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TALK AT NATIONAL UNIVERSITY OF SINGAPORE ON 7 NOVEMBER 2002
BY MR HAROLD TAN, GENERAL MANAGER, WEARNES DEVELOPMENT (CHINA)

CHINA - THE RISING DRAGON: KEY ISSUES IN PROPERTY INVESTMENT & DEVELOPMENT IN CHINA
As part of the Singapore Learning Festival, NUS Department of Real Estate has organised the above public talk at the NUS. The audience comprised of representatives from developers, real estate consultants, potential investors, academia, students.

Mr Tan briefed the audience on the property market in Shanghai and Beijing, outlined opportunities and risks for real estate professionals, issues in property investments for individuals and businesses and factors for business success for those who are keen to get involved in the property market in China.

Mr Tan first presented the 2001 comparative indicators for Singapore and Shanghai:
Singapore Shanghai
Land Area 650 km² 6,340 km²
GDP growth 2 - 4% 10 - 12%
GDP US$85.3b US$59.7b
GDP/ capita US$20,636 US$4,500
Foreign Direct Investment US$5.08 billion US$4.4 billion
Number of Foreign Projects Not available 2,460 projects

Mr Tan also presented a forecast of annual supply, absorption and vacancy rate for residential properties for Shanghai and Beijing and an analysis of average capital values, average rental trend of residential properties for these 2 cities.

Shanghai
Using tables showing forecast annual supply, absorption and vacancy rate, Mr Tan highlighted that from 1999 to 2002, the absorption rate for Shanghai has been higher than the supply. However, this is expected to reverse as more new projects are to be completed by 2003-2004 and the absorption rate is then higher than the supply from 2005 - 2006. The current average capital value in Shanghai is about US$1,000/ m² and rental is US$2,500/ m² for residential properties.

He mentioned that those who had invested in property 2 years ago will see double digit returns currently but the market is too high now for those who are intending to get in now. However, he does not expect any major crunch in property prices but foresee a price correction of about 10%. Nevertheless, for very prime areas in Shanghai such as Huangshan Road, Hengshan Road and Xujiahui, their value is expected to hold out on their own despite any price correction similar to any other prime areas in other cities worldwide due to their limited supply.

One needs to adapt to the mentality that Shanghai is big and there is no scarcity of land but one has to pay very close attention to microeconomics of the local area in question. Vacancy rate has been dropping until 2002 and is expected to rise again with the completion of new projects with a peak in 2003 and a gradual levelling off from 2006 onwards.

The price differential between Puxi, the traditional downtown and Pudong, the new downtown has been closing in due to governmental regulations which stipulate that banking licences for new foreign banks should be located only in Pudong and the attractiveness to build new large modern buildings on "Greenfield" sites and the engagement of foreign architects into the design. Currently the best rental for commercial spaces is about US$1/ m² in Puxi such as Huaihai road and Nanjing road areas and that of Pudong being US$.60/m².

Beijing The absorption rate in Beijing is not as strong as that in Beijing. Huge projects are expected to be completed by 2005-2006, leading up to the 2008 Beijing Olympics. After 2008, the property market for Beijing can be seen from the Olympic effect of other host cities although the local context varies.

The vacancy rate is 20% and is the normal rate for in China unlike in Singapore. Beijing's culture due to its administrative position of China also contrasts with that of Shanghai which is entrepreneurial driven and city officials are open to projects which would bring in immense downstream benefits rather than immediate monetary gains.

THREATS IN PROPERTY INVESTMENT FOR REAL ESTATE PROFESSIONALS

Mr Tan informed that every region, every city has different guanxi and the concept of guanxi is no different for any other business communities elsewhere for newcomers intending to penetrate into the community.

He outlined the following issues for consideration:
  1. Changing environment, politics, economic, social and the competition. One has to be flexible and nimble and may even need to revise one's plan every 6 months.

  2. Presence of copycats. One developer's successful formula could be replicated by others quickly

  3. Big is powerful. The scale of development in Shanghai-Beijing is very different fromthat in Singapore. For example, a launch could be 1,000 units compared to about 100 units per launch in Singapore.

  4. Shrewdness and craftiness. One needs to get used to the concept of "game-playing" with different parties, including the joint-venture partner. In Singapore, businesspeople could be used to the predictability of outcome of certain actions due to the well-regulated environment but one has to open up one's minds and adapt to the different operating environment in China. Nothing is impossible, it may just take a little longer.

  5. Misinformation, Half-truths and Hype. One should not just rely on consultants' reports and need to do own assessment on the ground and countercheck on claims.

OPPORTUNITIES

Mr Tan highlighted several areas Singaporeans, who are effectively bilingual in English and Chinese, can get involved in:

  1. Software is still weak: management skills, organisation, level of service, construction finishing and property management standards

  2. Consultancy: advisory for property development, valuation, feasibility, analysis, advisory and professional agencies
  3. Development of residential properties (mid-low to middle income) for the locals

  4. Good building and layout design

ISSUES IN PROPERTY INVESTMENT

  1. Verify data, information and claims. He cautioned against those who inform of phenomenal capital values as these figures could represent the very prime areas and not representative of the average.

  2. Sheer lack of secondary market. The secondary market in China is lacking and undeveloped currently and investors should expect to resell their properties to locals only.

  3. Newer is better. Compared to several years ago, the new buildings are better built, better financing available. New properties command a premium over existing properties for rental market.

  4. Price-sensitive market.

  5. Not easy to extradite funds from China.

  6. Property market is very imperfect. There is great disparity in the market and the local market is spoilt for choice with new projects completed on-stream.

  7. Reputation of developer (overseas deemed better). Singaporean developers have a good reputation of being reliable with good quality products and can deliver.

  8. Reputation of property manager (international is better)

  9. Enforceability of law.

  10. Different Strata Title concept. There is no proper strata title in China and property buyers only have a right to use the unit purchased only.

  11. Reap profits quickly. Due to the fast-changing environment, it is prudent to reap profits quickly.

  12. Watch your investment due to the fast-changing environment.

FACTORS FOR BUSINESS SUCCESS

  1. It is a game with changing rules

  2. Operate from a zone of discomfort and one needs EQ and AQ

  3. Be diplomatic and humble

  4. Be patient even it things did not come as expected, continue to negotiate and dialogue

  5. Be sharp and plan a few steps ahead

  6. Give face and respect the prople

  7. Nurture and develop guanxi (relationship)

  8. Play up the hype in marketing (showroom, PR, visibility)

  9. Continue to be watchful

  10. North China v Middle China v South China. The Chinese in different regions have different attitudes towards other Chinese of other regions.

  11. Perceptions. Different people may see the same thing but have different expectations as in the Singapore investor and the Chinese partner.

CONCLUSION

Mr Tan noted that many of Singapore-Chinese had ancestors coming from China leaving China at a time when it was attractive to come to Singapore due to the economic conditions in China then. Perhaps, the trend is now reversed as with the growing opportunities in China and the situation in Singapore, it would be worth exploring the prospect on working in China "the motherland".

He urged potential investors to look into the following:

  1. Read Suntzu: The At of War; Dream of the Red Chamber and Romance of 3 Kingdoms to get a better insight in to the Chinese mind

  2. Evaluate the following questions:
    • What are our choices?
    • Who moved my cheese?

  3. Learn to engage, succeed and prosper

  4. Understand that when there is a will, there is a way
The event which commenced at 12:00 pm, ended at 1:30 pm.

SIP is in the process of forming a business venture, SIP Consultants Pte Ltd as a vehicle to tap on the opportunities of securing planning projects overseas particularly in China, India and the ASEAN region. A Extraordinary General Meeting (EOGM) will be held to amend the Constitution to allow the Institute to set up the company on 4 Dec 2002 (Wednesday), 6:45pm at Halia Restaurant, Singapore Botanic Gardens. SIP Fellows and Members are urged to attend the EOGM to give their full support towards the setting up of the company.

SIP is organising in conjunction with SIA, a full-day seminar with panel discussion on 10 Jan 03 at Sheraton Towers on planning experiences in India and China. The Chief Planner of India and a suitable representative of the Chief Planner of Shanghai are expected to be the keynote speakers for this event. SIP members and friends are encouraged to attend the seminar to network and obtain some insights into the property scene in India and China.
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