Real estate developer, taking off with the wing of ‘finance’
While there are many businesses from small companies to large developers, there is one person who grabs the attention in the real estate development market with outstanding growth for the past few years. He is chairman Chung Jae-hwan of DS Networks. He created another sensation in the industry by acquiring securities company this year after recording sales of over KRW 1 trillion won last year.
People remind large construction companies such as ‘○○ Construction’ when it comes to large-scale housing development. In particular, given the characteristics of the domestic real estate market which is dominated by housing development projects under the name of ‘Apartment Republic’, major construction companies and their apartment brands are regarded as same as real estate development project.
The real estate market experienced unprecedented boom in the 2000s after financial crisis in the late 1990s. That is the time when developers which focus on development separate from construction of building began to take root. For consumers, construction companies or apartment brands matter. However, developers are an entity that coordinates all development from purchase of site, planning, licensing, designing, construction and sales. That is why this entity is called developer.
As of November this year, the number of registered real estate developers registered in Korea is over 6,100. The number of members for Korea Developer Association amounts to 740.
The growth of DS Networks led by Chairman Chung Jae-hwan is the core of the recent surge in the development industry. In 2013, DS Networks recorded KRW 86.4 billion in sales and net income of KRW 97.7 billion. As of 2018, the sales increased to KRW 1.2567 trillion, operating income increased to KRW 140.9 billion and net income increased to KRW 97.7 billion. The real estate development business regards sales of KRW 100 billion won as small amount of sales. In this market, a small company with sales of less than KRW 100 billion has grown into a company that joins the ranks of large companies within just 5 years.
In his exclusive interview with Forbes Korea, Chairman Chung, who has not appeared on the media at all said that his goal is to make the company a real developer at the global level.
The charm of construction business that attracted CEO in the manufacturing indsutry.
People often say that real estate development is the business that is close to prison. That is because real estate development is often connected to lobbying government and politicians for licensing and conspiracies such as bribery or embezzlement. In particular, there is a common belief that if the newly constructed houses are sold well, it will return huge profit to the construction company while poor sales leading to deficit. As such development business is classified as a representative ‘high-risk, high-return’ business.
In the development sector where the concept of ‘all or nothing’ dominates, DS Networks has shown its power to be a major developer based on continued growth. DS Networks increased sales and net income by 1355% and 466% respectively from 2013. The sales broke the record of KRW 1 trillion, making the company one of the major developers.
DS Networks was originated from Daeseung Industries in 1981. Late Chung Seung-il, the father of Chairman Chung, entered the watch manufacturing business after founding Daeseung Industries. In the 1980s, wrist watch TUGARIS, which was regarded as premium watch brand, was the main product of Daeseung Industries. Chairman Chung entered Daeseung Industries in January 1988 at the wish of his father after graduating from the department of business administration of Hankuk University of Foreign Studies. Chairman Chung smiled saying “Without my father’s sudden death, I might still be making watches”.
“In December 1989, a year after I joined the company, he died of hypertension. As a sideline business, the company was constructing a gas station in Yeoksamdong and this serves as an opportunity for me to have interest in the construction business. At that time, watch business had become a red ocean and I was not a manufacturing person. Large scale construction business was attractive to me”.
In 1991, Chairman Chung stepped out of the watch manufacturing business completely. Starting with the development of a gas station in Yeoksamdong, he changed the type of business by constructing 50 more gas stations. In 1992, he entered the development business in earnest. He constructed three buildings named Daeseung Plaza, Daeseung Core and Daeseung Prime by investing KRW 100 billion won in new town in Haeundae. Chairman Chung remembered that “for manufacturing business the investment of KRW 100 billion was a huge investment but it was very small investment in the real estate development business.” “I was attracted by the large scale of real estate business where trillions of investment is made frequently”.
Quick decision-making and bold investment
After taking a short break from the challenges of financial crisis in the late 1990s, opportunity came in 2001. As the real estate market began to be vibrant, he entered large projects starting with the development of site for Taihan Textile in Chimsan-dong, Daegu. It was a landmark project to sell 1,289 households by constructing 9 40-story apartment buildings (Daewoo Dream World) and 1 officetel building on 40,000㎡. After that, Chairman Chung accumulated his successful track record by completing Daewoo Dream World project in Incheon Dangha district for 719 households, Siji Prugio in Sawoldong, Daegu for 362 households, Daewoo Dream World II in Jangyu, Gimhae for 304 households, Gimhae Yulha Prugio III and IV for 632 and 348 households respectively and Shinil IT Yuto Knowledge Industry Center in Dangjeong-dong, Gunpo. In 2006, the company changed its name from Daeseung Industries to DS Networks.
DS Networks began to draw attention from the industry in 2011. It was when the real estate market which was hit hard temporarily by financial crisis in 2008 began to rebound. Chairman Chung boldly ventured into large-scale development projects such as Jinju Innovative City, Sejong City, Songdo International City, Magok District, Wirye New Town, Eunpyeong NEW Town and Yongin Giheung area near station and successfully sold the houses developed. This year, the company earned profit of KRW 1.5 trillion from SK Leaders View project and expects the sold out of 1,000 households in Yeongjong Haneul City.
Chairman Chung said, “sales will be completed from projects in areas including Pyeongchon, Goyang Deokeun, Incheon Lu 1 City, Gasan-dong Knowledge Industry Center, Daegu Gamsan-dong, Dooryu-dong and Yeongjong-do” and added that “after breaking the record of KRW 1 trillion in sales last year we expect the sales of KRW 1.6 trillion this year and KRW 2 trillion in sales for the first time next year.”
The profit of real estate developer is determined by profit from selling houses. In fact, according to audit report of DS Networks, the profit from sales of houses amounted to KRW 1.25 trillion in 2008, accounting for most of the profit. In the industry, the secret to sold-ou of DS Networks is the vision and bold betting of the CEO. Chairman Chung praised the efforts of the team leaders in purchasing major sites but it was the CEO who made the decision on investment worth hundreds of billions.
“DS Networks’ strength lies in the collaborative process in finding decent site. The developer, the major construction company in charge of construction, and the financial company in charge of financing check business feasibility from the tapping (demand survey) process each other. If all three agreed that it is OK, it means that the business feasibility was objectively verified. If you hesitate when your chances of generating a profit are high, it’s already too late. Land that is good in my eyes is also good in the eyes of others. Our competitiveness is quick and bold investment compared to other companies.”
The purchase of entire site for Lu 1 City showed the stark example of the investment propensity of DS Networks. In May 2018, Chairman Chung became a successful bidder for the 5/6 block of Lu 1 City, which was posted by the Korea Land and Housing Corporation (LH). The secret to winning the bid is to call the highest price among 10 competitors. The bid was successful by calling KRW 314 billion for the site, which is 50% more than the price suggested by LH. As the company added KRW 100 billion to the price proposed by LH, competitors could not compete with DS Networks. DS Networks plans to develop and sell 1,800 households on this site.
“Stable supply of high-quality land can make a profit. This month (November), we purchased the site of Yangji Temple in Gasan-dong, Geumcheon-gu, for 170 billion won, entirely with company fund. The final investment decision is ultimately up to the CEO.”
Taking a step closer to be a ‘real developer’ by acquiring securities company
Chairman Chung grabs the attention from the industry this year one more time by entering financial business in earnest. His move started with the establishment of DS Investment and Securities by acquiring Taurus Investment & Securities. Smooth financing is the key to determine success or failure of the project to the extent that it is said that real estate development these days is more like financial industry than construction industry. Chairman Chung said, “if our group has focused on projects as a developer, we will grow into a comprehensive developer that covers both finance and construction.” Chairman Chung established DS Networks Asset Management in late 2017 and acquired DS Investment and Securities in April this year.
“In Korea, there are no real developers such as Wanda Group in China and The Trump Organization in the US. They secure finance based on its own credit. On the other hand, developers in Korea purchase and develop land after licensing is completed. Even big developers cannot secure project financing without major construction company’s completion of construction. Our ultimate goal is to become the first real developer in Korea covering both real estate development and finance.”
According to Chairman Chung, active M&A is required to be a comprehensive real estate developer. Chairman Chung expressed his willingness to expand the business areas to cover the areas of major construction companies and securities companies with the start of acquiring Taurus Investment & Securities.
DS Networks increased the equity capital of DS Investment & Securities to 100 billion won immediately by issuing a 47 billion won capital increase at the end of November this year. Chairman Chung said, “we are at the beginning stage of securities business so we will focus on real estate finance and structured finance that can create synergy for our group.” The company plans to grow into an investment bank (IB) with an equity capital of 1 trillion won in the near future through IPO and firm securities company with capital of KRW 3 trillion with active M&A.
Chairman Chung plans to establish new 15-story building after removing Daeseung Building in Gangnam, the legacy of his father at the end of this year. If the new building is completed, Samsung Electronics will move in and use the first to fifth floors, making the building a new landmark in Gangnam Station area.
“It is not an exaggeration to say that DS Networks grew by using the office building in Gangnam as collateral to have leverage effect. It is meaningful asset for me and our company. With completely new office building, my ultimate goal is to establish a comprehensive real estate developer for the first time in Korea”.
Forbes Korea / Reported by Jang Jin-won