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By Robin Lore ’19
From March 12th to 16th, 2018, 30 Columbia Business School real estate students and administrators traveled to Hong Kong and Shanghai, learning about the market in China and meeting with both local and foreign real estate companies.Touring the Robert Indiana exhibit at the Asia Society Hong Kong Centre
Over the past few years, one might argue that no group of investors have made a bigger mark in the US real estate market than the Chinese. From Chinese airline turned global conglomerate, HNA, to insurance company turned investor, Anbang, as well as conglomerate Wanda, these Chinese investors have been buying up some of the biggest trophy properties in the United States, including the Waldorf Astoria, 245 Park Avenue, and other large office and hotel properties. These investors are scooping up prize properties across the country and partnering with some of New York’s most established companies.
The Chinese government, concerned about potentially risky overseas investments and capital outflows, began to enact capital controls in November 2016. Chinese investment in the US began to slow but large acquisitions continued, such as HNA’s $2.21 billion purchase of 245 Park in May 2017. The clampdown came to a head in early 2018: Anbang was seized by the China Insurance Regulatory Commission and the firm’s chairman, Wu Xiaohui, was charged with financial fraud. HNA is facing a debt crisis and is selling assets.
With all this recent news in mind, we were curious about the real estate sentiment that we would encounter in China. Most of our meetings were with local companies in Hong Kong and Shanghai and our perspectives broadened with the insights from locals. Despite alarms that were being raised stateside, the local real estate experts that we encountered were optimistic about the state of the real estate in China.
Hong Kong: Learning the Market FundamentalsOur trip began in on a sunny Sunday in Hong Kong and a first glance at the city’s impressive real estate from Victoria Peak.
The group’s first day offered in-depth discussions of Hong Kong and global real estate from a wide range of presenters and hosts. We started bright and early Monday morning with a comprehensive overview of the Asian real estate market by Shane Taylor AC’04 Head of Research and Strategy for APAC at CBRE and graduate of the Columbia MSRED program. We discussed growth projections in the different Asian markets and, as we would continue to hear throughout this trip, we learned that despite a slower growth rate projected in China, real estate investors are still bullish on the market.
We then focused in on Hong Kong investment with one of the oldest property developers in town, Hong Kong Land, a publicly traded company that is part of Jardine, Matheson & Co. We met with Clement Lau, Head of Development and Valuations, and Wesley Chan, Senior Development Manager. Hong Kong Land has an extremely large presence in its namesake city with an office and luxury retail portfolio of 450,000 sq m (4.8 million sq ft) and solidified their influence in the city by building the first above-ground walkways, an extensive footbridge network that connects Admiralty, Central and parts of Sheung Wan.
A highlight for many on our trip was a tour of the Asia Society Hong Kong Centre’s Robert Indiana exhibit, and a fireside chat hosted by Ronnie Chan, Chairman of Hang Lung Properties and billionaire real estate developer. Eschewing our typical meeting format, Mr. Chan led an informal discussion, offering his candid views on different real estate markets, and riding out cycles. He debated with us about the risks associated with emerging markets versus developed markets, proposing that sometimes the risk is worth it. For many of us, this challenged our views that developed and stable economies are the safest, but Mr. Chan argued that without growth, you inherently take on risk.Ronnie Chan, Chairman of Hang Lung Properties, explains his investment rationale
Our first day ended with a presentation from Dorsett Hospitality and a tour of the Dorsett Wanchai Hotel and their “themed and family” rooms. We learned about how the company is positioning themselves to take advantage of the large number of Chinese tourists and some of their other business lines, including their car park platform.
A Transit-Oriented City by Nature
Coming from New York City, we know what it is like to live in a highly populated and dense urban area. Fitting its 7.4 million residents into just over 1,100 square kilometers is remarkable and this stat becomes mind-boggling when we learned that three-quarters of Hong Kong’s land is green. This results in extremely high rents and prices—even by New York standards—and it also results in innovative developments to cope with the severe lack of developable land.
One of the most innovative development models that we encountered on our real estate focused trek has been the Rail + Property model implemented by the MTR (Hong Kong’s mass transit railway). With the expressed purpose of capturing the value creation that a new railway line will have on the surrounding land, the publicly-traded MTR is able to operate at a profit. When the MTR develops a new line, they obtain land development rights from the Hong Kong government. They then work with a development partner to build on top of the station site and share in a portion of the development profits, usually by receiving either a percentage of profits, fixed lump sum, or a portion of the properties built on the station. In fact, the vast majority of profits earned by the MTR is from the management of assets developed as part of the Rail + Property model. While many cities have been focused on transit-oriented development over the past few years, Hong Kong and the MTR have been building on and around transportation centers for decades. Approximately half of Hong Kong’s subway stations have a development above. As we learned from MTR (and experienced as we moved around the city on our own) the MTR is exceptionally well-run with over 99.9% of trains running on time.
Following our discussion with Kelson Chan, Strategy and Planning Manager, and Steve Yiu, Principal Advisor, Property Planning, we toured a prime example of the Rail + Property model at Kowloon Station, one of Hong Kong’s busiest subway stations. The station is complete with underground retail and is the site of the International Commerce Centre, Hong Kong’s tallest tower.In front of Hong Kong’s tallest tower, the International Commerce Centre, which was built on Kowloon Station
The MTR is a relatively new public transportation system, which was established in the 1970s. Building an extensive subway system like Hong Kong’s is a daunting task especially when you consider the financial challenges that many public transportation systems face. The Rail + Property model efficiently allows for the capture of value increase resulting from investments made in infrastructure. Hong Kong’s highly dense population and low car ownership makes this city the perfect location for this type of model. It will be interesting to see how this model can be adapted in other cities.