During recent years, the office and residential real estate markets in the major cities of China have continued to mature. The supply of Class A office space and luxury residential properties is now much higher, leading to declines in rents. For example, in Shanghai, 691,237 sq metres of Class A office space was completed in 1997. In the residential market, the sup-ply of housing is now four times what it was at the end of 1993.
Despite the growth in these two markets, problems of quality and service persist. But by carefully reviewing the lease before signing, many problems can be anticipated.
I find itself paying for repairs of air-conditioning systems or for the upkeep of elevator services.
Other issues may depend on the circumstances. For example, although restricted access to a building may be a necessary security measure, a lessee that regularly receives visitors into its offices will want reassurance that this power will not be wielded in an autocratic or arbitrary way. In other instances, lessors have been known to rent out the ground floors of buildings other-wise reserved for business use to discos or bars. Companies which are concerned about presenting a certain image to clients should consider clauses that restrict the landlord in the use of the building or allow for early termination for improper use.
the business licence, should sign the lease. Failing this, a power of attorney may authorise a different signatory.
Stamp duty applies to lease contracts, although this tends often to be honoured in the breach. Stamp duty is 0.1 per cent of the leasing fee, payable by both parties.
Lease contracts must be registered with the local administration in charge. While national law does not require it, some areas will only register standard form lease con-tracts as a matter of law, as in Shenzhen, or practice, as in Shanghai, but additional attachments are commonly included.
Additionally, the domestic Economic Contract Law applies to a commercial office lease between a joint venture company and a Chinese lessor, or to a residential lease between a foreign expatriate/oversees Chinese and a Chinese lessor. Article 23 of the Economic Contract Law sets out some basic requirements for a contract for the lease of property, including the following.
The lease contract must include the name of the property to be leased, quantity, purpose, lease term, lease fees and payment schedules, responsibility for maintenance of the property, and responsibility for breach of contract.
The lease contract may be assigned by the lessee to a third party with the consent of the lessor. If the lessor sells the property, the lease contract remains valid and the new owner must perform the lease contract.
The state has the right to set standards for lease fees of property of various types. If there are no relevant standards set by the state, the parties may determine the lease fee through consultation.
Previously, the residential housing market in China was divided into two types: housing for the local market and housing aimed at the overseas market. Foreigners were strictly prohibited from using local housing by the Public Security Bureau and other authorities. Now, however, with the move towards an open market economy, as long as residential property can be leased legally, no differentiation is made between leasing to foreigners and locals. The exception is government subsidised housing, offered for free or for a nominal fee: local authorities do not allow foreigners to live there.
Many concerns are common to office and residential leases ?for example, who is responsible for the management of the building and the common areas. But the different pattern usage of residential property may raise particular issues. Some residential leases give the lessor the right to disconnect utilities and services if bills go unpaid, but this might be problematic if the lessee travels frequently; a penalty, but no disconnection, may be a better solution. And different considerations might make a lessee want to quit a residential rather than an office lease, such as an individual change of posting.
Living in a bustling city brings other tenant concerns. A covenant for quiet enjoyment could allow for early termination of the lease if factors such as noise or smell substantially affect the habitability of the residence.
Laws and regulations
The Administration of the Leasing of Urban Premises Procedures, implemented in 1995, is China's first national law on leasing. There are also local regulations in areas such as Shenzhen. The Administrative Department in Charge of Construction of the State Council is the highest national authority for the administration of leasing. Locally, departments in charge of real property or construction are responsible.
The leasing procedures list the types of premises which may not be leased. They include those for which no title certificates have been lawfully obtained, sealed premises, commonly owned premises where there is no common consent to lease, premises which do not meet regulatory and safety standards, mortgaged premises where the consent of the mortgagee has not been obtained and premises prohibited by laws. There may be additional local restrictions ?for instance, the Shenzhen regulations set out clear limits on the term of lease agreements.
Before entering into a lease contract, there are several issues to consider.
Ownership of the property should be evidenced by land use and building ownership certificates (which may be combined into one certificate). Strictly speaking, only granted, as opposed to allocated, land may be leased. If the landlord is itself an inter-mediate tenant, you would need to check the terms of the intermediate lease(s) for relevant restrictions together with the title of the head landlord. .
When leasing from a company, the 'legal representative' of the landlord, as given in
Freshfields is an international law firm. Most of its offices throughout Asia, Europe and North America include China specialists. For further details, contact Matthew Cosans through the firm's offices in Hong Kong (tel: +852 2846 3400) or Beijing (tel: +86 (10) 6410 6338) or by e-mail: mcosans @freshfields. corn.
The land administrations of several cities, including Shanghai, publish a list of office and office/residential buildings permitted to be leased to foreign entities. These lists generally offer a wide choice of quality and price. Foreign lessees who venture outside this list risk adverse government action.
Responsibility for maintenance should be stated clearly in an office lease. Although the lease may assign responsibilities to a party for the maintenance of the office space itself, the lease may not stipulate who is to be responsible for maintaining the building and common areas. An unwary lessee might
The future is in the post
Conditions are not yet ripe for direct mail in China but some successful campaigns have already been undertaken.
The decision to ban direct selling in China was a major setback to those foreign companies which had been building up what they regarded as legitimate networks to market their goods. Amway, Avon and Mary Kay were just three companies to have established manufacturing capacity in the mainland to sup-ply products for their direct sales teams.
According to the State Council, the ban was necessary because the Chinese public was insufficiently mature to detect fake products or scams. It was aimed at door-to-door sales activities, where consumers are potentially more vulnerable, rather than direct advertising or promotion.
However, Ms Katherine Tong of Direct Marketing of Asia Advertising Services in Hong Kong believes the ban will have a negative impact on the whole direct marketing industry ?a range of activities which includes direct response print advertising, direct mail, telephone marketing, direct sales catalogues and, looking more to the future, shopping by television and e-mail. "Because of the ban on direct sales, people are getting very frightened about investing in direct marketing," Tong says.
Not all marketing practitioners expect there to be adverse repercussions. Most regard the ban on direct sales to be a drastic but sensible move to eradicate the problems of pyramid sales, a practice which has led to social unrest in other countries.
Indeed, the impact on direct marketing might actually be positive. Ms Jo Jo So of Direct Marketing International stresses that there is a big difference between direct selling and direct marketing. She says there was a lack of confidence in, and understanding of, the directing selling business in China. The direct marketing sector could benefit, she argues, since there are now fewer channels to explore.
Ms Candy Wan, general manager of Grey Direct in Hong Kong, believes the government ban on direct sales is here to stay and is likely to usher in a better regulated direct marketing industry and one that is more trusted in the long run.
To an extent this has happened already. Regulations were introduced by the centralgovernment in 1994 because, in her opinion, "the situation got chaotic". Today, the State Administration of Industry and Commerce and local AICs grant approval for all printed matter. There are also local restrictions ?for example, temporary advertising permits are required for the distribution of materials in Beijing.
A privacy act was introduced in 1998, laying down standards for the direct marketing industry and giving protection to individuals, as is common in other countries. For example, people have to give consent to have their name included on a database and at any time they can demand to have their name removed.
Cheap production costs
It is difficult to estimate the size of the direct marketing industry in China, but it is clearly in its formative years and concentrated in the three main cities of Beijing, Shanghai and Guangzhou. Grey Direct's billings for Hong Kong and the mainland were a little under US$l m in 1997. This was a 300 per cent growth on 1996 but the forecast for 1998 is for a drop of 20 per cent because of the regional economic downturn.
"There is great potential and it is starting. But in terms of numbers, it's not huge," says Mr Chris Marsh, who heads up the direct marketing unit of Dentsu, Young & Rubicam in China and Hong Kong.
Viability in the mainland is restricted by the extremely low ownership levels of credit cards and personal cheque books. Without a credit card, it simply becomes impossible tofulfil a sale remote from a retail outlet. This is a major obstacle holding back the mail order business, according to Mr Mark Sol-nick of the US Postal Service (see box).
Nevertheless, direct marketing is being used to promote product awareness and encourage brand purchasing. In particular, direct mail is emerging as a relatively new and cheap form of promotion in China. Production costs, including labour, materials and postage, are low ?about 50 per cent cheaper in the mainland than in Hong Kong, according to Candy Wan ?and the postal system is regarded as efficient. This means that it is relatively cheap and easy to deliver messages. "Advertising is very expensive in China," says Wan. "People are very receptive to direct mail."
Some sectors are effectively forced into direct mail. Cigarette manufacturers, for example, use it to get round the ban on tobacco advertising. Manufacturers organise market researchers to identify people smoking on the streets, conduct an interview and find out their names and address. Then they are sent a free sample by post, which So says is more cost effective than advertising.
Wan warns that the legislative net is tightening for tobacco companies. "They have to do some tricks [to get around the restrictions]," she says, such as developing direct marketing campaigns around event sponsor-ship programmes. Grey Direct has built up a close working relationship with BAT, building databases and planning campaigns. One frequent purchase programme for BAT generated a response rate of 69 per cent. Wan says the attractiveness of the reward for cumulative purchases is a key to a successful promotion.
Tobacco is not the only sector forced into direct mail by advertising restrictions. A future ban on alcohol advertising is a possibility, according to Wan. More bizarre, a pet
Mailed to order
The US Postal Service has been working with China Post for the past two years with the aim of developing the Chinese market for direct mail and mail order. "One of the key issues is the fact that Chinese consumers are unfamiliar with mail order as a concept," says Mr Mark Solnick of the USPS international department.
A trial scheme is in operation, allowing companies from each country to access customers from the other. In China, China Post has developed a test mailing list of 120,000 names from Beijing, Shanghai and Guangzhou. Solnick says the list is of a high quality because all individuals had expressed an interest in receiving catalogues. Moreover, most are young, high earners with a relatively high credit card ownership level.
Customer care/call centres have been established which are designed to make life easy for American mail order firms. For example, they provide translation and sales support services, assistance with financial transactions and currency conversion. Few American companies are ready to invest in developing such facilities on their own.
The trial scheme has now been running for about 10 months and so far three American companies have undertaken mailings: a ginseng producer, a seller of sports goods, and a company offering a range of household goods, fashion items, postage stamps and collectables.
Solnick says it is too early to evaluate the marketing results as most of the companies are still in testing mode. However, from an operational point of view he deems it a success ?consumers receiving the goods within 10 days of making the order, having initially indicated that 14 days would be acceptable.
"Generally, Chinese say American products represent a high level of quality," Solnick says. "There is strong interest in home furnishings and home improvement products as China builds more and more houses." He also envisages growing participation from the business-to-business sector, from the likes of medical suppliers and publishers.
food company operating in Beijing was told by the authorities that a planned advertising campaign for dog food could not proceed since it might send out the wrong message in a society where many people do not have the means to feed themselves. Consequently, direct marketing was the only option left open to the company. It went on to build up its own database by asking pet shop customers in the city to complete a survey and product information is now sent to their homes on a regular basis.
Pharmaceuticals are another possible growth area. Currently, nearly all drugs are dispensed by hospital doctors but this is a wasteful practice which is certain to change. The likely emergence of an over-the-counter market separate from prescription drugs will create opportunities for manufacturers to tar-get certain segments of society, such as expectant mothers.
Poor list quality
argues Tong, and are mostly business lists classified according to industry. It is rare to find consumer lists which are broken down according to socio-economic and demo-graphic profiles. "Marketers are ready to invest in direct mail but the quality of lists is a drawback," admits Wan.
Current lists are unsatisfactory, she adds, because the data is captured in a way that does not facilitate either selection or testing. Most lists do not include a telephone number and some even fail to carry addressee names. As a consequence, the undelivered rate in China is 10-20 per cent compared with around four per cent in Hong Kong.
Marsh says the lack of data makes it impossible to quantify the effectiveness of a direct mail campaign. The exercise can certainly be unpredictable, as Grey found when it undertook a door drop programme for a 7-eleven retail store. The offers proved so attractive that children stole the coupons from mail-boxes, with the result that few of the messages actually reached their desired targets.
In a `frontier' environment such as in China, Marsh says "anything you can learn, you have to deem a success… and every communication you send out is a bit like doing a test."
Investing in databases
The post office holds the biggest list database and while there are list brokers operating, they basically peddle the same limited information. A few companies in Hong Kong are starting to invest in the mainland and build databases from a variety of sources which include telephone directories, credit card issuing banks, mobile phone and paging companies and trade and consumer publications.
More and more investors operating in China are taking the trouble to create from scratch their own databases, often with the help of their advertising agencies. The broad aim is to identify high-value customers. Leading the way are companies involved in information technology, pharmaceuticals, credit cards, mobile phones and baby-related products. Particularly popular are premium products which can't be found in local retail outlets. For example, Cartier is looking to build up its own list of affluent Chinese.
So says the average response rate on the mainland is an impressive nine per cent compared with 2-3 per cent in Hong Kong, which is close to the world average. She attributes the high response rate to the relative freshness of the concept in China. As a result, mailshots tend to be read with greater interest than in the West indeed, long copy can lend credibility. However, Wan warns that companies should not neglect presentation even if visuals are regarded as less important than in other markets.
Not everyone is convinced that the time for direct mail is yet ripe. Tong says it's still too early to be a significant marketing tool in its own right, its biggest use being as a sup-port to advertising. She says more needs to be done to build up advertising before there is big investment in direct mail and that it will take five years to take off.
The are two main users of direct mail: business-to-business companies, such as real estate firths and office equipment suppliers, where the main objective is to generate leads; and FMCG companies, where the intention is to build awareness, undertake sampling and generate databases.
Apart from payment issues, the main problem lies with the poor quality of lists. Breakdowns tend to be unsophisticated.
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