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Scrambling For A Berth In China


International Finance

SCRAMBLING FOR A BERTH IN CHINA

From the 37th floor of the China World Hotel, patrons used to look out on downtown Beijing's sprawl from a British-style pub. Recently, the hotel tore it out--as well as several other top-floor restaurants--and put in offices, completed this month. The pub fell victim not to communist xenophobes but to Western executives craving space for their China operations. Demand for offices is also surging at the Holiday Inn Lido Beijing. Even though it expanded its nearby office tower in July, it still can't keep up. "We have 100 companies on a waiting list," says Michael Yuan, the Lido's deputy public-relations manager.

As foreigners flood into China, they are getting used to coping with one of Asia's worst real estate crunches. In Beijing alone, the number of representative offices of foreign companies has increased 64%, to 3,568, since 1992. Given the space crunch, prices are expected to jump about 20% in the next 12 months. "The market is going crazy," says Stan Berliner, a property consultant with San Jose (Calif.)-based Berliner Cohen who represents such giants as Apple Computer Inc. and Intel Corp. in China.

There are some signs of relief, though, for those who are willing to wait. A bevy of high-quality commercial buildings in Beijing and Shanghai are expected to open by 1997. Many are being built by Hong Kong's blue-chip property developers, such as billionaire Li Ka-shing. Given their excellent connections in China and strong capital base in Hong Kong, the territory's property magnates are betting that they can replicate their Hong Kong real estate successes on the mainland. And some Western companies are hoping that teaming up with the Hong Kong magnates will solve their real estate headaches.

WHOLE HOG. For now, though, the long-term outlook provides little comfort for foreign executives plagued by short-term needs. In Beijing, where there's only 29,000 square meters of high-quality office space, the demand has pushed rents in some buildings to levels similar to Hong Kong, at an annual average of about $870 per square meter. At Beijing's China World Trade Center, they're an astounding $1,570 per square meter. The situation in Shanghai is only slightly better. Average rents are $830 per square meter, and in the Shanghai Portman complex, offices are going for $1,290 a square meter.

A few multinationals are taking matters into their own hands. Some companies with large offices have taken to buying buildings, says Michael Purefoy, Beijing branch manager of L&D Holdings Ltd., a Hong Kong-based property group. For instance, Motorola is buying about 15 units to house its expatriate staff, says Chi-sun Lai, president of Motorola China Electronics Ltd. The company, which has seen sales skyrocket, has also leased and renovated a 16,300- square-meter Beijing office building for 20 years.

The Western arrival with some of the most ambitious plans is Goldman, Sachs & Co. It has formed a joint venture with Li Ka-shing's Cheung Kong (Holdings) as well as Hong Kong-based Orient Overseas (International) Ltd. and the Beijing city government to turn a massive expanse of land into a $1.5 billion multiuse complex. Located close to Tiananmen Square, the 835,000-square-meter project will include retail space, luxury apartments, offices, and possibly a hotel. The company has also taken an undisclosed stake in a $200 million Shanghai project that's managed by Sun Hung Kai Properties Ltd., another Hong Kong property powerhouse. "We're actively looking at other investments," says Henry Cornell, Goldman's executive director.

Other developers are also frantically building in Shanghai. Adrian Faure, the Hong Kong-based research director for Merrill Lynch & Co., predicts that some 1.1 million square meters of commercial property will come on the market by 1997--six times the present amount. Hong Kong's Hang Lung Group has broken ground for two $500 million multipurpose buildings, says Roy Ho, the group's Shanghai representative. One complex will occupy an entire city block, while the other will have two office towers of 66 and 48 stories.

With the government promoting more development in China's interior, inland cities are also getting a boost. Hong Kong-based Wharf (Holdings) Ltd. has begun work on a $900 million joint-venture hotel and commercial and residential complex in the central city of Wuhan. It could be completed by as early as 1997.

NOT FOR AMATEURS. Even with the frenzied quest for space, foreign developers have their work cut out for them. They must cope with the cumbersome process of negotiating with the bureaucracy over land prices, long-term leases, and relocation of existing tenants. Once work is under way, there are endless other hassles. For instance, many construction workers disappear during harvest time to return to their farms. And even wily Hong Kong giants have yet to see whether Chinese subcontractors can build first-rate buildings according to specifications. "It's not a market for amateurs," says Rose Lee, managing director of Hong Kong Bank China Services Ltd.

The Chinese government is trying to impose some order on the real estate explosion. It imposed a credit squeeze last year, in part to cool the overheated market in southern China. Since many well-connected Chinese were playing the real estate market after gaining land-use rights, Beijing passed an urban real estate law in July to restrict speculation. Once the law goes into effect next year, developers may lose their land-use rights if they fail to build within two years. But foreigners will still be

prohibited from developing real estate on their own.

For the foreseeable future, foreigners will therefore need to rely on joint ventures with Chinese partners. But that doesn't seem to be discouraging most developers. Indeed, once the new Hong Kong-managed buildings come on the market, some of the Chinese-run buildings currently demanding huge rents will suffer. Beijing and Shanghai should be a "renter's market in two years' time," predicts Paul Burke, associate director for regional consultancy at Colliers Jardine in Hong Kong. For foreigners scrambling for space in China, the worst may soon be over.

FOREIGN PROJECTS

ARE TAKING OFF

CHEUNG KONG (HOLDINGS)

Using political connections, Hong Kong billionaire Li Ka-shing's company is building a huge Beijing complex

GOLDMAN SACHS

Taking a stake in a $1.5 billion Beijing development as part of ambitious plans for Chinese projects

HANG LUNG GROUP

Constructing two Shanghai office towers worth $1 billion in the Hong Kong company's bid to be a power

in China's financial capital

MOTOROLA

Leasing a Beijing office building and buying apartments to house expatriates who are managing the company's booming China business

DATA: BUSINESS WEEKJoyce Barnathan in Hong Kong, with Lynne Curry in Beijing and Russell Mitchell in San Francisco


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