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China property

Chinese developers renovate run-down buildings to gain foothold in Beijing, Shanghai

In the first half of this year Beijing had less than 1 million sq m of completed and ongoing conversion projects, out of the city’s total 47 million sq m of commercial space

PUBLISHED : Thursday, 28 December, 2017, 12:16pm
UPDATED : Thursday, 28 December, 2017, 11:26pm

In Beijing and Shanghai, as in other major cities across the world, land for new development is scarce due to government restrictions and the sheer difficulty involved in getting any existing buildings in decent sites torn down.

So Chinese developers have been looking in a different direction recently: buying older run-down blocks to redesign and renovate, in an effort to gain a foothold in the two giant cities.

But even that process is easier said that done, and examples are rare.

According to the International Federation of Finance & Real Estate, an association of real estate and finance professionals, in the first half of this year Beijing had less than 1 million square metres of completed and ongoing conversion projects, out of the city’s total 47 million sq m of commercial space.

ZRiver Capital, a private equity and asset management firm, however, can boast of being one of the very few to have two such projects ongoing at the same time: a hotel conversion near Beijing’s Financial Street area – which it bought for 2 billion yuan (US$300 million) in 2016 – and the revamp of a flagging department store right on the North Third Ring Road which it bought for 2.5 billion yuan the same year.

Both will be converted into commercial office space and are expected to be completed by early 2018.

“In Beijing there is simply no available buildings. And to be honest, 99 per cent of its hotels and malls are unsuitable for conversion anyway.

“So we’re really lucky to have managed to acquire two projects at the same time,” said Wang Yutao, the president and CEO of ZRiver Capital, which manages 10 billion yuan worth of asset.

ZRiver is a subsidiary of Zhongrong International Trust, one of the country’s largest trust firms, which set up the unit to kick-start its asset management capability.

Without having years of experience, it would have been impossible to have the vision right from the beginning to decide if the building would be suitable for selling to institutional investors or to end users: they are totally different prospects
Wang Yutao, the president and CEO of ZRiver Capital

With nearly 20 years’ experience in real estate development and management in Beijing, Wang leads the effort – but even he says it’s a very challenging market.

Take the hotel project as an example. Its floor heights were too low for use as offices, but the project’s designers have been able to raise the heights without sacrificing much of its existing fundamental facilities, so it can still meet an A-grade office standards.

The team has also had to replace all of its out-dated lifts and air conditioning systems, floor-heating system, and add a three-storey escalator to reduce pedestrian pressure during rush hours.

Meeting those standards, Wang says, has required his own micro-management – right down to the choice of stone used in the lobby and how that is designed. There are even conditions affecting what toilets and urinals have to be used, and so he has already tried those for himself.

“I am on-site every day,” he jokes, “I feel like a construction worker”.

But foremost, right from the projects’ onsets, he has had go keep clearly in mind what kind of eventual tenants or buyers he needs to attract.

The two projects will be very different.

The hotel conversion commands a good view of Beijing and hopefully will be attractive to institutional investors such as insurers, asset or fund funds. And his primary goal is to secure an anchor tenant or two, to ensure stable income.

There’s less need to create such a “shop-window” feature building at the store project, which is easily seen by the thousands of vehicles driving along the Third Ring Road daily and nearness too to Financial Street – which is almost fully occupied – and his target will be smaller financial buyers, viewing the site as an investment, but possibly also for self-use.

The good news is it has already been leased to a leading German car company to house its Beijing headquarters, and a ground floor showroom.

“Without having years of experience, it would have been impossible to have the vision right from the beginning to decide if the building would be suitable for selling to institutional investors or to end users: they are totally different prospects,” he said.

The same applies to other aspects of the fund’s business.

Wang says it used to be a relatively easy task to take a text-book approach to development by simply inputting variables such as financing costs, conversion costs, expected occupancy and rent levels, and calculate if the expected return justified the investment.

But the problem in today’s market is that these are all now just “assumptions” and only veteran managers like himself have the know-how to feel if those assumptions are anything like “viable”.

Judging by the stage and state of his two ongoing developments, Wang expects decent returns, though he is unwilling to be any more precise.

He stresses, however, that as well as private equity and asset management specialists like himself, big insurers, pension funds and other investors are creating their own internal teams to hunt for similar prospective profit-earning developments.

“If you can’t manage to distinguish yourself from those others, in choosing the right prospects to develop,” he adds, “what chance do you have of convincing clients to allow you to manage their assets.”

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