Find the supply and demand imbalance

The Maldives is one of the most beautiful places on earth, consisting of almost 1200 islands. As a nation originally led by kings and queens, these islands came to prominence as the perfect stop on the way to India from Europe.

Nestled to the southwest of Sri Lanka, this island nation is a slice of paradise. After the influence of colonial powers began in the sixteenth century, the people of this beautiful island chafed under the rule of various European colonial leaders until finally shaking free of British rule in 1965. The British maintained an air base on the island for another 12 years, but with their departure, this nation has begun rebuilding its reputation as the ultimate global vacation destination.

With an aim to expanding beyond fishing and traditional tourism, the Maldives have entered the twenty-first century with an eye toward luxury tourism. That’s where our next Titan, Rohit Ravi, has managed to develop one of the most awe-inspiring hotels in the world, the St. Regis Vommuli Resort.

The Foundation

Real estate is in my blood. My family has been involved in real estate development ever since my grandfather founded the company in 1959, at a time when there was no organized player in southern India. At the time, the real estate market was quite fragmented, and he saw an opportunity to bring organization and structure to the market.

He began by purchasing 125 acres near the Chennai airport. Since that time, the company has built 12 million square feet and 12,000 apartments.

After building so many permanent homes and gaining a strong focus in the residential market in southern India, we began to realize that there is a great opportunity in the hotel market. When it comes to building and developing them, hotels and apartments have many similarities. Twenty years ago, we realized that it was the logical progression for our development projects, so we started experimenting with developing and investing in hotels.

Because real estate was the family business, my entrance into that world was expected; my love affair with the power of construction began at an early age.

I grew up curious about what my father did and how he took care of us. That curiosity turned into a passion, which turned into my career. Not everyone is fortunate enough to be born into a real estate legacy. There are certain pieces of knowledge passed down in families like mine, and the lessons we take for granted are difficult to learn without a mentor in your life. There are some very important real estate principles that I intend to pass on to my children and to their children after.

My company has been very successful because we follow a very simple principle: we stick to what we know in terms of asset classes and geography. We stick to a very small sector within real estate, but what we do, we do to the best of our ability, and we provide a lot of safety for our investors and developers because we have a strong name. We always try to over-deliver on our promises, and this continues to raise the value of our family name and brand.

In real estate, as in many other businesses, there is often the opportunity to gain short-term profit with a bit of deviousness. For example, some players will try to slip clauses into a contract in the hopes that the other party won’t notice or won’t point out that a property has damages or governmental issues. While this can earn you a little money in the short-term, eventually your reputation will get tarnished. There is nothing worse than having a former business associate or investor of yours speaking bad about you all over town. The real estate industry is very small; all the players in the local market know each other. The short-term benefits are not worth it. Your reputation should come above all else. There is nothing more valuable than your reputation—it’s worth more than gold.

Developing an Island

My favorite real estate deal is one that I fully oversaw, the St. Regis Vommuli Resort in the Maldives. I learned some painful yet critical lessons there. The main one is about cost overruns. When you’re developing in an exotic location or even a place that you don’t know as well, big surprises will come your way. In the case of the Maldives, the destination is hard to reach. Everything is different when access and airlift is difficult.

When building on an island, the raw materials must be brought in by boat. When transporting by boat, you are vulnerable to a whole new range of surprises. Rain doesn’t stop the trucks from operating when you have roads, but it can certainly turn the seas into a hazard and delay deliveries by days or even weeks when you are using water to transport materials.

A single storm can shatter your project calendar. The construction materials don’t arrive on time, and you have an entire crew sitting around doing nothing for days, simply waiting for a delivery of cement or wood. Additionally, the price of raw materials can spike beyond initial projections because of the exorbitant shipping costs linked to storms and other natural unforeseen events. The number of ships operating in exotic locations is quite limited.

Our family invested heavily in this project putting up $125 million of its own equity. This wasn’t nearly enough money to build something so luxurious in such a remote location. We obtained additional construction financing from a financial institution.

Much to my disappointment, the project was not completed on time. The unexpected challenges of building in the Maldives overwhelmed our meticulous planning. This put a great deal of pressure on my family. An important lesson here is that when you are in real estate development—no matter how well you plan things out—there will be things that will be out of your control.

Any time you have construction financing in place, you have interest costs that get triggered, and your investors get upset. When you’re doing a deal of this size and you’re late, an apology to the bank or to other stakeholders isn’t enough to cover it. It’s a brutal lesson; while profits grow with scale, so do the risks. And this was a very large project indeed.

Despite all these issues, in the end, the hotel opened and has had very successful operation history. Fortunately, we have won numerous awards from UNESCO, as well as the World’s Leading Luxury Island Resort at the 24th World Travel Awards, a British Society award, and an SBID International Design Award, among others.

Winning awards is nice, but it’s important to stay humble and ensure the stakeholders do well. As I look back on this experience, I wish going in that we’d known a little better what we learned on the other side. Whenever you invest in a new location, new surprises will arise, and local knowledge can be incredibly valuable. In this situation we lacked a little bit of that local knowledge.

For this reason, it’s better to focus your real estate projects in a region you fully understand and know. While two-story houses might be quite valuable where you live, the opportunity to acquire a property like this in a desert region might actually be an albatross. In extremely hot regions, taller houses can be exponentially more expensive due to air conditioning, and in the end, actually worth less. Without local knowledge, you could think you’re getting a great deal until you realize the property is completely illiquid and unsellable. Data is very important.

Twenty years ago, we entered our least successful deal in Chennai. We bought a property in an urban location using 100 percent debt, and because we had to put down a guarantee, we didn’t make any money on the development. We developed 120 apartments, and we had to use our equity and other projects just to finance this one. We were over-leveraged, and when you’re leveraged too high, the entire profit can get expunged very quickly.

Different people believe in different leverage percentages, but what I can tell you is that when you’re over-leveraged—anything above 80 percent loan-to-cost or loan-to-value—if anything goes wrong, you will run into trouble. There is a zero margin for error and that is not realistic.

When analyzing real estate, I look for three key elements. My family is mainly in the residential business, so we focus on location, price, and momentum of sales. The classic cliché of “location, location, location” has turned out to be true in our case in India. Once we find the correct location on a main avenue with good ingress/egress, one near public transportation and other services, we then study the market and analyze the demand to determine if the price we can sell the units at makes sense in this market. Once we begin selling units in a new building, we start to build up momentum that we can use to our advantage.

No matter how large your company, you still need to consult external market research. We seek data on the current prices people are paying in the region and how fast purchases are occurring. If we like what the data we buy says, we then launch our own internal study—we don’t just rely on external information. Use a combination of external and internal research and data to gain the clearest and most comprehensive perspective possible. No matter what property type you are looking at, or where in the world you are; I always recommend you do this.

Starting Over

If I were just starting out today, I would be doing the exact same thing. I have a passion for residential real estate and hotels. Hotels are my favorite type of project to build and maintain. In the past, I experimented with other types of real estate. I developed some office buildings, and eventually we sold them off to a strategic fund because we believe real estate is a local business, and we like to focus on the areas that we understand.

India is unique in that multifamily homes don’t make sense because the interest rates are 10 to 12 percent of the cost. While duplexes and quadplexes might be amazing in America, for our market, it’s hard to build them profitably, especially when you’re just starting out.

Don’t forget the value of diversifying your income streams. Prepare yourself for real estate markets to grow and shrink, and for shifts in the market that don’t come directly from real estate cycles. If the market gets crowded or a lot of other companies come to compete with you in one area of your business, having other areas will keep you strong. You will avoid forcing yourself to make a deal you would normally not make or accept a price you normally wouldn’t take.

Market Shocks

I’m a big believer in opening up multiple revenue streams so you can focus on whichever one is the right stream at any given time. Before entering a new market, look for the greatest demand and supply imbalance. For example, in India at the moment, there are more people than homes. There is a significant home deficit, and people will always need a place to live.

When it comes to financing, at a certain point you’ll have to take on debt or leverage to scale up your company or side business. You want to protect yourself as much as possible and not take on too much debt. I like to have more equity than debt and maintain a 60:40 percent equity-to-debt ratio for my projects. I believe that this ratio puts you in a strong position to survive economic downturns, surprises, and crises that may arise.

No matter how lucrative the upside, never close a deal without looking at the property in person. Things that look amazing on paper might not be that great when you see them in their real context. You might find that within an apartment building you can purchase some really great units at below replacement cost. Nonetheless, it turns out that there are 50 other units for sale in the same complex. I’ve seen projects where more than 60 percent of the units have been on sale for multiple years, and they just don’t get absorbed for different reasons: The apartments might be too big for the local market surrounding the project. The mix of rooms is incorrect. The amenities are not there. People don’t like the design or quality of the building. Or other factors may come into play.

Get ready for deals that underperform. Do your best to minimize the downside and always rely on your common sense. Get as much data as you can so that when you enter a deal, you have as much data as possible. The more you know before you go into a deal, the more likely it is to end up profitable.

There’s currently a big real estate shift in India that I don’t think is a good idea. It’s called “land banking,” and this is where developers take on debt to purchase land and keep buying more, putting out more guarantees and putting themselves in a highly levered position. They’re unbelievably vulnerable to an imminent market shock.

Technology

I believe that technology is going to affect every real estate market. Within the retail industry there has been massive disruption due to Amazon and other technological innovations that have pushed a growing number of consumers to mobile purchases and e-commerce. In the office sector, WeWork and other workspace companies are transforming the way we function in and carry out our jobs. Traditionally, office environments have been places where employees go to work Monday through Friday from roughly 9 to 5. This is now changing.

Car riding service and driverless cars will have an impact on all real estate segments in different levels. Within the hotel space, we have seen that Airbnb and other similar companies have affected the lower and middle end of the market. In Appaswamy we focus on the top of the market—the luxury and five-star segment—and within this arena of the market, technology is still not affecting but rather complementing.

The top echelon of the market likes the luxury hotel experience, and we are making sure we upgrade our hotel rooms with smart technology to stay ahead of the competition. At the moment, we are building a high-end residential building in Chennai, one of India’s largest cities. It’s going to be a smart tower where you can control the entire apartment from an iPad. It will also have several green and environmentally friendly components, something we believe are also very important to include in your projects these days.

From a sales angle, it’s critical to use technology because the internet and social media play an essential role today when it comes to selling and leasing properties.

My Philosophy

When it comes to the balance between mindset and technical skills, I believe that mindset is far more important. You’re going to spend a lot of time with yourself, and all that time when you’re alone, you have to believe in yourself and in your projects.

In terms of mentors, as I come from a family business, my father and my grandfather both inspired, educated, and trained me. In addition to them, I look up to Stephen Ross from Related Companies in the United States and Simon Chung in Singapore. These are two extraordinary real estate investors who have taught me so much.

My favorite book is The Art of the Deal by Donald Trump. I read it when I was a kid, and it is still one of my favorite readings.

If all I could leave my children were three real estate recommendations, these would be it:

1. Be alert to seize an opportunity.
2. Be patient and wait for the right opportunity.
3. Be balanced while dealing with challenges.