This is China! BLOG

Getting Real in China with American Real Estate

Things must be really tough in the American real estate market. I haven’t been back to the States for nearly a year, but I get the feeling events on the ground are more dramatic than what even the media can make them out to be.

I recently delivered a presentation at the United States Foreign Commercial Service Department in Shanghai to a group of realestate agents from Kentucky. I entitled the talk, “How High is Up? China’s Realestate Market”. The United States government apparently figured that my work in China site selection gave me a perspective on the dynamics of the Mainland’s most durable bubble.

I set about framing the discussion in social and historic terms, pointing out that China’s development was going to define the shape of the 21st century, and that the real estate industry was going to color the results. My focus on the talk was primarily on 2nd- and 3rd-tier Chinese cities, in which land was still available for development. The opportunities for foreign investors in the 1st-tier cities like Shanghai and Beijing were few and rapidly diminishing in the light of the frenetic development activities running up to the 2008 Olympics and the 2010 World Expo, in Beijing and Shanghai, respectively.

The x-tier cities, as I like to call them, though, still have opportunities aplenty, predominantly in the retail sector. Companies like Walmart, Carrefour, KFC and McDonald’s are continuing to expand apace in the x-tier cities, while development in office space is languishing. The focus on development of most x-tier cities is on the manufacturing sector, which is more dependent on swathes of land on which steel- and concrete-factory buildings are built. Office space, on the other hand, is more dependent on service-oriented industries like advertising, finance, accountancy, and legal. Several studies have cited though that retail outlets organized in Western-style malls pose a tremendous opportunity for foreign real estate developers. Foreign developers have the funds and the expertise x-tier developers do not to build and operate malls. However, as my own experience and other studies have shown, doing business in x-tier cities often involves developing deep relationships with government officials in a business environment that lacks transparency and accountability.

Participants, though, seemed more interested in real estate opportunities in America than in China … for the noveau riche Chinese. As I explained to one agent, the Chinese with money do not feel their money secure in China: they want to get it out of the country. And they want to put it into assets they know: real estate has historically been one of Chinese people’s favorite investments.

The last question I fielded, after the Q&A session, rather surprised me: was I interested in buying property back in the States? one agent asked me. Startled, I answered I already had an apartment near dowtown Chicago. “How about on the East Coast; would you like something on the East Coast?” the middle-aged woman pressed.

“Mmm, no,” I answered warily, “I’m quite happy here in China; no plans to move to the East Coast.” Unfazed - used to dejection in today’s American real estate maket, I guessed - she moved on to join the departing group of realtors.

Things must be more desparate State-side than even the media has made out.

Bill Dodson
SUZHOU, China