Corporate real estate
Concrete Analysis

China poses unique challenges for corporate real estate strategy

Companies seeking factory or office space need to understand each city's conditions, and do due diligence on their local partners

PUBLISHED : Tuesday, 18 March, 2014, 2:20pm
UPDATED : Wednesday, 19 March, 2014, 3:34am

Multinational companies have expanded aggressively in China in recent years to capitalise on the labour force advantages, production cost benefits and seemingly unlimited market potential.

But establishing and developing corporate real estate (CRE) strategies to drive business expansion in China can encounter challenges rarely confronted elsewhere in Asia, let alone worldwide.

Two years ago, my employer, JLL, named its annual CRE survey report The Dragon is Stirring. That may have been an understatement. In the intervening period, the CRE market has continued to evolve.

This year, as the Chinese government attempts to restructure the nation's economic growth, foreign investors are placing extra emphasis on real estate planning in their business plans.

As we will discuss later this month at the CoreNet Global Asia-Pacific summit in Singapore (March 25-27), China is a unique country, not just in terms of its vast physical expanse and its numerous regional and urban marketplaces, but also because of the contextual importance of culture and politics.

Despite its economic advances, China remains a developing country

Although it is easy to be dazzled by the scale and speed of the country's macroeconomic development over the past 20 years - which is unprecedented in human history - it is incorrect to assume that similar commercial, cultural and political factors apply nationwide.

Each region and each city in China must be approached on its own merits, and local governmental relations need be handled with impeccable care and skilled etiquette.

Since 2012, the positioning of CRE policies in the expansion strategies of domestic and overseas firms has been part of the discussion. The business considerations of Chinese companies, particularly those with regional and global aspirations, have become more similar to those of their international counterparts, and the majority now expect their portfolios to expand over the next three years.

Multinational companies and Chinese firms are diversifying their businesses as China's rate of urbanisation increases and improved transport infrastructure and internal logistical capabilities make it easier to access customers nationwide.

As work practices and patterns of organisational development and outsourcing become more aligned to meet fierce domestic competition within China, companies will seek to drive workplace transformation and create productive spaces to benefit the bottom line.

From whichever angle a company is now approaching CRE in China - whether it be setting up a new operation, expanding from first-tier cities into second- and third-tier locations, or diversifying from a mixed portfolio into geographically more dispersed areas - it is important to be clear about the priorities each step of the way.

Proven local expertise and targeted market research can assist CRE managers to fully understand the market fundamentals, opportunities and challenges and make informed decisions that are consistent with the objectives of longer-term planning.

Another key consideration and a topic we will be focusing on at the CoreNet Global summit is talent. Real estate is a relatively new industry in China. Indeed, it's a term that barely existed 20 years ago.

As many companies have discovered, getting the most out of the talent available is a major challenge in China. Employing skilled real estate professionals with proven local expertise and a global understanding of the business goals can prove invaluable.

Despite the significant changes in China in recent years, one long-standing tenet of doing business has not altered: be clear about your governance structures and compliance strategy.

Despite its economic advances, China remains a developing country, and keeping abreast of shifting compliance requirements is crucial. Cultural factors strongly overlap with corporate governance, and being able to respond and act quickly can reduce the reputational impact of unexpected compliance issues.

The same applies to the structure of the business and the partners chosen to help develop market access, customer reach and logistical management.

Legions of foreign firms have failed to undertake full due diligence when selecting partners in China.

This is a process taken for granted elsewhere in the world, and China - where the risks of getting it wrong are high - should be no different.

Once the CRE strategy is in place and all the checks and balances have been agreed, the ability to implement can be a genuine market differentiator.

The internal management structure must have the skills and experience to take the business forward at each stage of development and to spot the internal and external challenges that may hinder growth.

Julien Zhang is managing director, North China, at JLL