Shenzhen Real Estate Firms Take Lead in Winning Land for Development via Urban Renewal Projects
August 26, 2014, Beijing – Shortage of land in China's first-tier cities has become a growing concern for developers in recent years, with the phenomenon being most pronounced in the southern cities of Guangzhou and Shenzhen. According to the Guangzhou Land Use Development Plan for the period 2006–2020 — produced by the city's Housing Management Bureau — only 90 of the total 1,772 sq. km. of city land available for development remains to be used. Moreover, if Guangzhou's undeveloped land continues to be used at the current rate of 25 sq. km./year, it will take only three years to fully deplete the remaining supply. A similar situation exists in Shenzhen, where only 59 sq. km. of undeveloped land remains to meet development demand before 2020, all of which will be used up within four years at the current rate that it is being supplied to the market.
On the other hand, there exists in the first-tier cities an abundant stock of land with potential for redevelopment. Nearly 60% of land that came onto the market in Shenzhen in 2013 was in fact land for redevelopment. "City renewal projects have already become an important future development direction for the first-tier cities, and the questions of how to identify land for redevelopment and propel the process of urban renewal are issues that every developer should be thinking about now," says Eddie Heng, Executive Director, Head of CBRE Consulting, China.
Urban Renewal to Shape the Real Estate Industry in China
Urban renewal has already become a field of intense competition among developers, with increasing numbers of major players eagerly entering the game. Presently more than 30 enterprises involved in real estate development have won land use rights through urban renewal projects in Shenzhen. They include giant national state enterprises such as China Resources Land, China Merchants Land and COFCO Property, as well as local companies like Kaisa Group, Kingkey Group, Gemdale, Galaxy Group and Excellence Group.
"We have yet to see a domestic real estate developer prove itself to be a leader in the field of urban renewal," says Heng. He expects to see more and more real estate firms investing in urban renewal projects as supplies of undeveloped land continue to dwindle in the country. This will make the market increasingly competitive and have significant impact on the future development of China's real estate industry, he believes.
Barriers to Entry and Market Advantages
In the Shenzhen, experience and relationships accumulated over years operating in the city’s market have given slight advantage to the local developers like Kaisa, Galaxy and Kingkey. The national state-owned giants like China Resources Land and COFCO Land, meanwhile, have also been able to perform well by relying on their deep pockets and government backgrounds.
"The challenges presented by urban renewal projects include typically long development periods, the large investment amounts that are usually required, and the complicated tasks of balancing the interests of different stakeholders," notes Coco Huang, Director of Consulting in Shenzhen, CBRE. He adds that compared to standard development projects, urban renewal projects also have higher requirements in terms of ability to control the development process and the use of capital, as well as higher barriers to entry. Additionally, the developer's brand and reputation help to ensure good communication with the original property owner. Obtaining the support of the local government is also crucial.
Mixed-use Projects and Industrial Properties — Two Paths to Urban Renewal
In China, urban renewal is currently being implemented in two ways: the standard mixed-use project model and the industrial property model.
The mixed-use project model is usually based on the rebuilding an old section of city, with final goals typically being the establishment of new business ecosystems, city beautification and higher property values. This model has been successfully applied in urban renewal projects in central Shenzhen, including projects in the Gang Xia, Da Chong, and Cai Wu Wei districts. In the western section of Gang Xia, a group of developers led by Gemdale and Excellence Group restructured the area’s properties, transforming it into the 1.4-million-sq. m. mixed-use "Gemdale Dabaihui" development that encompasses residential buildings, office towers, retail properties and other facilities. A five-theme street mall covering 300,000 sq. m. and a landmark cluster of grade A office towers (including one 350-meter skyscraper) within the development has elevated its image and boosted property prices. Homes within the "Tian Yuan" apartments recently opened within the development have been selling at around RMB 70,000/sq. m.
The industrial property model has been adapted for many urban renewal projects in the rural areas of Shenzhen. Under this model, land is reclaimed for redevelopment and real estate upgraded and optimized through the rebuilding and repurposing of old factory buildings into new types of properties and businesses.
The industrial property model of urban renewal can be further categorized into two operational models: the industrial clustering model and the industrial-financial integration model. The development of Shenzhen Longgang Tianan Cyber Park is considered an outstanding example of the former. The project integrated the digital electronics industry resources that it had accumulated over years to achieve an industrial clustering effect, attracting tenants both upstream and downstream from its traditional industrial chain tenant mix. It then used this as bargaining capital to achieve a high proportion of sales. For example, the proportion of units sold at Tianan Cyber Park has reached 80%, greatly improving the developer's returns while reducing its risk exposure.
Galaxy Group's "Galaxy World" project is an example of urban renewal through the industrial-financial integration model. This project involved cooperation with Shenzhen Capital Group and made clever use of financing methods to transform property rights into equity rights, enabling the sharing of future profits accrued from enterprises moving into the park.
"In contrast to the traditional real estate development process of land acquisition, to construction, then sales, the development and operation of industrial properties has a higher level of difficulty," Huang cautions. "The success of an industrial property development depends more on the participation and incubation of its industrial tenants. Increasing property prices and promoting the growth of industry within the development is a long-term goal achieved through industry integration and long-term operation. In terms of profit model, returns will take longer for investments in industrial properties, and there are a greater number of potential unforeseen factors."
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2014 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.
