Andaman, the maverick developer

By Khairie Hisyam

In the first of a two-part series, KiniBiz speaks to Andaman Property chief Vincent Tiew on the company’s unique overall approach to property development. In an exclusive interview, Tiew talks about how landbanks can be detrimental for a developer, why Andaman prefers to operate without bridging loans and how the volume game works for the boutique developer.

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Some things are just part and parcel of the property development business — massive landbank and expensive bridging loans among them. But not so for Andaman Property Management Sdn Bhd, the property development arm of the Andaman Group.

Unlike many other developers, Andaman Property does not keep landbank, aiming to launch development projects within a year of land purchase.

While that in itself is not unique to Andaman in the country, another aspect that stands out is how little the company relies on bridging loans in undertaking its projects.

Heading for untapped waters

According to Dr Vincent Tiew, managing director of Andaman Property Management, the company adopts the blue ocean strategy in context of property development.

“The clear differentiation with Andaman is that we’d rather sell cheaper on a per sq ft (psf) basis and in turn be able to sell the properties faster,” said Tiew, adding that this also enables Andaman’s buyers to enjoy a significant return on investment (ROI) margin of gain.

Throughout Andaman’s eight years in the property development business, said Tiew, the developer has not sold high-rise properties with absolute value of more than RM750,000 in selling price, nor have they exceeded the RM600 psf mark for high-rise properties.

“And these products that I mentioned are not built in unpopulated or immature locations,” added Tiew. “These prices are also the same ones we adopted in Kota Damansara, Serdang, Bangi, Cyberjaya and Subang USJ for example.”

Therefore Andaman’s buyers often actually see gains of more than 30―50% within 24 to 36 months of their purchase, added Tiew.

“Our buyers bear much less risk but enjoys much higher gains than we do,” said Tiew in an exclusive interview with KiniBiz.

A general rule among investors is that properties usually appreciate by about 20% upon completion, so how does Andaman deliver up to 50% appreciation within 24―36 months of purchase, which would coincide with completion?

The answer: Andaman does not charge purchasers for its developer name. According to Tiew, Andaman tries hard to avoid costing in the branding premium into their projects.

“Some developers in the market, by virtue of their name, already fetch a certain premium in selling price,” explained Tiew. “But if you look at costs of construction, concept and materials used, you don’t see much of a difference (from one to another).”

Additionally, Andaman chooses its locations carefully, going into those with growth potential without incurring excessive entry costs for itself.

“So if we are able to make reasonable returns, we will confidently be able to allow and enable the buyers to enjoy more substantial returns,” said Tiew.

Staying nimble without landbank

Not keeping landbank, Andaman aim for development launch within 12 months of land purchase — a somewhat poetic approach given that the company started eight years without any landbank.

“We don’t do landbanking, we don’t buy and wait for price to go up, so we go (about) very strategically — if we buy a land, it must see launch within 12 months,” said Andaman Property chief Tiew.

The ideology is to make the money now rather than wait for the land price itself to go up, said Tiew, because it is more efficient to cash out of a project before buying more land.

It comes down to maintaining cash liquidity and flexibility, said the 38-year-old, explaining that liquidity has been key for Andaman’s survival and success so far because what will happen in the future is anyone’s guess.

“It will become more important for developers to better manage their cashflow from 2014 onwards because of the economy and the market sentiment,” said Tiew to KiniBiz.

“Say I don’t buy this land, I don’t sit on this land waiting for its price to go up, then in a few years I’ll have the value of my money in cash while you have the same value in land,” he elaborated. “Because I have cash in hand, I have more options and I can have a better deal, especially during tougher times.”

In addition, avoiding a situation where its cash is stuck in a land parcel means the company can find better use for its cash as the situation at hand requires — including re-investing its money into existing projects to enhance quality and value — especially if the company have not identified good land pieces for purchase.

“We can use the cash for things such as faster construction and getting better credit terms from the contractors as well as adjusting, amending, improvising the concept and the standards of the remaining unsold products in our existing projects,” explained Tiew.

However, Tiew points out that such an approach is not unique to Andaman, as Mah Sing Group also does not do landbanking per se.

“When they acquire, I would say safely within a year they’ll have launched a project already barring certain circumstances like approval delays,” said Tiew.

Paying for information

One negative for Andaman’s zero-landbank strategy is the company often sees relatively higher prices for its land purchases.

“Land prices keep going up. Sometimes when we could have bought at, say, RM50 psf, by the time we come back with more cash it might have been worth RM70 psf,” admitted Tiew, adding that Andaman has met such a scenario “very often”.

But paying extra in such cases is the cost for lower risk and clearer market conditions, stressed Tiew.

Further elaborating, the Andaman property chief explains that one risk of buying a land too early and launching much later is that market conditions — e.g. government rulings and policies — on which said development was planned around may have changed by the launch time.

“So the conditions our product was meant for has changed,” said Tiew.

However, timing the entry just right means a developer can offer a better product that is still relevant to the existing market conditions, to the buyers and to the industry.

“Thus I don’t mind a slightly higher price, because my probability of success is higher as a result,” added Tiew.

“Another example is if I were to buy (into an area) in 2013, I would not know who else (developers) are buying into the area,” said Tiew. “If I buy in 2014, I would have seen, say, another 11 developers already ready to launch.”

“So I’ll study all their products and only then I launch mine,” said Tiew.

In comparison, had he bought into the area in his scenario in 2013 itself then it may have spelt trouble because, without knowing what everyone else is building, developers may see themselves doing the same thing as the rest of the crowd.

“And (thus) you see some places where there are six shopping malls being built in the same location,” added Tiew.

Keeping options open without financing

Remarkably, for the past eight years most of Andaman’s projects were undertaken without any financing, including bridging loans.

Tiew explains that with the company’s healthy savings from internally generated funds, Andaman is thus able to save on interest costs that would have been incurred via financing.

“But most important however is actually the freedom and flexibility to tailor-made, customise, amend the project concept and pricing to cater to the market from time to time if it’s required,” said Tiew to KiniBiz. “So there is flexibility (this way).”

“For example, if you already have a whole project that is already charged to the bank and you want to do any changes to its components, not only do you find difficulties with the authorities’ side but the bankers are also an additional stakeholder that you have to take care of,” added Tiew.

Such a scenario presents difficulties for the developer to adapt its projects in order to respond to changing economic and market conditions, said Tiew.

In turn, Andaman has that flexibility, said Tiew, because the company can call the shots on its own.

“We own the land and we don’t have any liabilities with anybody,” said Tiew.

“If our project has three phases and market and economic conditions does not warrant introducing phase 3 of the project, we could hold it off for six or nine months and come back then with a different product or a better pricing,” explained Tiew to Kinibiz. “There is less pressure.”

‘The volume game pays’

The main challenge when a developer tries to avoid dependency on financing is the limitations on size, said Tiew, explaining that Andaman usually caps its land cost under a certain limit.

“We take a guide, for example the land value should be below RM50 million,” explained Tiew. “So it’s a manageable kind of figure for us.”

While each project would be smaller as a result, Andaman compensates by upping the volume.

“The key thing in Andaman’s strategy is that we don’t mind doing five projects of RM200 million in sales gross development value (GDV) each to achieve RM1 billion,” said Tiew.

“So we need not focus on pushing all the way out for two iconic projects, each about RM500–600 million.”

Additionally, focusing on volume as opposed to absolute GDV value in individual projects mean lower land costs anyway, translating into manageable expenses.

“When we have a project worth about RM100 million in GDV, it probably means that my land cost would probably be, for example, RM5 million,” explained Tiew. “And why would we need a loan for the RM5 million price of the land?”

“So that’s the whole beauty of it.”

With such an approach, Tiew explains that Andaman does not need to push itself to buy for example a RM50-million land parcel in order to struggle harder towards a RM700-million sales GDV target

“No pressure,” said Tiew. “We do more projects and we get better total yield.”

How has Andaman done so far with its volume-focused approach?

“To-date, we have accumulated in total more than RM3 billion in sales GDV,” answered Tiew. “Andaman’s target for next year is another RM1 billion.”

Spreading out for added competitiveness

For 2014, said Tiew, Andaman’s focus remains Johor Bahru, Klang Valley-Selangor as well as Perak, explaining that these are the three states with the most important fundamental factor in property development: population.

For a boutique developer, however, Andaman seems pretty spread out. Outside of the Klang Valley, the company also has presence in Ipoh, Pantai Remis and Slim River in Perak as well as Johor Bahru.

During the interview, Tiew said the company has nine sales offices throughout Malaysia.

“Spreading out is pretty much Andaman’s strategy too,” said Tiew, highlighting that end-financing has been one of Andaman’s strengths.

“The banks themselves are the toughest and most challenging consideration of factors among developers now in 2013–2014,” explains Tiew. “You can launch and sell but do you have bankers supporting you in terms of providing loans to your buyers?”

Therefore spreading out is actually in-line with what the financial institutions are comfortable with, said Tiew, as banks have branches nationwide.

“Every branch in every zone wants to perform,” Tiew pointed out. “For example, let’s say you’re a bank branch in Pantai Remis — you can’t say for one whole year the Pantai Remis branch did not give out any loans.”

In comparison, when there is too much focus into one area such as seen with the Klang Valley, then all the banks would merely continue extending loans in the same areas.

Another plus from diversifying in terms of location is it helps the company gain financing should there be need because the risk is also diversified for the bankers, said Tiew, relating back to the company’s focus on volume.

“Basically, if in one location we are doing RM150 million and the banks support 20%, that is RM30 million — simple (for the banks),” said Tiew. “But if that one project itself is RM900 million, imagine asking Maybank or CIMB to support you 30–40% respectively in that project.”

Instead of putting in say RM500 million in one project, the banks would be more comfortable putting in RM250 million in one project and RM250 million in another, said Tiew by way of example.

“So that’s the difference,” said Tiew.