David vs Goliath: David’s Weapons and Strategies in Asian Real Estate
Real estate development (the process of purchasing a land, designing and financing a project, and managing its construction) is a big boys’ game, hence start-ups tend to develop ancillary businesses such as agencies and platforms. We chose the hard way: we studied what the most established real estate firms had to offer, we focused on a niche market, and strived to deliver better value to buyers and tenants in secondary cities in South-East Asia.
Success is made of intuition, preparation, persistence, and a bit of luck. Therefore, this is no recipe for making it, I just hope that sharing the story of NOON will inspire other real estate entrepreneurs to go against the odds and undertake ventures despite existing oligopolies.
Identifying the opportunity
It all started in 2014, with an offer to take over a distressed land in Chalong, the residential part of Phuket, Thailand. The market was and still is very much skewed towards resorts and high-end projects where margins are arguably the most attractive, but with the increasing number of long-term residents driven to the island by job opportunities, good education, and affordable healthcare, the demand for cost-effective accommodations was growing rapidly.
In the same period co-working (and subsequently co-living) was becoming popular, together with the idea of creating communities around real estate projects. We loved the concept and decided to add our own property management to the business plan. This ensures that quality control is on us, and our tenants would always get the service level that we stand for.
Most property developers do not manage the projects they build, they pass them on to third-party agencies. We understood that it was crucial to stay in touch with our residents, understand their concerns and consistently improve the standards of our apartments.
Most co-working/co-living operators do not own the space they manage, leaving to landlords a substantial chunk of the value generated by revamping neighborhoods.
Despite the capital intensiveness, we chose to integrate ownership and management and consolidate the two activities under the same brand.
Building the Team and Aligning interests
Lack of control on costs and execution is one of the main reasons real estate projects in emerging markets fail. We opted for an integrated value chain, eliminating contractors and giving us full rein on our projects. We had to build a founding team with diverse experience to complement each other and cover all aspects of property development. When the six of us came together we had an engineer, an architect, a construction coordinator, a property manager and two investment managers. Some of us had worked for the biggest developers in Thailand, others managed investments in Asia for over ten years. We fully aligned our interests: each would have a stake in the company and would control its own team, working at cost and profiting only at the partnership level.
With the human resources in place, and some equity to secure land and building permits, we started our fundraising. Although we had extensive experience in our respective fields, our brand had no track record, hence storytelling became the key to succeed. Humans are emotional creatures, and storytelling helps connect information to emotions.
While property prices in Singapore and Hong Kong were skyrocketing, real estate investors in the region were looking for alternative opportunities, and we were offering low investment tickets (less than USD 90k per apartment) with attractive rental returns and catalysts for price appreciation, all in a fully managed package that allowed buyers to receive periodic payments in a completely hassle-free manner. Concurrently, we signed partnerships with six Thai banks to provide loans to our domestic clients.
Our backers loved the idea of participating in an investment that was traditional on the surface but had many innovative tweaks. In six months we fully funded our first 74-apartament building, and we completed its construction in the following 16 months, two ahead of schedule and within budget.
The fully integrated business model allows us to obtain high technical specifications at entry level prices, and our connections with European suppliers facilitates the sourcing of more durable materials and furniture at the cost of Thai products. The result is what we call “aspirational housing”: a product made available to nearly everybody that changes their perception of what’s affordable.
Managing the property, coordinating the rentals and streamlining operations was probably the hardest part. However, despite our multiple mistakes with handling reservations and services, the response of the community was overwhelming, with occupancy rate over 90% after only 10 months of operations, and clients preferring us to the giants of Thai real estate (Sansiri, Supalai, Sugarpalm, to name a few).
Scaling the business
Once the concept was proven, we began thinking how to scale the operations: we bought two more plots of land and optioned a fourth one for a total pipeline of over 600 apartments.
The second building is currently under construction and it was fully funded in no time by buyers of the first project, new high-net-worth investors and a family office, bringing the total capital raised to date to USD 10 million.
Social networks and word of mouth played a key role in strengthening the brand within the local community. Our tenants are international school teachers, doctors, F&B managers, entrepreneurs, of over 20 different nationalities.
Integrating technology
A challenge to scalability is the management of the increasing number of periodic cash flows derived from rentals, utility bills and additional services we provide.
Similarly, only automated investor relations and reporting procedures can guarantee transparency to a large and growing clientele base.
This is where technology can play a big role. Specifically, the blockchain, a phenomenon that has taken the world by storm. Blockchain has sometimes lacked significant use cases where the technology’s application is clear and practical.
For NOON, blockchain’s use is evident and precise. We are educating our young and tech savvy tenants to use digital wallets for regular monthly bills, while also securing funding from our investors through digital certificates backed by our projects.
We believe the interconnectivity of these applications onto the same blockchain (Ethereum) can produce a seamless, efficient and transparent process. We could potentially distribute in real-time a small dividend to our investors every time we receive a rental payment.
Blockchain has the power to enable growth and, when applied to solid businesses with clear value propositions, can allow ambitious start-ups like us to challenge the industry Goliaths.
