At first glance, the skyscraper-packed big cities of the world’s second-largest economy may look a lot like Los Angeles, San Francisco or New York City. But when it comes to real estate in China, there’s a radical difference at the ground level.
Literally at ground level.
“The State owns the land in China,” says Andy Walburger, Executive Director of SPIRE. “So transactions and developments are done through long term land use agreements.”
Mr. Walburger was part of a six-person delegation (4 alumni and 2 Stanford students) to China June 17-25 that was sponsored by the SREC, the SPIRE sponsored Real Estate Council, which consists of about 60 Stanford Alumni that are senior executives participating at the highest levels of the real estate industry. The group was in Shanghai for two days, Xuzhou for one day, and ended the trip in Beijing for three full days.
Chad Hagle, President of SPIRE and a member of the SREC reflected on the trip, “The Chinese real estate market is separate, distinct, and unique from that of the United States. Trying to look through an American lens at the Chinese landscape is a futile exercise. China is fueled by rampant capitalism and consumption amidst the backdrop of the birth and growth of the largest middle class on the planet. However, that growth is controlled and limited by a state-run communist system.”
The trip’s genesis was from a discussion at the SREC conference nearly a year earlier, says Mr. Walburger. “There was a discussion about real estate in China and how it compared to other developing nations such as India,” he says. “One of our members, Goodwin Gaw, with a portfolio of real estate assets in mainland China, urged his fellow SREC members to get an on-the-ground look at China and its burgeoning real estate industry. He offered to host a SREC delegation and show them properties that illustrate the region’s potential and challenges.”
ProLogis, one of the world’s largest owners of distribution and logistics centers, and Hines, a privately owned, international real estate firm, generously agreed to host the SREC group for a day. Both firms boast extensive experience in China and shared their unique local and global perspectives with our visiting group.
As part of SPIRE’s goal to support student interest in real estate, SPIRE sponsored two students to participate as part of the delegation. One of those attending was Anthony Clarke, class of 2012 who received his Masters in Civil Engineering and Construction Management and is embarking on a career with Walton Street Capital LLC of Chicago. He remarked on the fundamental difference in real estate between China and the U.S. “You don’t control the land. Ultimately, someone else has that ownership,” says Mr. Clarke. “When you’re investing in a new market, that’s a tremendous risk. But at the same time, all the growth you see there can justify those risks.”
From a business perspective, China appears to be “a capitalist society – we saw very little evidence of communism. The business culture is driven by opportunity, growth and hard work,” says Mr. Walburger in describing the day-to-day life he and the others saw. “There’s optimism, and aggressive business energy,” he says. “Their lives have changed dramatically over the last 20 years, and they have grown accustomed to the growth and improvement that their government has provided to them,” he says.
Dave Butler, a member of the SREC and principal at Argosy Real Estate of San Francisco, shared the following. “I didn’t feel like I was in a communist country,” he says. “Only in Tiananmen Square did you feel like you were in a communist country.”
Mr. Butler was also impressed by how rapidly the country is developing its real estate.
“I had expected there to be a lot of development and growth, but not until you actually see it can you believe it,” he says. “I was incredibly impressed with what they’ve accomplished growth-wise over the last 20 years.”
Mr. Butler says there are ways for American firms to tap into the Chinese real estate boom – if they do it carefully, and with a local partner. “I wouldn’t recommend being an outsider investing directly in China without somebody there on the ground who’s a local Chinese national,” he says.
The group’s first stop was Shanghai, one of the financial centers of China.
“I was amazed how much growth was there – the amount of new construction,” says Mr. Clarke, who was selected for the trip after a lengthy interviewing process.
While in Shanghai, the delegation visited the cities highly lauded Urban Planning Museum. The museum details the almost total makeover of the city during the past 20 years and where government leaders expected it to be in the years ahead.
“They had a massive 3-D model of the city and how it will look in 2020,” Mr. Clarke says. “You could see how things are changing very quickly. It’s not all that different from a New York City. But, putting that in perspective, the majority of Shanghai’s growth has taken place over the last two decades as compared to New York where the growth has taken place over a century.”
Stanford MBA Robert Hollister, who is the Senior Managing Director in Shanghai for Hines, helped shape the tour’s focus in Shangai.
Mr. Hollister “had tremendous perspective,” says Mr. Clarke. Mr. Hollister has been guiding the Hines efforts in Shanghai since 1996. The SREC group appreciated his candid views on doing business in China and how to adapt to the market realities and opportunities.
In addition to showing the SREC delegation California Place, a five million square foot mixed use development with high density residential and a large shopping complex, Mr. Hollister gave them insight into what his company’s plans for further development in China.
The second stop on the tour was Xuzhou. An interior city, considered a tier three city in China. Strategically located as a transportation hub, with a high speed train stop connecting to the major cities in China, Xuzhou boasts a population of 9 million.
As the traveling party emerged from the airport towards the city they spotted “an outcropping of 30 to 40 story residential towers under construction. Some of the individual projects are capable of housing 12,000 families. Nine million people would be one of our largest markets in the United States,” Mr. Clarke says. In China, a city of that size isn’t even noteworthy.
In the evenings, the delegation enjoyed authentic meals and rich discussion with business leaders from both American and Chinese firms driving real estate development throughout China. These dinners proved a highlight of the trip for all involved.
While much is made in U.S. media of trade rivalry between the two countries, Mr. Butler says he didn’t feel any animosity during the trip. “The U.S. definitely is still held in high regard in a number of ways,” he says of the people with whom the group met. “At the same time, I think there’s some concern of the U.S. in terms of its debt levels.”
Those on the SREC trip were Dave Butler, Argosy Real Estate; Chad Hagle, Aventine Development; Patrick Tooley, Wilson Meany Sullivan; Andy Walburger, SPIRE; Anthony Clarke, Walton Street Capital (Stanford 2012); and Nelson Estrada, Stanford student (Stanford, class of 2013).
Although packed with learning, It wasn’t entirely business. The SREC itinerary left time for a private tour of the Mutianyu Section of the Great Wall as well as sightseeing in the Forbidden City and Tiananmen Square.
“Exposure to a new and unique market is something that can’t really be supplanted,” Mr. Clarke says, praising SREC and SPIRE for their support. “It’s a trip no one in my current position has experienced. I feel that it will really help me bring a unique perspective to my new employer.”
“I think everyone’s got to get over there to see it for themselves,” says Mr. Butler. “The country is just a juggernaut. I don’t think you can ever pretend to understand a country without being there in person and seeing it.”
A final thought from Chad Hagle summed up the week and opportunity. “I don’t know any other way to gain a more complete picture of a country – its culture, economic system, real estate market and its people – in a one-week time frame. This excursion was extraordinarily valuable and marks a highlight of my professional life. I hope more of our membership has an opportunity to participate in programs of this nature going forward. This is a great benefit of SREC membership that is not to be missed.”