In mid-March, Kenneth Rhee, executive director of ULI China Mainland, spoke with ULI leader Vincent Lo, chairman of Shui On Land. The Hong Kong– and Shanghai-based firm developed Xintiandi, a groundbreaking retail, entertainment, office, and cultural destination in a historically significant part of Shanghai.
Lo and Shui On Land also created the Knowledge and Innovation Community, or KIC, a large, mixed-use technology innovation development located amid several of Shanghai’s premier universities; and Lingnan Tiandi in Foshan, Guangdong Province, a mixed-use development project that preserved a historical area including a nearly 1,000-year-old temple. Xintiandi was the first winner of the ULI Global Award for Excellence Award from Mainland China, and both KIC and Lingnan Tiandi won last year’s ULI Global Excellence Award.
ULI members can access case studies on these award-winning projects on Knowledge Finder.
The coronavirus epidemic is having a serious impact on the economy and the real estate sector in Mainland China and many parts of the Asia Pacific region and, now, globally. You experienced the 2002–2003 SARS [severe acute respiratory syndrome] epidemic firsthand. What are your thoughts on the near-term impact of COVID-19 on China’s real estate market and, in the long run, how the urban environment and real estate industry will change?
Although both SARS and COVID-19 appear to have common elements, SARS was more contained in Asia and, in particular, Mainland China and Hong Kong. But COVID-19 is actually now a pandemic. It is really shocking to see the number of new cases in Italy and Spain and all these places. I think there are a lot of hidden cases as well, because a lot of Western countries haven’t had the facilities to provide tests for people who might show symptoms.
The large number of new cases in the last few days is very worrying because it shows that there must be a lot of other hidden cases. I believe this pandemic will have a much deeper and longer impact on the world than SARS did, particularly on the real estate industry.
For example, in China people have been going back to work after several weeks of their workplaces being closed. But a lot of them are starting to believe that working from home is safer and more comfortable. If there are more people who want to work from home, that will have a major impact on offices and the way we work. Of course, today’s technology makes working from home feasible. But how do you ensure that the efficiency and effectiveness are there? I’m sure some of the staff couldn’t sit at their desk at home and diligently work as they would in the office. Also, working at home, they may not have access to all the company information that they need.
Still, I think working from home is definitely a trend that is going to affect our industry. Residential properties will have to make some changes, such as providing dedicated places for working. In high-rise apartment complexes, in addition to clubhouses for entertainment and sports, developers will need to think about providing places for work with good internet connections.
If more people stay home and work, how would that affect popular places like Xintiandi located in urban centers?
I think when people are more conscious of health and security and staying away from viruses, a place like Xintiandi will definitely be affected.
So, we will have to step up our safety measures. Right now, in a lot of premises in Hong Kong, you go in and you have your temperature taken. Xintiandi maybe will have to do the same.
But, of course, it’s not that easy to control a virus. As the owner of a premise like that, Shui On Land will have to ensure that all our tenants have top-grade help and control measures. Their staff will have to be checked on a daily basis. It’s going to make life more difficult for staff, but I don’t think people will shy away from visiting Xintiandi. It’s a place where they experience a high quality of life, enjoyment, and relaxation and meet friends. Human beings want to interact. We could not just rely on our phones to communicate with one another.
Of course, online shopping will become a greater attraction. How do we build a combination of in-store shopping so that people can feel safe to go and check the quality or the size, and online shopping?
For retailers, live online broadcasts of products are going to become much more common. In Hong Kong, people can now see residential flats via a camera rather than by physically visiting them.
Right now, it’s a sensitive phase where people are very conscious of the virus. But after a year or two, things will quiet down and people will go back to their normal lives—but knowing that, maybe every 10 years, a new virus will come up and hit us.
Coming back to real estate design—we love density, but density is a problem right now. How do we overcome that? These are all issues that our industry will have to look at. And I think that innovative developers will come up with the right formulas pretty soon.
With Xintiandi, you are credited with pioneering the concept of using historical preservation and an open-style retail and F&B [food and beverage] center as an anchor of large-scale mixed-use development. Can you share how you came up with the project and what led to its final development plan?
In the mid-1990s, the Shanghai government asked me to advise them on this very big run-down neighborhood in the center of the city. I looked at the location and I said, ‘This is probably the most prime area in Shanghai.’ I basically volunteered to do a master plan for the government without considering whether I would become the developer of this piece of land.
I engaged SOM to work on the master plan with me. I had a very clear vision of what Shanghai would become in the longer term. And so I planned the Xintiandi area to supplement the future development of Shanghai. When the mayor and other officials saw the master plan, they loved it and invited us to do the development.
At that time, the market in China was very bad, with runaway inflation. I thought, with 52 hectares [129 acres] right in the heart of town, where do I start? Typically, developers would start with residential. But in 2001in Shanghai, there were going to be two major events: the APEC [Asia-Pacific Economic Cooperation] meeting in October and the 80th anniversary of the Communist Party, whose First Congress Hall was within these 52 hectares [128 acres]. I thought if I could do something with this particular neighborhood, maybe it could help Shanghai reposition itself and kick-start our project.
We started to discuss with the government their requirements on preservation. We found that no high-rise would be permitted near the First Congress Hall, a few of the extant buildings would have to be preserved, and the ambience of the old neighborhood should be maintained without, say, widened streets.
This forced me to consider how we could do this project. What could we bring in? What could we build? I came up with the idea that we keep the facade of shikumen [stone gate] housing, which is unique to Shanghai, and bring new elements inside.
We really put a lot of effort, money, and time into this project. And it was very well received from day one. Now it’s a landmark in Shanghai and known around the world.
How do you approach a new project in terms of what to build, and then how do you execute the plan? Maybe you could talk about KIC [Knowledge and Innovation Community] or Lingnan Tiandi as an example.
Both projects received the ULI Award for Excellence, and I’m very, very happy with that. When we build a new project, we always study what is lacking in the city and where the city is going, based on professional analyses. Then we come up with the master plan on how we can execute and implement that strategy.
Take the example of KIC. In early 2000, Shanghai wanted to upgrade its technology and innovation so that it could cope with future development. The city had a lot of very good universities, but it wasn’t bringing their research into the market. I thought, ‘How do you really build something like Silicon Valley?’ It would be difficult, but at least you needed to have the hardware, the software, and the ecosystem for it to happen. We needed to create a place where people could meet and congregate and hopefully start some new ideas. Maybe researchers could bring their research there and say, how do you commercialize this? NGOs [nongovernmental organizations] and venture capitalists could go there and work with them.
We designed KIC to be that sort of a place. That’s why we have so many pockets where people can sit and meet with each other and then have a drink. In KIC, you probably have the most coffee shops in the whole of Shanghai because that’s where people hang out or have a break, have a coffee to stimulate themselves, and interact with one another to come up with new ideas.
You have traveled throughout the world, and the places that you visited have impacted many of your projects. Can you talk about the places that you think are best examples of urban development?
University Avenue in Palo Alto, California, has a special ambience. But you cannot really re-create that; KIC’s University Avenue has its own sort of atmosphere. But, still, it’s a gathering place for young people, and you feel very free there. That’s why we struggled with the government to allow outdoor seating at KIC. We finally convinced them.
Wherever I visit, I like to go to the city’s old town. I believe if you look at the old town, you see the traditions, the history, and the culture of that place. And if the old town is well preserved, it usually means that the city is doing well economically.
You have also done suburban projects in places like Hongqiao Tiandi [a destination for dining, entertainment, and leisure]. How do you create projects in suburbs with no existing urban fabric?
For Hongqiao Tiandi, I wrote to the Shanghai mayor and secretary in 2005 suggesting that they should build a transportation hub there, because Hongqiao’s old airport was being reformed. I said, if you can build the airport, a new highway, a high-speed rail station, and a mass transit station together, then this would become the most convenient transportation hub in China. They took that advice.
Our project, Hongqiao Tiandi, is the first use of land the Hongqiao development authority put up for auction. I saw the benefits of having a location like that. You can literally walk to the rail station in five minutes or to the airport in 10 minutes. We proactively search for opportunities like these rather than just sitting back and waiting for land to come to our doorstep.
How do you see Mainland China’s real estate sector evolving over the next few decades?
It’s really amazing to see the number of major developers who have established themselves over the past 20 years. I think right now there are five developers that have a sales turnover of over RMB 500 billion [US$70 billion] per annum. The biggest one, I think, has a turnover of RMB 700 billion, which is equal to US$100 billion. That’s quite staggering. And it’s only in a very short 20 years that these companies have established themselves. These real estate companies have become giants, and they are very, very powerful and substantial.
Over the next 10 years, there’s going to be major change in the market because the leadership in Beijing has said that houses are for living, not for speculation. That would bring a big change to the residential market. There’s a lot of restriction on buying and selling, even for us developers; if we make too much money, we have to pay a 50 percent land appreciation tax. That’s going to affect the way we do business.
These developers have grown so fast because they have worked most effectively at a fast turn rate. But I must give them credit. I think some of their quality is still quite attractive despite the fact that they build so quickly.
We cannot compete with them, because we cannot do a fast turn like they do and, on the quality side, we insist on doing everything to our specification and standard. Of course, on the high end of the market, we are still competitive because we have built communities like those in the Xintiandi area. Our residential is probably selling at the top of the Shanghai market and is likewise in other cities.
For us, coming from outside of Mainland China, we have to find our own niche in the market, and we’ve been focused on doing integrated communities. A lot of the big domestic developers will also be looking at retail and offices going forward. It’s good to have competition for ourselves as it would force us to innovate, and we’re not too worried because we believe we are more established in that arena. We know what the market wants, and we’re always one step ahead of the markets.
In the last decade or so, Chinese insurance companies have become important players in the real estate market as providers of long-term financing. How is that affecting the real estate industry?
Because insurance companies have a lot of annual income, they need to make sure it is invested into good, steady-yield assets. They look at our commercial projects and our office towers, and they want to work with us or buy from us. But we don’t want to sell some of these projects because they’re irreplaceable.
We did not want to sell office buildings in the Xintiandi area, but because we wanted to recycle our capital, we needed to sell some of the office towers. We need to do that as a developer. We cannot just sit on our rental properties and wait for them to mature, when we can invest the money elsewhere and make a much higher return. So, the insurance companies are actually very good partners for us. It’s a win/win situation for us to work with them.
How do you upgrade your existing assets in terms of hardware and software? It seems that your company has been emphasizing the need to upgrade existing assets. Can you talk about key objectives in this?
The key objective is to improve the value of our properties and the yield for us as an investor. Of course, we don’t just look at that. We need to ask, for example, what is required for KIC to upgrade itself so that it can continue to be a magnet for researchers and entrepreneurs?
Another example is the podium floors of our office tower Shui On Plaza at Huai Hai Road [Shanghai]. My daughter came up with the concept of planning something mainly servicing the working-women community. We did a major renovation recently, and now the property has become much more successful. We have tripled our rental income from that asset.
We bring new ideas to our own projects because that is the only way we can maintain our edge in the market.
Besides running Shui On Land, you have done a lot of public-sector work, most recently as chairman of the Hong Kong Trade Development Council. What insights have you gained from this work?
I work at these community posts as a contribution to the city. At the Hong Kong Trade Development Council, it was very exciting and challenging for me to be chairman for the past few years, because that’s when the Belt and Road Initiative [BRI] was introduced. I believe that the BRI needed to have a commercial hub to make it easier for companies to invest in its projects.
When BRI was first introduced in 2013, I asked myself, it’s a very attractive concept, but how do you make it work? How does a company like Shui On Land invest in BRI countries? I thought if Hong Kong could become the commercial hub for BRI projects, that would make things a lot easier and more attractive.
I discussed my concept with the chief executive of Hong Kong at that time, and I suggested that the Hong Kong Trade Development Council would be the ideal vehicle to do this. Before I knew it, I was asked to take on the job.
You’re a longtime member of ULI, and you’ve been very generous to ULI over the years. How have you enjoyed your membership and your support of ULI’s growth in Mainland China?
I think ULI is a very good organization. The mission of ULI—to provide leadership in the responsible and good use of land and sustainable urban development—is something that we all need to strive for.
With ULI, I find it interesting to be interacting with other leaders in this industry. My first impression of ULI was when we received the Award for Excellence for Xintiandi almost 20 years ago. The very methodical and professional research that ULI conducted before giving us the award was most impressive. It gave me a very positive view of ULI.
Over the years, we’ve worked very closely together. A lot of our staff have been active as ULI members. I think it’s great that ULI came to Asia Pacific, particularly China, at this critical time. You bring so much expertise that is required for the market to learn and mature. I wish you every success in your future endeavors, because I think we’re all going to benefit from you.
Thank you. What key insights about Chinese cities and the real estate development sector would you like to share with people who are not familiar with China?
At this stage, a lot of Chinese cities will have to restructure themselves because the supply chain, the market, technology—everything—is changing. They will have to catch up. I believe where there is change, there is opportunity. Western developers who are interested in working in China will need to understand which part of the market they want to work on and then bring their expertise.
It’s an exciting time, but I think real estate is a very local business. You cannot just plan projects from thousands of miles away. You’ve got to be on the ground.
Can you share particular experiences that had a significant impact on you as a real estate developer?
I feel if you want to become a successful real estate developer, you have to do it from the ground up. You have to learn. When I first established my own business, I started a construction company. So, I am very familiar with the construction process.
On the planning side, I’ve worked with many architects and I know what it takes to be a good architect. I appreciate that, as a developer, you cannot just give a project to the professionals and ask them to plan it for you. You have to tell them exactly what you want from that project—what you want to build, who your customers are, which sector of the market you are targeting.
The developer has to play that leadership role. I see a lot of developers just say, I want to do a residential project. They’ll try and get a well-known architect and give them a free hand to plan it. It’s not so simple.
What advice would you give to young real estate development professionals?
It’s a very exciting and very worrying time for young professionals because the world is changing so fast and it is so complex. I think they should look at the positive side and recognize the opportunities that are available. But they have to really work hard because it’s not so easy and simple. They need to decide which area they want to focus on. Real estate development is a local game. If you want to be good at it, you need to know what you can do and want to do, you need to pick the right place, and go from there.
KENNETH RHEE is the executive director of ULI China Mainland.
