Business Tianjin Magazine

While Hong Kong business tycoon Li Ka-shing hit the headlines by selling more than 10 billion CNY (1.65 billion USD) of his properties in the Chinese mainland recently, his counterpart Vincent Lo Hong-shui is shifting more focus on to the mainland's property market.

"I made a decision to exit all overseas investments seven years ago and only maintained our holdings on the Chinese mainland," said Lo, chairman of China Xintiandi (New Heaven and Earth in Chinese) Co, which owns and operates a series of premium commercial properties in China.

Sitting in an executive room of boutique hotel 88 Xintiandi Shanghai on an autumn afternoon, Lo wore his customary Chinese tunic, unlike most businessmen who opt for formal dark suits and ties.

Lo said he firmly believes China's property market will benefit from its economic development.

"Many people are concerned about sky-rocketing property prices at the moment, but I think so long as our economy is constantly growing, property values will still rise," he said, referring to the price of residential housing, which has been growing for 18 consecutive months since June 2012.

Statistics from the China Index Academy, the research arm of the nation's biggest real estate website, show that China's average home prices in 100 cities rose 10.99 percent in November from the previous year.

There are worries that people's spending power and quality of life will be eroded by the runaway home prices and rent inflation. Lo's suggestion is letting the government do its part to help poor families priced out of the market. That is to build low-rent apartments and provide housing aid for them.

According to Lo, the strongest residential developers will survive. Developers dare not put an outrageous price tag on homes if there is no demand.

Being a commercial real estate veteran, Lo gained his reputation among Chinese real estate developers with his Xintiandi project in Shanghai. Since 1999, Lo has headed Shui On Land Ltd, spending 1.4 billion yuan on the development of three hectares of narrow lanes lined with traditional houses in downtown Shanghai, located near the historical site where the Communist Party of China held its first meeting.

The Xintiandi project was developed into a new mixed-use complex comprising restaurants, bars and shops and soon became a popular entertainment and shopping spot in the city.

It is never easy to develop such a project from scratch, especially in the wake of the devastating Asian financial crisis. Developers then could hardly find any capital support from banks.

"At that time, my Hong Kong friends all called me a lunatic," said Lo. Instead of waiting for bank loans to support his project, Lo determined to use his own money. Lo said he was eager to complete construction of the creative project ahead of the then upcoming Asia-Pacific Economic Cooperation meeting, which was scheduled to be held in Shanghai in October 2001.

However, his insistence in keeping the aged stones and architecture unchanged and making them part of the new project has increased the time and cost. But Lo's efforts paid off in later development.

His efforts finally paid off. Shanghai Xintiandi was named as one of the official recommendations to visit during the Asia-Pacific summit, and quite a few government heads and economies' leaders, including the Russian President Vladimir Putin, dined in Lo's club.

Since then, the project has become a landmark and a sightseeing spot in the country's commercial hub. Several other local governments across China have earnestly invited Lo and his company to develop similar projects in their cities. Successful followers after Shanghai's Xintiandi include Xihu Tiandi (Hangzhou), Chongqing Tiandi, Wuhan Tiandi and Foshan Lingnan Tiandi.

"But we do not go everywhere we are asked. Before any decision is made, we go there and research the city's history and culture, its current condition and economic outlook. To be honest, if a city does not have enough economic potential, we won't consider building such a costly project because our return will not be secured," said Lo.

But clearly not everybody agrees with Lo's view. Some with small shareholdings are complaining the company's slow capital flow has undermined the group's profitability.

In 2012, Hong Kong-listed Shui On Land recorded 4.8 billion CNY in revenue, down 43 percent year-on-year, partly because fewer properties were delivered and recognized as sales. Profits attributable to shareholders dropped 41 percent year-on-year to 2 billion CNY.

Lo decided to spin off the premium commercial property unit China Xintiandi Co, which started to operate separately from March 1. After the restructuring, the wholly owned subsidiary China Xintiandi Co will focus its role as a commercial property investor, operator and manager. The change is expected to bring higher efficiency.

Although the separate listing is still subject to regulatory approval, the business maneuver is generating a positive effect. During the first three quarters of this year, Shui On Land Ltd posted a surge of 239.7 percent year-on-year in revenue, ranking first among all listed developers in China.

"Personally, I hope the listing will happen at a time when China Xintiandi's business acumen is recognized. But the capital market environment is also an important consideration," said Lo, suggesting the listing may be take place in 2014 or even 2015 if the market does not make a turn for the better quickly.

Currently, developers are showing great enthusiasm for commercial property. From January to August, a total of 716.8 billion yuan was poured into the sector, up 26.5 percent year-on-year and higher than the overall real estate investment's 19.2 percent increase during the same period, according to data from the National Bureau of Statistics.

An increase in commercial property supply will be seen in the next two years because the central government's monetary tightening policies are driving developers to quit residential projects and flock to commercial ones, said Dai Fang, an industrial analyst from Zheshang Securities Co Ltd.

He expects an oversupply to develop in some third- and fourth-tier cities, but well-located commercial properties in the first- and second-tier cities won't be affected.

There are also external challenges to influence the return on commercial property investment, such as rising competition from e-commerce, which is driving an in increasing number of people from physical shopping to placing orders via the Web.

In addition, rising operating costs, especially labor, and lack of differences among products and services may pose a threat to the outlook for commercial properties, according to a report from global commercial real estate services firm CBRE Group Inc.

Chen Zhongwei, head of research at CBRE China, said mid-range department stores will take the biggest hit because the retail model is under double pressure from the shopping mall boom and the increasing popularity of e-commerce purchases.

"Experiential consumption or one-stop shopping is the most essential strategic adjustment to accommodate the online shopping boom," suggested Chen. In addition, to improve their competitiveness, landlords are likely to introduce professional retail asset management, differentiate themselves through the launch of new brands and/or undergo tenant-mixture adjustments.

But as a man bullish about China's prospects, Lo is confident about the country's outlook and its business center Shanghai.

"Shanghai is going to become a global financial hub in 2020 so it will need a lot of houses, offices and entertainment facilities. Meanwhile, the city's pilot free-trade zone project will also bring passenger flow and cash flow into the vibrant city," Lo said. "This is not a market of 23 million Shanghai people, but a market with demand from all over the world. That demand will bring us huge opportunities."

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