One of Goodwin Gaw’s real estate properties pulls in US$17 million a year from booze alone

GOODWIN GAW ONCE dreamed of being an architect. He even studied civil engineering at the University of Pennsylvania and construction management at Harvard. But an internship with Hong Kong’s celebrated Tao Ho convinced him that owning buildings might be more exciting than designing them – particularly when one of the buildings in question is a Hollywood landmark that draws celebrities like Leonardo DiCaprio and Lindsay Lohan.

Along with Los Angeles’ Roosevelt Hotel – a playground for the beautiful and famous on Hollywood Boulevard – Gaw now owns a number of swanky properties in the US. He also runs three real estate funds under the umbrella Gaw Capital that invest in Hong Kong and mainland China.

Gaw sat down with power’s Tiffany Tang in Central’s Lyndhurst Tower – his office is on the 22nd floor,. power’s on the 12th – to discuss strategies for investing during an economic downturn – and why it can be good for business when a rock star overdoses in one of your properties.

Let’s talk about Gaw Capital. We’re a little confused.
It was called Gateway Capital when the fund was launched in 2005 – like a gateway bringing money from the West and investing in the East. But that was too generic. Then a few months ago, the founder of a fund management company in Florida called Gateway Capital LLC got jailed for fraud. Then Deutsche Bank bought an office complex in Beijing called Gateway Plaza, took it public, and then they got defrauded by the seller. [At that point] I said, “Okay, let’s make sure we have a more unique name.”

You and your brother started it?
Correct. The way it worked was this. I spent a lot of time in the US from the mid-90s onward, so I built a pretty good track record starting businesses on my own. With some of my projects in the US, the family is an investor. But with many of them, they’re not. So I took that track record back to Hong Kong, and partnered with Morgan Stanley on some real estate deals in Hong Kong and did quite well. Later, my brother joined me when I launched the fund.

We’re trying to look ahead to the effects of the economic crisis on this business.
We have been weathering the crisis quite well, partly because the strategy changed quite a bit from our first fund to our second fund. Fund number one was launched in 2005. In those days, they were very few players in town, very few players who knew how to invest in Shanghai and Beijing, so we bought big, chunky assets. Together with Morgan Stanley we bought the Nexxus Building, the Old Hang Seng Bank, and we bought this building [Lyndhurst Tower]. We bought a building in Mong Kok, we bought a big shopping center in Beijing called The Village at Sanlitun, which we then sold a piece of to Swire, so Swire is our partner. And then we bought a historic mall in Shanghai. Those were all in fund number one, and those were well timed. So all those assets now have cash flow. All those assets have long-term debt. So we are in a pretty good shape. We launched fund number two in early 2007. That’s when we started our second step. We sold our building in Shanghai [and] we bought an empty apartment building in Xintiandi and we re-branded it Shama. Shama is one of our portfolio companies, which we co-own with Morgan Stanley and share the management of. Shama rented our building, and then after one year we sold it for a pretty good profit. When we were selling stuff in Shanghai, we said, “If we can get these prices, we should not be buying in these markets.” So the strategy shifted to building mass housing in second- and third-tier cities. My theory is if you want to make money in China, don’t fight the government. If the government doesn’t want you to invest in the tier-one cities because they think you are making the property prices go up, and they want you to go to secondary cities to build housing, go and do that. I mean you are in China – you basically have to set sail with the government behind you. The wind is going in that direction, so don’t fight it. That’s the way it is.

Okay. And fund three, when did that begin?
We haven’t officially closed fund three yet. In the fund business, you have series of closings, and it usually takes about a year from the first closing to the last closing. We had our first closing about a month and a half ago. It raised some money, but [because of] securities laws I can’t disclose exactly how much … but the timing was decent. The market was really tough, but because we have a strong investment base, we’re actually able to get quite a bit of money. Fund two will likely take a lot longer to be fully invested now, because it’s tough to buy stuff [right now]. We want to buy things cheap. The market is going down [but] the sellers always want a price that is too high.

That’s typical when you’re in the early stage of a downturn. I invested in the US during the time of the RTC [the Resolution Trust Corporation, a government-owned manager assigned with liquidating the assets of insolvent banks]. I remember that completely, but a lot of my young guys only know how a bull market works. I invested in a very bad market when I started the business. It’s always a big gap: the seller wants this [but] the market is going down. Some of the very best deals are done in the early period of a downturn, because there’s no transparency. I mean, you are flying blind. The seller is flying blind and the buyer is flying blind.

The key is to catch the right buyer at the right moment. The guy has to be desperate enough. So I tell the team, “When you bring me a deal, tell me whether the seller is distressed.” If the seller doesn’t need to sell in this environment, you are wasting your time because they will hate the price we will offer.
I have friends coming to me saying they have liquidity issues and they want to sell me stuff. I say, “You’re a friend so I don’t want to make you an offer. If I make you an offer, you may no longer be my friend. You will hate me. So go shop the deal. If you can’t find anyone you can deal with, look at me as a last resort.

“But be prepared, because it’s going to be ugly. I have a far greater duty to my investors to maximize the return.”

Are you looking at US real estate right now?
Not yet. There was a real estate conference here in Hong Kong in the last two days. There was a debate going on: do you want to invest in a very distressed developed market like Japan or the US? Or do you want to invest in a distressed emerging market like China or India? Ultimately [the question is] do you want to invest in a distressed economy that will actually decline for the next two years? Or do you want to invest in a distressed economy that is still growing at six percent or eight percent? Do you want to invest where the government is essentially broke? Or do you want to invest where the government has piles of money to stimulate the economy?

You suddenly make the choice very simple.
It is. I mean, there are ways to make money in a downward market even in the US, but you have to be very good at finding relative bargains. There will be opportunities for investing in Japan and the US, but I think the pain – in the US in particular – will be quite sustained. It’s a change of habit. Consumers have to learn how to go from spending based on credit to spending based on what they earn and spending based on savings, which is what the rest of the world does. That means the deleveraging that started at the banks is going to happen at the consumer level also. My guess is we’ll probably have another 18 to 24 months of downturn.

You were an intern with Tao Ho?
Way back, before college. Way, way back. I actually wanted to be an architect, but he talked me out of it. He said if you want to build buildings, be a developer because the developer tells the architect what to do. So I do appreciate what architects do. I actually think architects are one of the most under-appreciated, and underpaid, professions, because they are creative. They have to be very creative.

We’re featuring a lot of architects in power. We have Daniel Libeskind this month, William Pedersen last month.
I think a lot of the Japanese architects are going to get bigger and bigger in the next five to 10 years. I think they are not very good at marketing themselves. But I think their style is getting more and more appreciated.

The new International Style, isn’t it?
Yes, the new International Style. Kengo Kuma did our project in Beijing. I loved what he did, so we’re actually talking to him about doing a very high-end resort for us.

A lot of your properties are not just bought because of the square footage, but because they’re sexy. Do your investors like that? That sort of artsy side?
Ultimately it’s about value creation, right? I think if you can marry creativity with old boring real estate, you can create more value than someone else. As I was mentioning with my project out there in LA, we brought that whole New York [aesthetic] to a historical building and made it hip and sexy.

What’s the name of the building?
It’s called Rowan Lofts. It’s actually an 1898 office building. It’s spectacular. A lot of movies get shot there. All my US projects are on the private side. And all the China projects are in the fund. Basically I find the deals, and I capitalize each deal differently.

Which of your private investments is most fun? The Roosevelt Hotel?
Roosevelt is a lot of fun, because when we bought it, it was a bankrupt hotel. We increased the revenue six-fold. We increased the profitability 16 times over in the last 10 years. In fact, I think last year we sold US$17 million in alcohol alone. But what’s neat is it’s a very old Hollywood icon. It held the first Academy Awards ever in its ballroom. But it was down on its knees. Hollywood [Boulevard] was all drugs [and] prostitution. We bought it, and it was satisfying for me because I was actually the general manager for the first 18 months. I was 27. I really learned the business. I lived in the hotel, and I had breakfast, lunch and dinner with the staff in the cafeteria in the basement. I would sit with them, and after a while they talked to me.

They’d say, “That manager is doing this. That manager is doing that. That manager is no good.” So I found out a lot about what’s going on. It was really Business 101 for me – running a mini-corporation. You have human resources issues. You have insurance issues. You have 300 employees. You have different levels of employees. So it’s really where I matured as a businessman.

How did you manage to position it as a party place for celebrities?
Well, when I initially bought it, Hollywood wasn’t ready yet. So in 1996 I repositioned it as a tourist hotel. Hollywood was cheesy. So I went after the Japanese tourists, the Korean tourists, the European tourists and it became a very popular tourist hotel. The occupancy rate was very high. Not a very high [room] rate, but it became very profitable.

And then in 2001, when they were building the Kodak Theater across the street, I said, “Now this area is ready.” And 2001 was when the Internet bubble burst. The US was in a mild recession. That’s when I said, “Okay, in a mild recession, our business will suffer. It’s the best time to do a major, major redo, because when the recession comes, you can get cheaper construction costs. And it gives us a new product coming out of a recession.”

We brought in a designer called Dodd Mitchell who had never done a hotel because we wanted something that was more unusual, hipper. I didn’t want a cookie-cutter, Four Seasons type of hotel. This is a historic property. It has small bathrooms. It has limitations I can’t change. So I wanted to sell the experience. All I wanted was something dramatic. I wanted to create an urban resort, where you can stay for a week and every night you can hang out at a different corner of the hotel and you won’t get bored. And everywhere you go, you are feeding the cash register, and you enjoy doing it. I have younger friends from Asia who say that staying in the hotel is awesome for the first three days, but it gets tiring because you don’t feel like going to sleep. It needs so much energy. The whole thing is about sexiness. It’s very sexy, from the way the room is turned down at night, to how you walk to the pool. Everything makes you feel like you want to go out and party. And it works.

And what are the names of the clubs?
There are two clubs. One is called Tropicana, which is by the pool. The pool is hand painted by David Hockney. It’s actually one of the largest hotel pools in LA. We have famous pictures of Marilyn Monroe on the diving board. There’s a lot of history. So that area is very, very popular. The lighting, the massive palm trees – there are probably about 50 palm trees there and they’re about 10-storeys high. The ambience is fantastic. And we have fire pits everywhere.

And then we have a very exclusive club called Teddy’s, which is hidden in a corner of the lobby. That’s where Leonardo DiCaprio, Lindsay Lohan … she’s caused quite a scene.

I remember one time … I think it was Courtney Love. I was staying in the hotel [and] she over-dosed, flat-lined actually, and she got revived. And I said, “Hey guys, that can’t be good.” And my PR people called and said, “Oh, this is fantastic! This is Hollywood! No news is bad news!” It puts us in the news constantly.