Many economists think that China is going to suffer from a real estate glut sooner or later (the owner of Shanghai Tower likely agrees, see this week’s property story). But few with that view have the chance to voice their concerns in face-to-face meetings with senior Party officials. Levin Zhu is one key exception. The former chief executive of investment bank CICC (and son of former Premier Zhu Rongji) warned at a high-level conference last week that the surplus of residential units in China is enough to house 300 million people.
The country’s top economic planner the National Development and Reform Commission made similar observations in a report published almost exactly a year ago. It warned that local governments had approved zoning plans for at least 3,500 new towns, new areas or new industrial parks. If completed these new districts will be enough to house 3.4 billion people, or half of humanity, the NDRC calculated.
The building boom will inevitably result in more ‘ghost cities’, prompting economists such as Zhu to call on planners to focus instead on growing the services segment of their local economies, rather than put up empty towns and cities.
That’s why Chinese Premier Li Keqiang has been pushing for a “new type urbanisation” which means, in simple terms, that any ‘new’ town should be backed by sustainable economic activities.
Li’s calls for new thinking in urban policy has put one property firm under the spotlight. Step forward, China Fortune Land Development (CFLD).
Why is China Fortune in the news?
Dubbed by industry insiders as a “town builder”, CFLD was a largely unheralded property brand until 2015, when it acquired a Chinese Super League football club and renamed it Hebei China Fortune. Its founder and chairman Wang Wenxue has stayed relatively low profile since then, although European media reported last year that the Hebei native was one of the potential suitors for Italian football club AC Milan. CFLD has been getting more attention partly because of its rapid rise: it was one of the top 10 Chinese developers by sales last year, when its revenues climbed more than 65% to Rmb120 billion ($17.6 billion). This ranked CFLD ahead of even Wanda Group, the biggest commercial landlord, which came 10th with Rmb110 billion. Mirroring Wanda’s rapid expansion, CFLD’s assets have also jumped 13 times over the past five years.
While Wanda is working on about a dozen “Wanda cities” (massive property projects linked primarily to the local tourist industry), CFLD is developing 100 new towns or industrial parks.
Indeed, it appears to have emerged as the partner of choice for local governments keen to set up new towns under Li’s “new type” of urbanisation drive.
CFLD has a knack of moving in step with the policy mood. For instance, it hit the jackpot in April when the central government unveiled the mother of all new towns – the Xiongan New Area – on the southern outskirts of Beijing in Hebei, where CFLD has a sizable land reserve (see WiC361).
The company’s market value briefly surged 60% after the announcement (CFLD is currently worth about Rmb100 billion), prompting Hurun to crown Wang “Hebei’s richest man” in 2016 with a net worth of Rmb48.5 billion. Over the past three months, Caixin Weekly and Caijing, two respected financial magazines, have also profiled CFLD’s rise in cover stories. “Developers and local government officials from across China are flocking to an exhibition hall in Hebei’s Gu’an county,” Caixin wrote. “The project is being touted as a model for urban planning against the State Council’s effort to link new property projects with local economic development.”
How did CFLD get started?
It traces its origins to a hotpot restaurant in Hebei’s Langfang city.
According to Caijing’s report, Wang was born in 1965 to an ordinary family without political connections. After finishing high school in Langfang, he joined the local transport bureau then in 1992 he started his own restaurant.
Wang picked the right place and time for his startup. His hotpot shop became the hotspot for local government officials, who introduced him to the more lucrative business of renovating government offices and the headquarters of state-owned firms. However, Wang nearly went under in 1998 during the Asian financial crisis, when the central bank banned loans for constructing or refurbishing government buildings. As a result the local governments were deprived of funds to pay Wang’s firm. “Wang was forced to spend the Spring Festival that year away from home to avoid his creditors,” Caijing reports.
Wang came up with a bold move. He stormed into the office of the local Party boss and burned all the contracts, declaring that he would forgo all the money he was owed by the Langfang city government.
This courtesy was rewarded several months later when Beijing announced a new policy: state firms would no longer provide housing quarters for their employees. This decision was the catalyst for a boom in China’s private residential property market and Wang’s relationship with the Langfang government helped him to become one of the city’s first real estate developers. Better still, he was granted much needed bank finance to roll over his debts and expand his property venture. By July 1998, CFLD was firmly established, but the property firm initially focused on smaller cities and counties in Hebei, where returns were less lucrative than those of the nearby Chinese capital. “Wang would have liked to extend his reach into Beijing but he didn’t have to necessary guanxi,” Caijing says.
What is the ‘Gu’an model’?
CFLD’s next big break came in 2002 when it signed a 50-year agreement to develop an industrial park in Gu’an. Despite being just 50 kilometres away from Beijing’s Tiananmen Square, Gu’an ranked last among the 135 counties in Hebei in 2001 with a GDP of just Rmb3 billion. Since then its economy has expanded six-fold to Rmb18 billion last year, and much of the growth was sparked by CFLD’s investment in urban infrastructure, a five-star hotel, a convention centre, a commercial complex and residential buildings.
A key plank in CFLD’s strategy – besides building the high-rise homes – is its responsibility for luring businesses and investors to its new towns and industrial parks.
In Gu’an’s case, CFLD helped to bring in the likes of JD.com, China Aerospace Science and Technology Corp and the smartphone part maker BOE Technology. Companies that found operating in the Chinese capital too expensive decided to settle in Gu’an and construction related to the 2008 Olympic Games also contributed to the relocation of many firms out of Beijing into nearby Hebei areas such as Gu’an and Langfang.
At the heart of CFLD’s partnership with the Gu’an government is a revenue sharing agreement, with the company eligible for a cut of the tax income from the industrial park. Such arrangements were unconventional but Caixin Weekly has reported that the Gu’an government found loopholes in the law that allowed it to reward CFLD via different payment methods, such as the award of government contracts.
“CFLD has invested about Rmb32 billion in Gu’an county over the past 15 years. Meanwhile, the county government has handed the developer Rmb20 billion in reimbursements,” the magazine calculates.
Of course, CFLD benefits from Gu’an’s urbanisation and the upward pressure it exerts on real estate prices. In 2002 when the collaboration started, average land prices were only Rmb1,100 per square metre. By the end of last year residential properties in the city were changing hands at Rmb20,000 per square metre. And in a further illustration of the success of the Gu’an Industrial Park the project now covers 170 square kilometres, versus an original plan of just 60 square kilometres.
Why has CFLD succeeded?
All of China’s property developers have to cultivate good guanxi, or business relationships, with their local governments but Caijing reckons CFLD has built this practice into an art form.
“CFLD has only one client. And that is the government,” a former staffer told the magazine.
Wang Wenxue requires that all of his staff watch changes in policy closely and the company probably has the highest concentration of Communist Party members too. As of June 2016, CFLD employed 5,100 people of which Caijing said 3,600 belonged to the Party. This ideological tint has also made it easier for the developer to poach government officials into its ranks. Some are experienced executives from the central government’s urban planning department too.
CFLD’s so-called “business-to-government” (B2G) model appears to have earned the approval not only of local governments but the central authorities too. In June last year, Gu’an Industrial Park was identified by the People’s Daily as a role model for China’s public-private-partnership (PPP) initiative, one of the key strategies cited by the State Council for sustaining economic growth (see WiC361).
In March this year, financial regulators approved nine PPP projects that plan to raise funds through securitisation (the move is aimed at attracting more private investment for such projects). Notably CFLD was the only property developer on the list, raising Rmb700 million by selling securities backed by the income of a piped gas project at Gu’an Industrial Park.
“Financing via securitising the assets of PPP projects could become a unique competitive advantage of CFLD while other developers might find it increasingly difficult to raise funds,” 21CN Business Herald reported last week.
Can Gu’an be cloned nationwide?
That was the core question of Caixin Weekly’s cover story as CFLD pushes to expand its business model across the country. Most of its existing contracts – to build 100 or so new towns or industrial parks – have been signed over the past six months. If CFLD can implement the majority of these projects successfully, it will surely become the biggest real estate developer in China.
Yet Caixin Weekly has also noted that CFLD’s achievements in Gu’an may be harder to repeat, particularly in places further from the Chinese capital.“Nowhere in China is there a place so close to a metropolitan area where land and housing prices were so low but which have enjoyed such a sharp rise in a short period of time,” the magazine suggests. “The Gu’an model might be difficult, if not impossible, to replicate in other parts of the country.”
This has not deterred others from copying CFLD’s business model, especially after Li Keqiang voiced his support for “new type” urbanisation. The housing ministry says there will be 1,000 new cities or “small towns with distinctive local features” by 2020 and the term has become a buzzword for developers as they acquire land to develop new towns tied to tourism, logistics, education and tech.
Country Garden, for instance, plans to invest Rmb100 billion over the next five years to build “small tech towns” nationwide. Greentown, another of the top 10 developer by sales, has proposals to build 100 “small agricultural towns” in the coming decade which it hopes will deliver Rmb1 trillion of residential sales.
CFLD’s latest deals include MoUs for an aerospace and health industry project in Changsha and an intelligent manufacturing cluster in Hangzhou. It is also developing another new area near Guangdong’s Jiangmen city which specialises in global positioning satellite technology.
Will these new towns work on a national scale? Critics have countered that some of the projects are faddish or soulless. The wider trend also means that developers must do more to support local economies than just building and selling apartments. In many cases they will have to engage with unfamiliar industries (such as CFLD’s partnership with a local GPS system maker which aims to compete with the existing American GPS scheme).
Some of the projects may work, others may flounder. Which brings us back to the underlying concern: China’s propensity to overbuild. “We have to be wary of another glut of ghost towns following the craze in developing ‘small towns with distinctive local features’,” Caixin Weekly concluded in its editorial.
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