Ties That Bind - Bay Area Council Economic Institute

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Ties That Bind
firms into the market. Land is still owned by the state, with use granted under long-term lease.
Ownership of a building is typically set up through a wholly foreign owned enterprise (WFOE).
Foreigners may now invest directly in properties without bringing in a local partner, although a
well-connected partner may still be helpful in handling issues such as transfers, inspections
and taxes.
Japanese and Taiwan investors and developers arrived in the 1990s, following the massive offshore
migration by key industries to China’s lower-cost environment. More recent arrivals include
U.S. developers such as Simon Properties and Hines Interests, pension funds, real estate
investment trusts, insurance companies and investor groups led by Goldman Sachs, Merrill
Lynch and Morgan Stanley (Goldman, Morgan Stanley and Australia’s Macquarie Bank reportedly
invested a combined $450 million in four Shanghai commercial buildings in 2004; Merrill
Lynch announced in February 2006 a $30 million investment in Beijing’s tallest building, the Beijing
Yin Tai Center). The California Public Employees’ Retirement System (CalPERS) has created
a joint $400 million fund with U.S. developer Hines Interests to develop residential and retail
properties in China. It also has China exposure through a $200 million investment in Secured
Capital Group and a $400 million investment in AETOS Capital.
China’s State Administration of Foreign Exchange (SAFE) reported a total $3.4 billion in foreign
real estate investment during 2005, and the Ministry of Commerce reported another $1.5 billion
in first quarter 2006—up 47% from the same period in 2005. Much of that was in commercial
offices, upmarket housing and industrial properties, where Citigroup reports an average annual
return on investment of 7%, compared with 4.5% in the U.S., 4% in the United Kingdom and
3.5% in Japan.
Many Bay Area investors, mostly Chinese-Americans, are investing in China real estate—especially
condominiums. Development and investment opportunities are spreading out to secondtier
cities like Chongqing, Chengdu and Dalian. China’s property market—especially housing,
which saw prices rise 15% in major cities and 5.5% in medium-sized cities in first quarter 2006—
is so hot that government has stepped in to curb real estate speculation with higher interest rates,
a 5% transfer tax on property held less than five years, and a more recent 35% capital gains tax.
Foreign architects are higher cost than domestic Chinese architects, but their names carry experience
and prestige. While local firms design most projects and buildings, overseas firms compete
at the high end of the market, particularly on high visibility, signature developments. China has
embraced western design practices since the quality of design services performed by local professionals
is not yet at a level of maturity to deliver Class A international buildings. Significant price
differentials, primarily in labor costs and in shorter lead times required to break ground, have
resulted in a highly advanced market, often incorporating new building technologies that have
not yet been implemented in the U.S. Much of the competition in that market segment comes
from German and French firms.
Because land is owned by the government, public projects are awarded by governmentsponsored
competition. Private development projects entail a “scheme gathering” solicitation to
design firms to prepare concepts. These are submitted to “expert” panels who evaluate and rank