I just got back from London yesterday after 12 days of travelling. Made a dash to Kraków and Warsaw, Poland in between hectic days of meetings in London. London was its usual busy metropolis whereas Kraków and Warsaw are two lovely cities that are very livable and relatively modern by European standards.
After eight years of spectacular growth since 2009, the London property market stalled last year and started its decline, with the high-end segment being the most affected. With Brexit still undecided, foreign buyers have been staying away unless big discounts are given, which will translate into a higher rental yield. Rental yields have been falling since 2010 as the growth in rental rates has been outstripped by a higher growth in capital value gains.
Currently, in central London, rental rates have held steady whereas selling prices have fallen. That is because there is still a shortage in housing accommodations. In Malaysian high-end property market (above RM 500,000) there is an over-supply with low tenancy demands especially from the expatriate community. So the selling price and rental rates are falling in tandem.
It has been proven that property cycles operate in the most simple economic form of demand and supply and yet many developers have been caught out in every cycle. Developers with good location developments and strong financials can afford to hold on and ride out the trough cycle whereas the financially strapped developer have to give away its margins to cover the bank loans.
Property developers in London have more difficult financing conditions compared to Malaysian developers. Build to sell concept means collecting deposits on off-plan sales while under construction, where the deposits are covered by insurance to protect buyer’s interests. No further progress payment is allowed which means developers are funding the development 100% from day one and can only get paid upon completion of the project.
Small developers have to fall back on mezzanine financiers (local ah-longs ) who charge between 10% and 15% per annum. Generally small projects/ refurbishments take between one and three years, relatively quick turnaround time if the developer hopes to make some money.
In comparison Malaysian developers have it easy from a financing perspective, are able to leverage off easy bank loans and progressive payments from confirmed sales helping to pay for construction costs. The trick in Malaysia is to get confirmed sales with approved bank loans. Then it is supposedly smooth sailing to completion if you have 60%-70% pre sold.
In a property downturn cycle, it does not matter which part of the world you are in, the problems facing any developer are the same. Critical cash flows, vanishing customers, banks tightening access to liquidity, suppliers chasing for payments and developers holding on to a supposedly unconvertible valuable asset. You are on your own. Alone and not a friend in sight.
Talking about friends, I was invited by Tomasz B, my classmate from Harvard Business School (HBS) AMP 182 program, 2012 to visit him in Warsaw. Tomasz was a rising star in the Polish banking scene, becoming the CEO of a medium size Polish Bank at the age of 43. After attending the HBS program, he was headhunted to be the CEO of a large French Bank in Poland.
Imagine our surprise when after three years into the job, he sent us a photo of himself in a hoodie working in a co-working space having invested in two fintech projects. He was 50 years old when he left the French Bank one and a half years ago.
Leaving a top corporate job is pretty common for high achievers but to immediately plunge into fintech startups takes guts and conviction.
From giving out loans, he is now searching for funding. Corporate perks vs startups peanut pay and what perks? He is learning to make his own coffee which is good sign of a wannabe entrepreneur.
My wife and I were invited to his home for a Polish dinner cooked by him and his wife, Iza. From red borscht (beetroot) soup with dumplings to veal pate, traditional salads of cabbages, cucumbers, mashed beetroots etc.
It was such an authentic meal, his whole family of children and grandchildren were present and pleasant. Tomasz has got a lovely family who is fully supportive of his new ventures. Another good sign for the wannabe entrepreneur.
Personally I would not recommend my corporate leader friends to leave their current jobs to join startups. Professionally, I would think that the fintech startups would benefit from the vast experience of someone like Tomasz. Insider knowledge on the banking system, disrupting the high margin segments, regulatory maneuvering, so much experience that will help minimize learning curve mistakes and being more focused on the right strategy from the start.
But can good corporate leaders be good entrepreneurs in startups?
Yes if the corporate leader has sufficient savings to invest and work for next to nothing wages for the next 2-3 years.
Yes if he has the right attitude in terms of starting again at the bottom of the food chain and he is not disappointed when his so-called friends in the corporate world suddenly disappear from his life.
Yes if he has the full support of his family especially the spouse. The entrepreneurial journey is lonely, stressful and problems often brought home. Family support gives you the strength to carry on.
Yes if he starts thinking like an entrepreneur and leaves his corporate gamesmanship behind.
Tomasz and Iza had recommended that my wife and I visit The Salt Mine in Kraków which is a world heritage site. What they did not tell us was that we had to walk down 135 meters or about 400 feet into the mines which was at the sea level of the Baltic Sea. Last year a total of 1.7 million tourists visited this site.
The Salt Mine Company is one of the oldest salt mining companies in the world. It has an amazing construction of 280 km of tunnels and chambers that the biggest chamber was converted into a chapel, some 135 meters below the surface.
While going down the steps and into one of the many tunnels, I was looking for natural light at the end of the tunnel and thinking of the property markets in Kuala Lumpur and London all at the same time. After two hours of walking underground, I was pleased to jump into a two level and two-sided chamber lift (for miners) and it only took 40 seconds to reach the top and into sunlight.
I would recommend that you visit this salt mine just once in your life time. Just like a wannabe developer should experience the trough of a property cycle or a CEO of a bank starting all over again in a fintech startup. Just once ….. in your lifetime.