Education is key to U.S./China RE-lations

Our very gracious hosts arranged for a driver to lead a tour of what they believed would be the highlight of our visit: a new multifamily residential complex "out in the country." That proved to be somewhat of a misnomer. The site actually was an undeveloped tract several miles from the center of the city. On the drive to the site, we couldn't help but notice the poor condition of the roads, the lack of existing infrastructure and the absence of any signs of viable retail developments, public transportation or places of employment. In fact, there wasn't much of anything in the area but undeveloped land.

Upon reaching our destination, we were impressed by the initial appearance of the villas, constructed on zero-lot lines and featuring a contemporary architectural design. Upon first view, the development could have fit comfortably in many suburban residential subdivisions across the country. We asked how many units were sold. "None," we were told. And how long were these properties on the market? "Three years."

The scenario just described did not take place in a depressed domestic market. It happened on the other side of the world, at a new - yet still vacant - development several miles from Shanghai, China. The new villas were vacant for two key reasons: the cost of the homes was beyond the means of most Chinese, and there was no easy way for people to reach the property. In essence, this project exemplifies in quite dramatic fashion the current condition of commercial real estate in China and illustrates the need for significant changes in real estate practices as that country moves toward a more free-market economy and embraces more foreign investment.

In May of this year a leadership team from the Commercial Investment Real Estate Institute was invited by the Chinese government to visit three major cities in that country: Beijing, Shanghai and Hong Kong. Our objectives were twofold. First, we wanted to learn about current commercial real estate practices and the state of the industry; secondly, we wanted to initiate the groundwork for an introductory CCIM education program in China. The CCIM team spent more than a week visiting properties and meeting government officials, educators and development company representatives.

During this whirlwind tour, our official hosts were the Sun Development Group of Beijing and the South Bun Development Group of Shanghai. We also met with the Chinese Real Estate Association university officials. The contingent of men and women from the host group went to great lengths to show hospitality (we frequently would raise a toast with a rousing shout of gambay), question us on contemporary market-driven commercial real estate and western education programs and coordinate tours of existing properties and properties under construction.

The dichotomy of the properties and regulations we witnessed was astounding. Consider the following recollections.

In Shanghai - which we were told has estimates of between 17 to 25% of the world's construction cranes - new residential and office buildings and projects nearing completion dotted the skyline. Marketing suites for the properties were staffed by professional, informative sales representatives armed with glossy project brochures touting modern amenities and floor plans geared to today's tenants. Yet, upon a first-hand tour of sites under construction, we witnessed earth moved by shovel and wheelbarrow (less expensive than by bulldozer and truck) and scaffolding constructed of bamboo (a material available in abundance).

Language and cultural barriers, bureaucratic red tape and an economy in transition are just a few of the issues we anticipated would hinder expansion of the Chinese commercial real estate industry. We were puzzled, however, when our hosts could not - or would not - provide any real market data. Questions about absorption or vacancy rates, appraisal practices or any other analytical data were answered with the response of: "Our investors are all very happy with their investments. You Americans analyze too much."

The Chinese government actively encourages private ownership of commercial properties, like offices, and multifamily or single-family homes. Yet, the government retains ownership of all the land under properties and establishes tax rates, which can not be challenged by property owners. Rates are set by an arbitrary decision by the authorities - not upon the assessed valuation of the real estate.

In light of these issues, western-based companies have targeted China with the hopes of gaining a foothold in the world's biggest market. McDonald's, Hewlett-Packard and Motorola are just a few of the multi-national corporations that already are doing business in China. Others certainly will follow.

It's our goal to begin an introductory course in China in late 1999. Through institution of a proven real estate education program, the officials behind this market of more than 1.2 billion people can take the first step toward opening the doors to sustained, significant foreign investment. Certainly, there will be risks involved - just as there are risks inherent in any real estate investment. From the overall perspective of our contingent, those risks are well worth taking.

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