Byron Kan is the general manager of the Shanghai Centre, which contains one of the first serviced apartment projects in China. The Shanghai Centre opened in 1990, and will celebrate its 20th anniversary next year. Kan has been with the company for eight years, coming over from AIG’s real estate group, the majority stakeholder in the Shanghai Centre. CHINA ECONOMIC REVIEW spoke with Kan about dealing with local competition and the long-term prospects for growth.
Q: There’s been some gloomy data about rental and occupancy rates in serviced apartments floating around, and people are saying the competition is intensifying. What’s your take on the state of the market?
A: Well, actually, the market for occupancy was competitive even before the downturn. It’s been extremely competitive over the last five years. There are a lot more direct competitors now, but not comparatively more purpose-built serviced apartments. Small operators may still be entering the market, but the only big one to enter recently was Fraser Suites. People building brand-new serviced apartments, those days are gone now. However, there’s another reason for the lower occupancy rates and rentals. Five years ago, there weren’t that many quality residential buildings, so people went to serviced apartments. If they went to a normal apartment, they might not get hot water. But the biggest new competitor of the serviced apartment sector today is the supply of high-quality condominiums that an individual can buy and give to a management firm to convert into serviced apartments. Or instead of paying a serviced apartment fee, they’ll get a normal apartment, and pay an ayi RMB2,000 a month to take care of it for them.
Q: Is this true for the whole country?
A: No, this is true only for the mature markets in Beijing, Shanghai and so on. If you go to a secondary city, a western city, you are going back to the residential real estate market of 10-15 years ago. If you went to rent an apartment from a Chinese landlord 15 years ago, you didn’t know what you were going to get.
Q: Morgan Stanley is selling the Shama Xuijiahui. What does this signify in your view?
A: I would not extrapolate their action to the market in general because it could be just a normal market exit. If the property is owned by a real estate fund, most funds have a five-to-seven year lifespan. If it’s an aggressive fund, they are trying to produce high returns. The high return happens during the development and initial years of a new property.
Q: A lot of multinational serviced apartment operators have been dismissive of the small domestic players entering the market.
A: I tend to agree. A lot of the local players will go to a quality apartment and say to the landlord, "You look like you aren’t renting it out, why don’t you rent it to me?" And they put it into a pool of apartments that can be turned into serviced apartments. Another popular thing is to go to a developer and say, "Why don’t you turn it into a serviced apartment and we’ll manage it for you?" And they get the contract because they charge a lower fee, but they don’t have the experience or the brand recognition, so they can’t attract tenants.
Q: What do you think of those who say that the glory days of the expatriate executive residential packages are over for good?
A: I don’t think it’s going to be a permanent fall. Look at Hong Kong, for example; they’ve got a steady flow of expats who are willing to pay good money for serviced apartments. Singapore and Tokyo are the same.
Q: But those cities are true international financial centers.
A: I think the Hong Kong model applies to Shanghai and Beijjng… maybe not so much Guangzhou or Shenzhen.
Q: What are the prospects for convincing mainland Chinese to rent out serviced apartments? Some operators say they have no Chinese tenants, others say they have up to 30%.
A: Thirty percent in a high-end serviced apartment? I find that hard to believe. However, these days, close to 10% of our tenants are from Hong Kong, Taiwan or returnees from the US working for global firms. But I don’t think purely domestic demand will ever offset expats because mainland Chinese clients want to buy their own property. They see renting as a waste of money.