S.E.C. Real Estate Observer

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As I get ready to return to the USA after seventeen days in China, I thought that I should share some of my thoughts of this country.

I visited China on a trip organized by the CCIM organization for the purpose of meeting counterparts in China, regional/local developers, and to educate ourselves somewhat as to what is happening in this country. Leading the tour was Pius Leung, CCIM President in 2005. Steven Price, the current 2006 CCIM President also came on the trip with his family. In all, 45 people were on the tour including the Chinese director, Steven Pang, Professor Bei Liung of Beijing, and two translators, April and Shelly and other support staff.

The name given to the trip was “2006 Real Estate Trade Mission” between the United States and China and we were given “red carpet” treatment by every host we met in the local city that we visited during each stage of the trip.

The tour was a little exhausting and exciting at the same time. When being led around by a tour group, one develops a “sheep” mentality of where to go and what to do and it’s hard to truly understand the context of that which one sees when you are “on-the-bus” and “off-the-bus” into boardrooms of buildings somewhere in a city before leaving for your next municipal destination. However, we did learn about the attitudes of the real estate business people that we met and some of the rules of investing in China. It’s not only the large differences that are striking but the small details as well. As an example of a subtle cultural difference: When we met with a large commercial real estate developer (and most are quasi-public, although there are some private ones), they line up their executives like a “Party” or “quasi-politburo” meeting and each person needs to have their “speech” time and it’s normally long and nothing substantial. I’ve never seen people talk for so long about nothing. “Thank you, Mr. So-and-So, and you can see that what he said was very important. It’s correct that you need to find good location and work well with your community. Real estate is very important in a community….” You get the idea. And it’s made even more taxing to have each painfully empty sentence translated before the next comes out. However, after you get used to it, I found it fascinating and realized how much deference and politeness was given to each person in the room.

I had my birthday while traveling from Xian to Hangzhou on Nov. 24. We met a large developer (multi-billion US dollar sales per year) and his team. We had a wonderful red carpet dinner. They then dimmed the lights and brought out a birthday cake for me. The President of the local real estate development company delivered the cake to me personally. I received my cake and, after the proper deference, I cut the first three pieces and brought them over to the top three officials who had seated themselves after serving me (with a bow, of course). They seemed to like it that a Westerner understood how they did things. We proceeded to drink a bottle of wine together in front of the entire group (including my Mother). They wouldn’t let me drink a little. After stating “kam pai” very loudly, I had to finish each glass in one shot and then they would fill it again and toast me. I was thoroughly “toasted” by the end of the long night. The President and I got along quite well despite the fact that he didn’t speak English.

My trip was a little different because after eleven days, when the CCIMs returned to San Francisco, I stayed with an old MBA study partner (previously an Asian investment banker with JP Morgan) and her husband (previously head of Inland Steel in China) for one week. My Mother and a friend (a previous investing client whom I had brokered a deal for) were with me and our hosts showed us a good cross section of life in Shanghai while sharing ideas in the tea houses and putting us up in their lavish home.

Here are some general socio-economic observations:

• Traffic is bad and you better have steely guts to drive around here. Westerners normally use a driver.
• Environmental issues are a real issue and concern. Beijing was always cloudy and, although we were told that blowing winds from the Gobi Desert played into that, the acrid smell in the air was from pollution.
• There was an ever present attempt to show how advanced the Chinese are. And many projects are very impressive. Personally, the most impressive city was Shanghai; although, even more impressive was the growth that Shanghai has experienced since 1990. This city is exciting and alive with energy. We were told that it’s the New York and Paris of Asia and, after having been there, I believe it is. In my opinion, it reminds me of either of those aforementioned cities but also with the eclecticism and serendipitous experience that you would experience in a rich cultural/business/environmental landscape seen in a city like San Francisco. I believe that Shanghai will be the one of the most, if not the most, powerful city in the world within 25 years.
• Land may only be purchased for 70 years. After 70 years, your property may pass back to the state. The Government’s intent of that law was to avoid land speculation. Therefore, any analysis of return on equity must be of the improvement after your sunk land cost up front. After your flat fee to the Government for the land, you will need to build. Until you do, you won’t be able to sell to anyone else other than back to the Government at cost. If you do build, you may sell to anyone but not until you have completed the improvement.
• There are no property taxes at the moment.
• You must have an office in China to be allowed to invest in real estate property.
• Financing is similar to that in the U.S. as are the interest rates (although a slightly larger down payment of 40% is usually required); however, a tightening of capital (in order to cool overheated growth) is under way.
• Construction is omnipresent and staggering. Most of the architects, developers and general contractors are foreign talent with local workers providing the hands-on labor.
• The haggling is annoying to me but I got used to it a little by the end of the trip. Sometimes, though, you see people settling on a cost of 10% of the original asking price. You lose confidence in any pricing you are offered, especially when they see you as stupidly not cost conscious, relatively wealthy, and willing to throw money around.
• The language barrier is also immense; however, the only other language on all major signs is English.
• It’s very inexpensive to live, travel and do business in China. Even in Shanghai, prices were very affordable. For approximately $700, I got wonderful material for four suits and eight shirts. It was tailor made and delivered with a couple of fittings. (Yes, I am declaring everything for customs.)
• We dined well, although some dishes take getting used to. For example, boiled turtle. Finding a turtle’s head in the rice was interesting. And the meat was hard to get to after eating around the bone.
• People are very friendly and intrigued by Western looking people.
• To me, most importantly, family and community bonds are very strong. Loyalties run deep and having a strong relationship in China would be key to any successful investment. However, once established, I believe that it’s possible to invest with close to the same confidence as investing within the U.S. (but only if you believe in your Chinese relationship).
• Most washrooms (“water closets”) don’t have toilet paper. You either buy paper there or there isn’t any and you are just expected to carry toilet paper with you. You also need to get used to squatting since toilets are just a hole in the ground. When finished, just push your foot against a little flush lever. The new hotels and any Western-style establishments normally have a few Western-style toilets.
• We stayed in nice hotels; however, their five star hotel doesn’t match up with our five-star level. The Crowne Plaza is considered right at the top for most of the country. However, Shanghai has the Grand Hyatt, Marriott and others and they are real five star properties.
• Chinese food is slow but people here take their time to socialize while eating. Tea houses and private rooms with tea and snacks reinforce the “leisurely chat” approach to business meetings. A full buffet of Chinese food, tea and a private room available to us all day in Shanghai cost $10 per person. I really enjoyed that approach to things. If you want “fast food,” you’ll need to visit a KFC, a Pizza Hut or a McDonald’s.
• Another luxury that I could quickly adjust to was the prolific use of massage houses. It’s typical to have a foot massage (they throw in a seated back massage). I had a couple of meetings with CCIMs discussing what we were experiencing (fully clothed!), drinking tea in a very comfortable chair, while masseuses worked our feet over. An hour-and-a-half cost approximately $10 USD.

Well, it’s hard to communicate more than that in an article but I hope I’ve given you a taste of China.