This week Cory and Adam are joined by the Investorpreneur himself Peter Leung who has amassed an international real estate portfolio in cities such as London, Vancouver and Hong Kong. Peter provides his insight on how investors can get started in commercial real estate, how commercial offers greater opportunities for investors that require funding than residential, his perspective on the Vancouver and BC marketplace, and he divulges a spectacular investment strategy. Peter shares his predictions on where the market is going in the coming years and what asset classes he is most interested in post COVID. This is an episode for all commercial real estate investors!
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Please tell us about yourself.
I began my journey in residential real estate in 2000. I started as an investor in BC and lived in Vancouver for 25 years. My experience came from my early days as a financial planner. Learning about the financial well-being of Canada, it taught me how fundamental real estate is as an investment. Most people become wealthy through real estate. It was the long term hold strategy that really caught my attention. So I started my portfolio in residential properties in BC, but realized I had significant challenges to scale because of how banking, lending and holding work in Canada.
In commercial real estate, the lid comes off! You can do whatever you can believe, imagine and structure. I knew commercial was where it was going to be. I was able to build my portfolio from BC to Toronto, to the US and into the UK with Brexit. We did 46 properties in 12 months throughout Brexit. We never look back – always looking for opportunity after opportunity. I believe that crises create opportunities. When things hit, like the pandemic, you need to know where the opportunities are and how you can capture them. That’s how I’ve grown my business around the world.
Can you speak to the restrictions you found in the residential side that don’t exist on the commercial side?
The lending restriction in Canada is based on TDSR (total debt servicing ratio). The amount of debt you can have is relative to your income. If I go into a bank and want to buy an apartment or single-family home, the first thing they ask for is my income. They want to justify lending to Peter. But when I go into a bank to buy a commercial property, they ask who the tenant is going to be. They don’t care about Peter. That makes commercial real estate immediately more scalable; it’s not about how much you’re personally making.
The amount of net income I have as an entrepreneur is the largest restriction to my lendability in residential. But in commercial, income is not looked at the same way. It’s focused on what kind of tenants I can bring in. AAA tenants became fundamental to my portfolio early on. I wasn’t just looking for great properties and great locations – I was also looking for great tenants with a big name.
What is your investment philosophy as you’re growing your portfolio? Have you carried over your buy and hold strategy from residential?
Absolutely. I have never been a seller of properties. I buy and hold; I seldom sell. Because of the lendability of the type of properties I’m looking at, I would much rather buy and hold because I’m not having to pay the same kind of taxes on a sale and repurchase. Inflation is a concern, particularly now, so hard assets are important. A commercial property with a great tenant is a very good hard asset. I believe investors make more money in real estate versus the stock market because you can’t buy and sell with the click of a button.
Having a staple or anchor tenant is a strategy my team and I utilize. The bank is justifying lending money to an IKEA, Walmart, Starbucks, etc. and not to Peter. They’re looking at the underlying asset. The anchor tenants become such an important asset. If you incorporate that into your strategy, it can be very lucrative.
As the property values go up, do you refinance to grow your portfolio?
Absolutely. Capital is always limited. There are an infinite number of deals but you’ll always run out of capital. Having the right tenants and the right leases allow you to take out equity in commercial or residential – but especially in commercial.
However, it depends on your strategy as an investor. Since I’m looking for long term passive income, I refinance the building if it makes sense. I believe in cash flow. Cash isn’t king, but cash flow is king. Banks don’t value cash; they value cash flow. That’s something an anchor tenant can provide you with; they give you stability. There’s less risk, and that’s why banks value anchor tenants so much.
How did you make the leap from local investor to global investor?
When opportunity knocks, you at least have to keep your mind open. I know I have to at least look at any opportunities that come my way. I didn’t come from a developer background and my family wasn’t interested in real estate. I knew Vancouver was a phenomenal market because you have so much inflow of capital.
I wanted to see if knowing what I do about the Vancouver market, could I replicate that elsewhere? So I looked at Toronto and realized it was a similar tax code, same language, etc. That taught me that anywhere where English was spoken was a possibility for me. I did a lot of private equity investing in Toronto which led me to the US. That really opened my horizons to what I could invest in. I was tagging onto other people who had done it before and had that experience. They enlightened me as to what I could do, which helped to stabilize my footing.
I moved to Hong Kong 10 years ago and looked at real estate here. But it doesn’t make any sense! I don’t understand how they can have these crazy prices. At that time, Vancouver was also creeping up. Coming to Hong Kong was a huge eye opener. Residential made no sense; it was about $5000 USD/square foot and returns were only 2% before fees. When I looked at commercial real estate, it was even crazier! The cap rate was only 1.25%.
There was no cash flow in Hong Kong, which goes against my investment strategy. That’s when I learned I would have to pick and choose what opportunities work for me and my family. I realized Hong Kong was not the place for us to invest. We didn’t know how good we had it in Vancouver until we got that perspective.
I also do a lot of work in residential real estate in the UK. The laws are very different from the laws in Canada. Having a global portfolio allows me to pick and choose, and learn from others about what works in one market compared to another.
What is Canada’s role for global real estate investors? What about Vancouver and BC?
Investors are looking at risks vs rewards. Canada offers low risk, reasonable return and favourable lending conditions. That’s attractive to global investors. A lot of institutions invest into the Canadian economy because our currency is relatively stable and employment is relatively stable. Because we don’t have a lot of change, we’re a good market to invest in. Investors are looking for consistency. They want to make sure their wealth is preserved.
One of my mentors told me this about real estate: They’re not making more land. Vancouver is in a very unique position because it’s surrounded by the border, water and the mountains.
Vancouver is set apart because of scarcity. Toronto has a lot of land and so does Alberta, Nova Scotia, etc. Vancouver has a unique value proposition to the global investor. Vancouver, and BC, also have multiculturalism which attracts the global community. BC is certainly a top place to invest. I still believe it’s undervalued in a lot of ways.
How does investing in major urban centres inform your investment philosophy?
Actually, I invest in places like Moncton, New Brunswick and smaller towns in the UK outside of London. So even though urban centres have their type of investment, I also want to build diversity. Each type of asset presents a different opportunity. Assets in major urban centres will only grow. Capital appreciation in major urban centres is key.
Do you see markets like Surrey and Richmond growing? Is there more room to grow there than in the urban centres, like Vancouver?
During covid, when everyone wanted to move away from the core, that told me there was an opportunity. Are we never going to see people or go out to dinner? No! We might be wearing masks but our human behaviour hasn’t changed. Our core centres were flat through the early part of the pandemic and those assets became undervalued. But if you’re investing for the long term, those assets will come back. So those urban centres were key for me during the early stages of the pandemic.
And now in the later stage of the pandemic, those assets are already coming back. I’m able to take out the equity and buy places outside of the urban centre. Outside of Vancouver, I would invest in Maple Ridge, New Westminster and Richmond. So I do believe with the scarcity of land and growing population of urban centres like Vancouver, the smaller markets outside the core will grow. It’s a matter of when, not if.
How do you see BC growing?
People are going to places that provide stability. People want a place that makes sense in terms of temperature, jobs, liveability, etc. BC has a unique proposition to be able to grow because of this inflow of people. In the global market, people want to be in BC. People move to where their friends live and where they can see their families growing. And they bring their capital with them.
In Hong Kong, there’s been an outflow of people leaving Hong Kong and moving to the UK or Canada. It’s a significant opportunity for the push up of commercial and residential properties in BC.
Where are you putting your money in BC?
Wherever you go in the world, you have to have the right people. Nothing is fully passive. Everything requires a bit of effort; if you’re not doing it, your team is. Having a great team in BC and everywhere I invest is a staple. If I don’t have a great team, I’m not investing. That means lawyers, accountants, property managers, realtors, etc.
With that being said, BC is a core of my investment strategy and we are looking at a lot of deals coming up. It’s a market I strongly believe in. And commercial real estate is without a doubt where I’d be putting my money. International institutional players are looking at the BC economy as strong for the long term. That’s where I’m investing.
I love Vancouver. I’m also looking at Maple Ridge; I love the fundamentals of that market. I like the core of Victoria. I like Chilliwack and believe that Chilliwack, Langley and Abbotsford are strong markets, depending on your appetite. I think those markets have so much potential for a significant uplift in the next 5-10 years.
What is your prediction for the BC real estate market in the next 3-5 years?
We’re always looking at what the future holds. In general, I think it’s still going to be up. The amount of capital sitting on the sidelines is a lot. The stock market is at an all-time high so people are wondering where to put their capital. In three years, I think it’s up from here. I think globally prices are going up. The question is whether the BC market will outperform the global market and I think the answer is yes.
What advice do you have for our listeners looking to enter the investment market in BC?
Buy and hold. Seldom sell. Take action and get yourself a team you can trust and relate to.
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