Chapter 124: Opportunities for Rapid Growth Before the Real Estate Crisis
“Boss, if we want to develop quickly, it's actually quite simple. The biggest problem with Wan'an Group is the lack of capital, which has, to a certain extent, limited our pace of expansion.
Let me give you an example. In March 1975, Wan'an Group competed with several real estate companies for a plot of land in Wan Chai.
At the time, we were determined to win that plot because everyone recognized its value.
To do so, we raised HK$50 million. HK$30 million came from the company's cash reserves, while the remaining HK$20 million was advanced by your father. We didn't borrow a single cent from the bank.
In the end, however, the land sold for HK$76 million, far exceeding the HK$50 million we had raised.
If Wan'an Group had been bold enough to secure the land first and then apply for bank loans afterward, we could have stayed in the bidding.
Unfortunately, we chose to give up.
The developer who bought that plot went on to earn well over HK$100 million from it because property prices had risen significantly compared with 1975. Their return exceeded 100%.
That's just one example. Since joining Wan'an Group, I've seen far too many regrets like this. It's also one of the reasons why our company has grown so slowly.
Of course, such a cautious investment style isn't without its advantages. Let me give you a more recent example. In 1974, affected by the oil crisis, Hong Kong's real estate industry suffered as well. Land prices fell by 40%, while housing prices dropped by 30% to 40%.
During that period, many heavily indebted property developers that had expanded aggressively saw their cash flow collapse and either went bankrupt or were acquired.
Wan'an Group, however, had zero debt. Although our profits also plunged during that period, we faced virtually no risk of bankruptcy and suffered almost no losses. We simply earned much less over those two years, allowing us to weather the storm safely.
So, Boss, if you want rapid growth, the simplest solution is to borrow from the banks and strengthen our financial resources. Only with sufficient capital can we seize more development opportunities.
However, expansion inevitably brings risks. We're currently in another oil crisis. It doesn't seem to be affecting the real estate industry for now, but no one knows whether another property crisis will occur.
So the decision is yours, Boss,” Yang Mingyi said frankly.
Lin Haoran nodded. The current situation at Wan'an Group was indeed exactly as Yang Mingyi had described.
For example, most of the group's funds were tied up in the North Point project. On top of that, they had previously spent nearly HK$20 million to purchase 5.1 million shares of Qingzhou Yingni.
As a result, the group's available cash had dwindled to only a few million Hong Kong dollars. For a corporation, that amount was barely enough to undertake any major projects.
In reality, however, Wan'an Group could fully leverage its strengths by borrowing from banks and continuing to develop more projects. It could easily work on two, three, or even more real estate developments simultaneously.
Instead of pouring a huge amount of money into one project and then having no investment capacity until returns from that project came in.
This clearly showed that while steady growth greatly reduced corporate risk, it also meant missing many opportunities for expansion.
As for the real estate crisis, if nothing unexpected happened, another severe property crisis would strike Hong Kong in three years, in 1982—especially after a certain lady took a fall outside City Hall.
This crisis caused Hong Kong housing prices by the end of 1982 to fall 60% from their 1981 peak. By 1983, the market had completely collapsed, with enormous consequences.
Fortunately, there were still three years before that happened, enough time for Wan'an Group to grow rapidly.
Moreover, while a property crisis would be a disaster for others, for Lin Haoran it could just as well be an extraordinary opportunity.
If he handled it properly, he could use this crisis to propel himself into the top tier of Hong Kong's real estate industry. The prerequisite was helping Wan'an Group accumulate enough capital over the next three years.
Now, he intended to help Wan'an Group rise step by step instead of continuing its previous slow and steady approach. That simply wasn't Lin Haoran's style.
“General Manager Yang, are there any good real estate investment opportunities at the moment?” Lin Haoran leaned back in his chair and asked.
“As far as I know, in a few days the Hong Kong government will auction off several more plots of land. If you're interested, Boss, I can call the auction office and have them fax us the information. Then you can take a look and see if anything catches your eye,” Yang Mingyi suggested.
Yang Mingyi had already guessed what Lin Haoran was thinking. Perhaps this new boss intended to take the path of bank financing.
He welcomed such a decision. It was the only way Wan'an Group could develop rapidly. If they continued operating under the old philosophy, the gap between them and other property developers would only continue to widen.
As the general manager of Wan'an Group and someone who had worked there for nearly twenty years, he had deep feelings for the company.
Still, how the company developed was the boss's decision, not that of an employee like him.
Lin Haoran nodded. “All right, make the arrangements.”
More than ten minutes later, Lin Haoran received the auction materials for the land parcels.
This time, the Hong Kong government was auctioning only four plots, located in Kowloon Tong, Kwai Chung, Chai Wan, and a reclamation project west of Yau Ma TeiIran.
After reading through the descriptions, Lin Haoran immediately eliminated the reclamation project west of Yau Ma Tei.
The bidding price for reclaimed land wouldn't be too high, and Yau Ma Tei was an excellent location with promising profits.
However, after acquiring the land, they would have to pay for the reclamation themselves before any development could begin. The timeline was simply too long. If Lin Haoran had abundant capital, he might have taken it, but he didn't.
So he turned his attention to Kowloon Tong, Kwai Chung, and Chai Wan.
Chai Wan was suitable for industrial buildings, while Kowloon Tong was ideal for low-density residential developments. After some thought, Lin Haoran concluded that the Kwai Chung plot offered the greatest potential.
Kwai Chung's advantages were obvious. Since cargo terminals had been developed there in the 1960s, the area's population had steadily increased. It was also one of Hong Kong's major industrial zones.
As a result, there were many people employed there, and residential developments in Kwai Chung were selling extremely well. Demand from owner-occupiers was very strong.
Compared with downtown, housing prices there were still too expensive for many ordinary citizens.
Kwai Chung, on the other hand, was adjacent to central Kowloon while offering much more affordable housing, making it an ideal choice for many middle-class buyers.
It could be said that if Wan'an Group acquired the Kwai Chung plot, there would be no need to worry about selling the apartments once construction was completed.
Although its location wasn't as good as the North Point project, the land price per unit area would also be much lower.
The starting bid for the Kwai Chung plot was HK$10 million.
“General Manager Yang, if we wanted to bid for the Kwai Chung plot, roughly how much would it take to win?” Lin Haoran asked.
“Based on past experience, the final transaction price is usually around double the starting bid. It depends on how many developers participate and how strong they are financially. There's no fixed rule,” Yang Mingyi replied.
Double the starting price? So around HK$20 million to acquire a plot twice the size of the North Point site. That really wasn't bad.
Although housing prices there would never reach North Point levels, its advantages were equally obvious. The larger scale meant total profits would be comparable.
“If we acquired this plot, how much profit could we make?” Lin Haoran continued.
“Judging by the size of the land, we'd need three to four years to complete construction. As for profits, that depends on whether we wait until completion to sell or start pre-selling units after obtaining the land and completing the design plans. The difference in profit between those two approaches is substantial.
Also, land acquisition is only part of the development cost, accounting for roughly 40% to 60%. In other words, construction costs afterward would roughly double the total investment. If the land costs HK$20 million, then the total development cost would reach HK$40 to HK$50 million.
Selling off-plan apartments allows us to recover costs quickly, but because prices need to be discounted to attract buyers, profits would probably only be around 30%. We'd essentially just be earning hard-earned money. After investing HK$40 to HK$50 million, we'd probably make only a little over HK$10 million in profit.
If we wait until construction is completed before selling, there are many uncertainties. We don't know whether Hong Kong property prices will rise over the next two or three years, or whether another property crisis will occur during that period. Based on the increase from last year to this year, though, our profits three years from now could easily double our investment.
Since we're currently in the midst of an oil crisis, I can't accurately predict the future. If we want to be conservative, the best approach is to start designing immediately after acquiring the land, launch advertising, begin pre-sales, and recover our costs as quickly as possible. That way, we virtually eliminate the possibility of losses.
However, if a property crisis breaks out within the next year or two and housing prices plunge, while our funds are borrowed and we have to repay the loans with interest, then this project might not only fail to make money—it could even lose money,” Yang Mingyi explained several possible scenarios, giving Lin Haoran a much clearer understanding of the situation.
Lin Haoran nodded. He had already made up his mind.
According to what he knew about Hong Kong's real estate crisis, the peak of the crisis occurred between the second half of 1982 and 1983, with warning signs of declining prices already appearing in the second half of 1981. It was now February 1979, meaning there were only two and a half years left before the market began to decline.
Time was extremely limited—so limited that even a single residential development might not be completed before the crisis erupted.
But who said making money in real estate required actually building houses?
Since housing prices would soar over the next two years, land prices would naturally soar as well—and likely by an even greater margin.
In that case, simply stockpiling land would be enough. Perhaps in two years, even selling the land alone could double the investment.
As for making only a modest profit by selling off-plan apartments?
Lin Haoran had no interest in that. Although it allowed for quick cost recovery, the profits were simply too low.
(End of Chapter)
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