to tell our story, what we could offer to investors, what investors looked for, returns expectations, investment horizon, etc. Next, we raised debt financing from banks. It was tough to raise capital and debt as a start-up so we started small and slowly grew our portfolio over time.
What is the future of both the Hong Kong and UK real estate markets? How do these compare to global market?
According to the latest Wealth Report 2021 published by Knight Frank, US$1m buys 23m2 of prime residential real estate in Hong Kong versus 31m2 in London. This gives you a sense of the prices between these two cities, which are amongst the most expensive in the world (No. 2 & No. 3, respectively). I have no crystal ball, so I really don’t know what the future holds. Having said that, as long as interest rates remain low and the flow of capital remains robust, prime luxury residential properties in key gateway cities across the globe will continue to appeal to global investors looking for safe havens, while commercial properties will attract institutional investors searching for rental yield. Logistic warehousing is also seeing a surge in investors’ interests in recent years.
It is amazing that Darrin cares for the community and chooses to invest in projects that organically rejuvenate the area. How is that balanced out against pressure from investors, pressure to maximise ROI?
Thank you. Our strategy aims to deliver excellent risk-adjusted ROI over long periods. There are typically three main investment strategies in private equity real estate - Core, Core+ and Opportunistic, each with its own risk and reward characteristics. Core strategy is the most conservative and Opportunistic the most aggressive. We run a Core+ strategy and we are proud to have delivered on our promise. It is our unique ability to reimagine, repurpose and reposition real estate spaces that unlocks hidden value in our property portfolio.
