Pre-developed Land Opens Up Wide-Ranging Opportunities for Asian Investors
Pre-developed land, a concept which may not be familiar to investors in Singapore and Asia, refers to land prior to infrastructure development and urbanisation. As an investible asset, it is even less well-known in Asia. However, in North America, institutions and individuals are able to invest in such assets. This opens up whole new opportunities for Asian investors looking to diversify into a long-term real asset. One of the leading investment and research firms for pre-developed land is Calgary-based Walton International, a family-owned firm with a long 38-year history in the real estate business.
Why Pre-developed Land
One of the main reasons which make pre-developed land such an attractive proposition is that the most significant increases in value for any piece land is typically between its undeveloped phase and initial development. The question then becomes: how do you know which pieces of land will become developed and experience large increases in value in the future?
Extensive Due Diligence Process
To ensure it only picks land parcels with the highest potential for future development, Walton performs extensive due diligence before deciding whether or not to invest. Mr Bill Doherty, CEO of Walton International commented, “That research comes down to three primary factors in general: pro-growth, pro-business areas, which create high potential for future economic development. Where there are jobs, people will come, and you will get building permits.”
The firm undertakes an exhaustive research process including demographic research, development pattern analysis, as well as software-and-data-aided analysis before deciding which land parcels to invest in. “We use a software called LandMaster, which is a GIS [Geographical Information Analysis] mapping system to gather data. We combine this with other sources of data to produce deep insights and analysis of the growth trends.”
This due diligence process can take two years or longer, but this does not mean Walton will be inclined to invest just because it has invested research into a potential opportunity. “In some cases, we have spent hundreds of thousands of dollars worth of research on a potential acquisition and still not invest when we felt it did not make sense,” added Mr Doherty.
Some reasons could be that certain jurisdictions could be challenging for long-term infrastructure development due to environmental concerns, or it could be that certain jurisdictions have such high hurdles to receiving approvals for development work that it makes no economic sense for Walton to enter the market. To ensure the highest chances of success, Walton International also works closely with City governments to understand where future development might be heading.
“I learned this business at the kitchen table.”
“When I was 10, my dad would take me on business trips with him and I would sit in the corner to listen and learn,” said Mr Doherty. The firm, which his father began decades ago, has grown into an international leader in the field. Starting out from a 14-acre parcel in the west side of Calgary, the firm now holds almost 100,000 acres of land worth almost CND5 billion, and employs more than 1,000 people worldwide, across eight cities.
Counting major pension funds such as CCPIB (Canada’s national pension fund), endowment funds from institutions such as Harvard and Yale, family offices, hedge funds, as well as blue-chip companies, it invests mostly in the United States and Canada. “Institutional investors are increasingly allocating a larger percentage of their portfolio into real assets,” said Mr Doherty. “This is because if you have patient capital, you should be able to attain very good returns over the long-term.”
The group has more than 90,000 investors across the world, with about 30,000 from Singapore and Malaysia. “It was very simple business model when we started, and still is,” added Mr Doherty. “But over more than 35 years, we have accumulated very deep, thorough and disciplined research methodologies to ensure we only invest in the highest potential parcels.”
Investing With Walton
“My parents set out to create a real estate investment opportunity for everybody.”
Walton International offers individuals the opportunity to participate in their investments, something normally reserved for institutional investors. Many young people who may not have built up a significant nest egg may find Walton’s investments palatable. For US$10,000 as a minimum, you can invest alongside Walton International. “With us, people from all walks of life are able to participate with us in owning a real asset,” said Mr Doherty.
For each investment, Walton also maintains a minimum of 5 per cent stake in the parcel. “Co-investing with our investors shows we believe in the project and this provides confidence to them,” said Mr Doherty. “Investors want to know we have skin in the game, and that we do have a vested interest.”
The firm also partners with property developers for projects on the land it invests in. Its projects range from as small as CND3 million to as large as CND50 million. The firm currently has 22 active development projects; 6 of them in the US, with the balance in Ontario and Alberta in Canada. The firm has experience in residential, retail as well as commercial and industrial-commercial projects.
For every project, Walton undertakes extensive feasibility studies before deciding whether it makes sense to develop a particular piece of property. If it decides to go ahead, it will raise capital from co-investors to buy out the individual investors from around the world who had previously invested in the pre-developed land. “We have great partners in business who take positions in our residential developments, and we sometimes even do joint venture with them on the industrial commercial side with a profit-sharing model,” said Mr Doherty.
For 20 of its 22 projects, Walton and its partners had bought out the investors of the pre-developed land which returned between 10 and 27 per cent – the average being around 16 per cent. Some of its institutional partners for development projects include Manulife, Sunlife, hedge funds, and CPPIB, which is the pension plan for Canada, the 10th largest in the world, as well as family offices, HNWIs, and building companies. “Our institutional investors trust us and have conducted extensive due diligence on our management team, expertise and track record. And, they have chosen to trust us.”
But some investors may be concerned about the liquidity of such assets. “If you have a well-researched product and you go in at the right price, and in the right area, even though it’s illiquid, we believe you will be able to attain very good returns, and we have proven that throughout our history,” added Mr Doherty.
The average holding period for investing in pre-developed land has been between 2 and 19 years, with the average just over 8 years. Most of its projects are marketed with a 4 to 6-year investment period. If the invested land does not gain interest from property developers, the firm takes a long-haul approach. “We sit on the property. That’s the benefit of the way we structure the investments. It’s all cash – zero debt,” said Mr Doherty. “Even in a down market or a prolonged timeline, people don’t have to sell.”
During tough times when investors are especially worried and cautious about their investments, Walton makes it a point to reassure its investors. “During tough times, we communicate with our investors and we let them know there is economic uncertainty in the region, national or the world, and we keep them informed of what’s happening,” said Mr Doherty. “Regardless of whether you are an institutional, or an individual, what you want is information and you want to know that someone is still driving the bus, and that you are in good hands. We are very good at that.”
If an offer is made on the land parcel, it is taken out to all owners of the land, and if 60 per cent of them agree to accept, there is a drag-along clause and the land will be sold. Individual investors cannot decide to carve out a part of the land as the asset is an undivided interest. However, ownership of a share of the invested land is legally transferrable.
Commenting on the property market in the United States, Mr Doherty said, “On the macro-level, it is doing very well. Areas in the South Eastern and mid-Atlantic parts of the US such as Virginia, Maryland and Washington D.C are doing very well.” Other areas such as Arizona, Nevada and California are in recovery mode, and are projected to improve strongly over the next two years, added Mr Doherty.
Need for a Different Mindset
“In Asia, when people think of real estate, they usually think local.”
“In Asia, when people think of real estate, they usually think local. They tend to want to be able to see and touch the asset in which they invest in,” said Mr. Gary Tom, President of Walton International Hong Kong. “If they cannot touch and feel the asset, they tend to not trust it.” There is also the lack of awareness that such opportunities exist, because in Asia, governments typically own the land and one cannot invest in the land. “People in Singapore may have no clear conception about differences between how real estate is developed in North America as compared to Singapore,” added Mr Gerald Foo, President of Walton International Singapore. “In Singapore, the Government conducts land sales, lays the horizontal, builds the vertical, and markets the finished product. In North America, there are many different players in the process. This opens up new investment opportunities for investors in Asia.” Mr Tom added that there is a need to educate and change mindsets in Asia, which ultimately, benefits any savvy investor looking to diversify their portfolios.
Speaking on the black sheep that plagued the market some years ago, Mr Doherty acknowledged that such firms had caused “everybody to be painted with the same brush”. “Black sheep exist in every market, and unfortunately, good companies also get painted with the same brush because of the bad companies. This not only happens in Singapore, but everywhere in the world, and in every industry.” Five years ago, many firms involved in land banking ‘blew up’ and caused a backlash, tainting the industry. “We will always have to deal with that. It is unfortunate to be lumped in with everybody else, but Walton has been in the real estate business since the 1950s. The founders of those fly-by-night companies … many of them have no real estate background,” explained Mr Doherty.
Mr Doherty is proud that many of the staff running his branches across Asia have stuck with the firm for a long time. “In all of our offices, we have people who have been with us 12, 15 years.” Many of his employees also invest in its pre-developed land offerings, and have seen returns. On what makes Walton stand out from other firms, Mr Doherty said, “We have been around for 36 years. Our proprietary research methodologies, ability to select and invest in the right land, ability to raise capital globally, and most importantly, the people we have, who believe in what we do.”
“Walton’s track record of having been through the ups and downs and still going strong, is indication of very sound management. We have gone through the good times, and anybody can go through good times, but we have gone through the bad times, and every time we do so, we come out of tough times as a stronger company,” he added.