Chinese developers abroad face steep ‘tuition fees’

Chinese developers expanding aggressively abroad may end up paying much more than they expect as construction and local planning approvals may take longer, industry experts warned.

Developers including Greenland Group, Dalian Wanda Group and China Vanke have surprised the world with the speed they snapped up iconic sites in countries such as Australia, Britain and the United States.

"There is a general feeling that some new entrants to the market [not just Chinese] may be making overoptimistic assumptions regarding construction costs, fees and sales values and are therefore overpaying for sites," Mark Farmer, a partner at global consultancy EC Harris, told the South China Morning Post. "There is a lot of interest in the London market as to how developers such as Greenland and Dalian Wanda deliver their schemes."

Greenland bought the site of Britain's oldest brewery, Ram Brewery, in London in January in its first venture into the European market. Two months later, it acquired the site of Europe's tallest residential tower in London's Canary Wharf financial district.

Dalian Wanda, which owns hotels, commercial properties and department stores, said last year it would build a 160-room luxury hotel in London as part of a £700 million (HK$9.09 billion) residential project.

British Prime Minister David Cameron said after meeting Wanda chairman Wang Jianlin the firm would invest £3 billion in regeneration projects in Britain.

While an undersupply of properties in cities such as London and Sydney may bode well for developers, Farmer said construction costs might increase "as businesses are vetting their clients more to look at track record, business culture and relationship strength".

"What will be interesting is whether UK consultants and contractors are prepared to work on a short-term basis for Chinese developers without a prospect of a longer relationship," he said.

By going abroad alone, without established in-house development and construction platforms, the Chinese have to rely heavily on domestic consultants and contractors. That was why Vanke decided to team up with strong domestic partners - Tishman Speyer in San Francisco and Hines in New York.

"Everyone will have to pay tuition fees when entering a foreign market," Vanke chief executive Yu Liang said. "Property development is a local business in every country. So we tie up with a local partner to help sort out construction and other issues."

Louise Mason, a managing director at AMP Capital in Australia, warned of another risk: strict planning regulations. "Sometimes they are overlooked or forgotten, and then it can be a shock that it can take five years to get the development happening … it's not a five or six-month process."

In China, developers usually try to pre-sell their projects six months after they buy the site.