The Experiential Real Estate of Shanghai

Strike up a conversation with any real estate professional and soon enough the “death of retail” topic will come up. Slightly exaggerated, perhaps, but retailers and the real estate they occupy are facing significant challenges as e-commerce continues to evolve. One message that we received again and again from the real estate experts that we met in China was that bricks and mortar retailers have already gone through many of the growing pains associated with e-commerce and learned the importance of “experiential retail” years before it became a buzzword in the US.

One of our first meetings in Shanghai was with Value Retail at their newly opened Shanghai Village. Located near the Shanghai Disney Resort, the luxury outlet mall is well positioned to attract nearby tourists. Meeting with Caleb Perrin, a Columbia MSRED graduate, and Lillian Cheng, it was clear that value proposition of Shanghai Village was hospitality and experience, rather than just providing a retail offering.

Our hosts began our tour with a discussion in the VIP hospitality room where shopping guest can relax, enjoy refreshments and have a concierge assist them with anything. Shoppers could also register so their purchases will be sent to concierge to be picked up at the end of the day or shipped directly to their home, staving off fatigue from hauling around heavy shopping bags. Boutiques were spacious and uncluttered, reminding us more of 5th Avenue retailers rather than a typical US outlet mall. The one design challenge that our group noticed was the open-air concept. While common in US and European outlet shopping centers, poor weather and air quality keeps customers away. We visited Shanghai Village on a rainy weekday and noticed very few shoppers around.

We built on our experiential retail tour with a tour of Swire’s HKRI Taikoo Hui, a mixed-use development in Shanghai’s vibrant Jing’an District with two office buildings, a retail mall, and three hotels / serviced apartments. The luxury boutiques are well-suited to the high-end neighborhood and contains the world’s largest Starbucks (29,000 square feet). The Starbucks Reserve Roastery is a highly experiential concept. The spaces doubles as a coffee factory and guests can learn about the roasting and brewing process while tasting coffees from all over the world. While coffee shops are not as vulnerable as fashion retailers to e-commerce, the Starbucks Reserve serves as a major draw to both locals and tourists for the shopping center.

Robin Lore ’19

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The group touring Shanghai Village

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The group touring Shanghai Village

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World’s largest Starbucks in Taikoo Hui

Hong Kong Real Estate Development, Transit-Oriented by Nature

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Above: Real Estate students meeting with MTR outside of the International Commerce Centre at Kowloon Station, Hong Kong

Coming from New York City, we know what it is like to live in a highly populated and dense city. Fitting its 7.4 million residents into just over 1,100 square kilometers is remarkable and this stat becomes mind-boggling when you realize that three-quarters of Hong Kong’s land is green. Of course this results in extremely high rents and prices (even by New York standards) and it also results in innovative developments to cope with the severe lack of developable land.

One of the most innovative development models that we have encountered on our real estate focused trek has been the Rail + Property model implemented by the MTR (Hong Kong’s mass transit railway). With the expressed purpose of capturing the value creation that a new railway line will have on the surrounding land, the publicly-traded MTR is able to operate at a profit. When the MTR develops a new line, they obtain land development rights from the Hong Kong government. They then work with a development partner to build on top of the station site and share in a portion of the development profits, usually by receiving a % of profits, a fixed lump sum, or a portion of the properties built on the station. In fact, the vast majority of profits earned by the MTR is from the management of assets developed as part of the Rail + Property model. While many cities have been focused on transit-oriented development over the past few years, Hong Kong and the MTR have been building on and around transportation centers for decades. Approximately half of all subway stations have a development on top. As we learned from MTR (and experienced as we moved around the city on our own) the MTR is exceptionally well-run and clean with over 99.9% of trains running on time.

Following our discussion with Kelson Chan, Strategy and Planning Manager, and Steve Yiu, Principal Advisor, Property Planning, we toured a prime example of the Rail + Property model at Kowloon Station, one of Hong Kong’s most busy subway stations. The station is complete with underground retail and is the site of the International Commerce Centre, Hong Kong’s tallest tower.

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Above: Kowloon Station, Hong Kong

The MTR is a relatively new public transportation system and was established in the 1970s. Building an extensive subway system like Hong Kong’s is a daunting task especially when you consider the financial challenges that many public transportation systems face (MTA riders – sound familiar?) The Rail + Property model efficiently allows for the capture of value increase resulting form investments made in infrastructure. Hong Kong’s highly dense population and low car-ownership makes this city the perfect location for this type of model. It will be interesting to see how this model can be adapted in other cities.

Flying into China’s real estate market as Chinese investors pull back from the US

Over the past few years, no group of investors have made a bigger mark in the US Real Estate market than the Chinese. From Chinese airline turned global conglomerate, HNA, to insurance company turned investor, Anbang, as well as conglomerate Wanda, these Chinese investors have been buying up some of the biggest trophy properties in the United States including the Waldorf Astoria, 245 Park Avenue and other large office and hotel properties. These investors were scooping up prize properties across the country and partnering with some of New York’s most established companies.

The Chinese government, concerned about potentially risky overseas investments and capital outflows, began to enact capital controls in November 2016. Chinese investment in the US began to slow but large acquisitions continued, such as HNA’s $2.21 billion purchase of 245 Park in May 2017.

However, the clampdown as come to a head in the past few weeks. Anbang was seized by the China Insurance Regulatory Commission for at least a year on February 23rd following the indictment of the firm’s chairman, Wu Xiaohui, who was charged with financial fraud, as reported by the Wall Street Journal. HNA is facing a debt crisis with $20 billion of bonds expiring in the next two years. Their credit profile has been lowered from b to ccc+ by S&P Global and the group has turned to employees to raise debt. In February 2018, HNA put 245 Park, the crown jewel of its estimated $14 billion real estate portfolio, for sale along with other US assets for $4 billion.

From March 11th to 18th, a group of 30 CBS students will meet with real estate companies in Hong Kong and Shanghai. While none of these aforementioned tumultuous and notoriously secretive companies have agreed to meet with us, there is an impressive line up of investors, developers and operators that will talk to our group about investments happening within Asia and hopefully offer an insider’s perspective on foreign investment crackdown.

Robin Lore ’19

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Ready to Explore Growth Opportunities in China

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In a few short hours, 30 of us will commence a trip of a lifetime learning first-hand about the latest developments in the Chinese Economy and exploring business opportunities in Shenzhen, China (aka the Silicon Valley of Hardware) and Hong Kong. Our research proposals and interest in the Chinese economy are as diverse as we are – from launching a local beer company to exploring clean energy opportunities and to developing e-commerce businesses across various industries.

In preparing for this excursion, we had the opportunity to learn more about the Chinese Economy from Professor Shang-Jin Wei. He notes that “China is not only the world’s largest manufacturing exporter, but has emerged to have the largest digital economy as well. China has been the largest single country contributor to global GDP growth since 2001 currently at 9%, but is facing pressures from a rising labor cost and a shrinking labor force. “Everything is possible, but nothing is easy” is an apt description that speaks to both enormous opportunities and massive challenges present in this economy.”

In order to be well equipped to complete our report following the trip, a robust agenda has been prepared –  In between a lot of dinners and sightseeing, we will visit the Hong Kong Stock Exchange and the Hong Kong Monetary Authority as well as select leading companies in various industries – internet, telecoms, hardware. We will also have some free time for self-arranged meetings.

Our preparation has been very useful to guide us on how to take full advantage of this trip and we are very excited and ready to explore growth opportunities in this transforming economy. Stay tuned!

 

Eniola Abimbola ‘18

Learn more about the Laidlaw Chazen Travel Fund here

 

CBS Chazen South Africa 4.0

The last two days in Capetown were filled with memorable moments, great people, and we all wish they lasted a bit longer. We toured the V&A Waterfront with members from the Green Building Council, discussed sustainability with Allan Gray Investment Management, visited a local development firm, hiked a 3,600-ft peak, enjoyed wine tastings in Constantia & Steenberg and took plenty of advantage of the coastal night life.

Firstly, our group received a presentation of the V&A waterfront from Colin Devenish, Executive Manager of Operations and a member of the Green Building Council. The Victoria & Alfred (V&A) waterfront is a mixed-use complex located on the Atlantic Shore, in Table Bay Harbor. Designed in the late 19th century, the complex is situated in South Africa’s oldest working harbor and comprises over 300 acres developed for both residential and commercial use. In light of the size and high utilization rate (over 23 million of annual visitors), we were pleased to learn the steps that management has been taking to reduce its footprint since 2008. To-date, the waterfront has invested R45 Million into energy efficiency, water savings and waste recycling across the 300-acre property, as well as introduced a number of other greening initiatives across the area. Efforts such as these have allowed the waterfront to nearly halve its waste going to landfills, significantly reduce electricity and water consumption and increased recycling and lower carbon emissions due to increased use of bicycles and public transportation.

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On the note of sustainability, our group had the pleasure of touring the headquarters of Allan Gray with Michael Smith, Department Head of Infrastructure and Security at the company. Headquartered in Silo One at the V&A Waterfront, Allan Gray’s office was built in 2014 and achieved the first ever six-star green rating in South Africa. We were delighted to hear that the modern building incorporates features such as high-performance, fully-glazed, double skin glass façade to optimize the use of natural lighting and advanced cooling system that rely on cold Atlantic seawater. Furthermore, the heat from the IT server room provides floor heating in the reception area while waste water from hand wash basins and showers is collected, treated within the grey water system, and reused for flushing water. A beautiful anchor to the waterfront, this visionary project has stunning views of Cape Town and of the surrounding harbor.

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Having witnessed the remarkable success of the Allan Gray headquarters development at V&A, our team headed to Devmark Property Group, a development firm in the Western Cape specializing in mixed-use projects across all asset classes. The firm owns all aspects of the development process from land acquisition to entitlement, development, construction and marketing. The firm’s pipeline encompasses investments such as a 1,000-unit integrated housing project, 111 luxury home and 54 assisted living facilities as well as a full-scale R3bn retail development in the Western Cape. Playing off its 30-year old local advantage, Devmark analyzes opportunities in the region with an eye toward demographic trends in urbanization and capital migration.

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Last, but not least, we had a lot of fun in Cape Town. Hiking up Table Mountain at 7 AM after a night of successive pub crawls gave each of us the opportunity to test our limits physically while enjoying the pristine views of the Cape Town skyline. Fittingly, our trip concluded driving along the coast right before the dawn. We stopped the bus to watch the sunset, gathered around, reminisced the memorable times we had had over the past few days and celebrated being in the moment with yet another standing ovation to Africa, a land of stunning natural beauty and fascination for all things (not just Real Estate). Good bye, South Africa and see you soon!DJI_0010.jpg

China is different

Over the last 2 weeks, along with 30 classmates and 2 professors I explored China, visiting Beijing, Shanghai, Hangzhou, Hong Kong and Macao. Our trip was centered around technology so in addition to hiking the Great Wall and eating Chinese delicacies like chicken feet we visited 10 of the biggest Internet companies and Venture Capital investors in China. On average, the Internet companies are only about 10 years old but have an astronomical number of users and huge valuations.

The biggest lesson that I took from our company visits is that business in China is different:

1) Chinese companies do not need to go global-

With a middle class of over 250 million people, more than 300 cities with a population of at least 1 million people, and over 800 million Internet users, China is like nowhere else. The local internet population is still under-served so there is a lot of opportunity to grow and no need for Chinese Internet companies to look outside China! Their focus is on making their products more “sticky” (a term we heard multiple times) and bringing more solutions to their existing Chinese consumers.

2) The big internet companies are so large that they do everything at once-

We observed that as Chinese internet companies grow, their growth does not follow that of internet companies elsewhere and it is difficult to pinpoint what their main business is.  For instance, the food delivery company that we visited called Meituan started off as a coupon website similar to Groupon, but it now also does coupons and restaurant ratings similar to Yelp, food delivery like Grub Hub and it is also a search engine like Google. The stories of Alibaba and Baidu are strikingly similar to this.  Baidu went from a search engine to food delivery. Alibaba has recently gone from e-commerce into the gaming industry.

These companies were able to do this because they typically did not face much competition in their early years and they were able to raise so much capital that when faced with the question of how to expand they looked at different business verticals instead of looking outside China. I also noted that although none of them is profitable and that even though their margins are a fraction of similar US businesses (food delivery margins in China are a tenth of US food delivery companies) they are focused solely on volumes, which I guess is what counts with that population.

China’s market is so big that it stifles its companies looking outside of China.

3) Chinese companies do not have counterparts outside of China-

Contrary to what I had heard before my visit, Alibaba is not the eBay of ChinaJD.com is not the Amazon of China and Didi is not the Uber of China. While the tech may be similar, the details of their operations are completely different to the US and I was impressed to see how much they are innovating and devoting to R&D. They are not just copying from the west.  One company we visited, a subsidiary of Alibaba called Ant Financial has spent close to $250 million developing technology for anti-fraud transactions and is the first company to successfully develop facial recognition and retinal recognition technology that can be used for everyday transactions. They showed us a demonstration and it was effortless!

3.1) This was one example of China becoming a leader in tech advancements especially in Artificial Intelligence. We were informed that close to 50% of all research papers on Artificial Intelligence in 2016 came from Chinese researchers. I am not surprised because in every city that we visited, our tour guide was quick to point out the universities and to mention how many of the top 10 universities in China were in that city. With such a strong talent pool and money at their disposal, Chinese companies are investing heavily in R&D. I left China convinced that Chinese companies will definitely be responsible for a bigger proportion of the technological advancements of the next 10 years.

3.2) China is the real home of BIG DATA.

Before visiting China, I constantly heard of the term ‘Big data’ but until now I did not have a real appreciation for what it is.  The companies that we visited, especially Tencent and JD.com have the real “BIG DATA”.  They are able to collect so much data on their hundreds of millions of unique users from where they eat and shop, how they bank and how they spend on electricity.  To put big data in perspective, Ant Financial the digital finance company that I mentioned earlier, has more than 500 million users, which is almost 10 times the level of the biggest banks in the world. This gives them access to a huge volume of information on default rates, which in turn will allow them to make more informed credit decisions than traditional banks.  Interestingly, my group was curious to know if the government had access to this data but when we asked this question it was intentionally not answered.  Either way, with the size of data available to Chinese Internet companies, it will be fascinating to see if they utilize it to become the leaders in the BIG DATA age.

4) I observed no signs of a slowdown in the Chinese economy.

I had read that the Chinese economy slowed from nearly 8% to 6% growth but I did not see anything like this. That could be because people have become wealthy in such a short space of time. In the last 10 years, GDP per capita has increased from ~$2k to ~$9k. You can see it everywhere with luxury retail brands, the dining out culture, the smartphones and the hundreds of Porsche’s and Audi’s that I have seen people driving. The Chinese middle class is not slowing down and the bottom line of all of the companies that we visited also does not seem to be affected. They continue to invest and are chasing phenomenal growth rates.

5) “There is an entrepreneurial hunger in China like nowhere else.” These were the wise words of the founder of China’s biggest VC, Qining Ventures. He said to us that in the US, there is a lot of innovation but in China there is entrepreneurial hunger, which the Chinese government is fueling by funding and backing early stage startups. It was self-evident everywhere we visited and is a practice that I have read the Nigerian government, is trying to replicate.

Bankole Cardoso ’18

Chazen China Tech/Innovation Study Tour

 

Real Estate Association Study Tour: Final Thoughts

Our final day abroad was spent traveling to Hong Kong, experiencing the process of passing through immigration from mainland China to Hong Kong Island. We learned that due to political limitations, there is a daily cap of residents of mainland China who are able to visit Hong Kong in any given day.

Our planned company visits were complete and we had a full day on Saturday to explore Hong Kong. The island was not as I expected it. Previously, I saw photos of the International Finance Center, a sky scraper housing restaurants, a mall, the logistics and baggage transfer portion of Hong Kong airport and large firms in its tower. I extended this image to the rest of Hong Kong and imagined it as an island covered in large, marble office towers housing retailers of luxury goods.

Instead I explored the narrow, hilly streets lined with everything from local fare to high-end fashion designers and artisans’ boutiques.  We visited the Police Married Quarters (PMQ) which is an adaptive reuse project consisting of two buildings formerly used as police barracks that have been transformed into a unique shopping mall housing local and international artisans and their trendy wares. The phrase “hipster central” would be an appropriate descriptor of this mall.

The city has rich character. Unfortunately, we only visited for one short day and were unable to see even a fraction of the sights available to us. Unlike during the previous days, we used Saturday to explore the city in small groups, deepening our conversations with one another and really coming together as a group.

As I reflect on this past week during my 16-hour plane ride home, the following thoughts come to mind:

  1. I’m grateful for the opportunity to witness China develop as a nation. I’m curious to see if this government-initiated (almost forced) growth and expansion will propel Guangzhou and Shenzhen into sustainable growth or if it will create the next ghost cities due to oversupply of office buildings.
  2. What is the future of public transportation expansion in Singapore and China as this is the one feature critical to upholding future real estate development?
  3. Will China ever place a moratorium on the number of massage parlors present?

 

Nicole Atoyan ‘17