Hong Kong property management companies are looking to the mainland as a potentially lucrative market in the long term, but there are still obstacles that pose risks for foreign firms doing business there. In 1993, Paul Tam Nai-po was part of the first team sent to Shanghai by Jones Lang LaSalle and has witnessed the development of property management in the mainland. The team brought in many management concepts previously unheard of in the country. Mr Tam says the expertise of Hong Kong companies has helped raise awareness of issues facing the sector, and the result is that the central government is in the process of amending regulations to reign in free-wheeling operators. Yet, the gap in the quality of property management between Hong Kong and the mainland remains substantial. Relationships, or guanxi, says Mr Tam, are still a crucial factor in business. Foreign companies are forced to hire more employees than are needed, increasing overheads. Tenants are often aware of their rights but disregard responsibilities. 'The concept of private property is primitive in the mainland. Hong Kong property owners know their rights and obligations but in China that is not the case,' Mr Tam says. This often leads to difficulties between tenants and also between tenants and property management companies. Furthermore, securing permits from various government departments used to be difficult because none wanted to take responsibility if something went wrong. But Mr Tam says the situation is improving and departments now often concede that certain amendments need to be made and are willing to issue permits. The bottom line is property management in the mainland can be lucrative but there are no 'supernormal' profits. In Shanghai, where there is substantial mainland and Asian money, it can be difficult to adopt property management concepts because investors are conservative. Jones Lang LaSalle manages about 40 properties, most of which are in Shanghai. Another problem for Hong Kong companies going into the mainland is they are often expected by mainland developers to transfer technology. 'Many developers welcome property management because they see it as a marketing opportunity, especially if the property management is being undertaken by a well-known Hong Kong company,' says Keith Futcher, managing director of EastPoint Property Management. But often the mainland developer does not want the Hong Kong company to provide a total service and is actually looking for a transfer of technology - training and supervision of the developer's employees. The problem is that once the expertise is transferred, the Hong Kong property management firm no longer has a role, Mr Futcher says. He agrees with Jones Lang LaSalle's Mr Tam that companies are forced to hire staff before they have even secured contracts, thus increasing costs. 'Operating in China is not easy,' he says. It is not all doom and gloom, however. Hong Kong firms have extensive experience in retail and commercial property management and they are good at letting and finding the right mix of tenants for a development, Mr Futcher says. Mainland developers respect the services provided by Hong Kong property management firms but they are more pragmatic and focus on the bottom line, where they want to see better rental returns as evidence of property management. Since China became a member of the World Trade Organisation, more multinationals have set up operations there and demand has grown for high levels of property management expertise. EastPoint expects growth, especially at the high end of the market, says Mr Futcher. The company has offices in Guangzhou, Chengdu, Beijing and Shanghai. CB Richard Ellis has been in the mainland for 10 years and has offices in Beijing, Shanghai and Guangzhou, with 70 million square feet of properties under management. The company has found that property management is not as lucrative as sales but it is solid income, says Stephen Mooney, CB Richard Ellis director, asset and facilities management, Asia-Pacific. 'It is crucial to have experienced staff. Having those people on the ground is useful to mesh expertise with local ways for effectiveness and efficiency,' he says. Good property and facility management affects the investment value of a property and is important for sustainable rental income. 'If it is undertaken in a professional manner, tenants stay. They are willing to pay more money to stay, and that means healthier rental return,' he says. Hsin Chong Real Estate Management has property management contracts in the mainland, with eight projects in Beijing alone. Last year, the company entered a joint venture with Beijing Strong, a property development company. 'It is best to have a partner when doing property or facility management in China,' says Fan Cheuk-hung, Hsin Chong director and general manager. Because markets are not open in Beijing or Guangzhou, a local partner is crucial in getting getting qualification permits, he says. It is a Catch-22 situation: without qualification permits a company cannot get staff; without staff you cannot get jobs. So businesses must make substantial outlays even before securing contracts. 'In Hong Kong, there are no barriers to entry but in the mainland there are numerous barriers so that is why a partner who knows the ins and outs is best,' says Mr Fan. The company had tried working as a wholly owned foreign enterprise in Shenzhen but encountered significant difficulties which cemented its belief that joint ventures were the most practical way of doing business. Mr Fan stresses the importance of guanxi to grease the wheels of business and warns of the dead end facing Hong Kong companies once their expertise is transferred to mainland firms. Property management in the mainland needs a long-term outlook and the returns are not impressive considering the tax rate can be as high as 30 per cent, he says. Yet, Mr Fan is confident because of the numbers of multinationals flocking to the mainland that expect quality property and facility management.