Vincent Lo Hong-sui, founder and chairman of Hong Kong-based Shui On Group, and mastermind behind Shanghai's celebrated Xintiandi makeover [among other high-profile projects in the city], is spearheading massive redevelopment of Chongqing, which aims to become the commercial hub of China's 300m-strong southwest region. To achieve his goal, Lo needs to build world-class facilities – and then fill them with world-class industries and people capable of building industry clusters the city so desperately needs. Lo talked to China Economic Review about Chongqing's Hualongqiao redevelopment and about the forces driving China's property market. Excerpts:
Q: Why Chongqing?
A: We'd been investing in the cement side from '95 so we built up our connections and our knowledge there, but we never considered that Chongqing would be a market for us on the property side. But in 2000, with the "Go West" program promulgated by the central government, we started to think Chongqing might have a role particularly after '97 when it was given the status of a direct municipality like Shanghai. When Huang Qifan, the executive vice-mayor in Chongqing now, was transferred from Shanghai, he came to see me and said, "Mr. Lo, we've worked together in Shanghai a long time and we know you could help us develop our property side." I said we didn't feel there was much we could do – there were no Grade A offices, the residential market isn't up to our standard, and he said, "Please take some time to understand the market because we have big plans for the city." He reiterated that Chongqing today is like Shanghai of 10 years ago and said that's what they wanted to do. So I asked my people to see whether we could see a specific role for ourselves, by going to the supermarkets and department stores to see what they're selling and get more knowledge of local market conditions. Later, they told me over 70% of the foodstuffs are imported. I said, that's crazy. Two thirds of the population in Chongqing are involved in agriculture – how could they be importing foodstuffs like that?
Q: So what was the answer?
A: Basically, they don't have the manufacturing clusters. Over 60% of clothing is also imported. Again, that didn't make sense. You have 30m population. The five provinces around Chongqing add up to 288m people and if the central government designates Chongqing as a direct municipality, then it should [logically] become the hub of the southwestern region with a population of over 300m. So I engaged some international experts on competitiveness and urban development [Hong Kong University's Michael Enright and Stanford's Douglas Webster] and all this helped me to understand the market more. I went to the mayor and said, you need to do this, this, this, this, this. And he said, "We agree with you – please help us."
Q: And then?
A: I identified this piece of land in Yuzhong in Chongqing's central district – 1.3 sq km – and said we will master-plan this to become the manufacturing service base for Chongqing and the [surrounding] provinces. We asked SOM [US-based urban designers and Shui On's Xintiandi partners Skidmore, Owings and Merrill] to do the master plan for us so we will have convention, exhibition, Grade A offices, hotels and residential that can cater to international business people. Right now, nobody wants to go to Chongqing because the facilities are so poor – so we will have to provide international schools and medical services as well.
Q: This sounds like a departure from conventional development.
A: Even in Shanghai, when we did the master plan for three big projects, we did very thorough research as to what is required by the city over the longer term. That includes Xintiandi, which is 0.5 sq km, Rainbow City, which is 40 hectares basically for yuppies, and Chuangzhi Tiandi, which is basically a Silicon Valley we're building. So we do development with that sort of ambition. It's the same for Chongqing, so now we're identifying industries that have a competitive edge in Chongqing itself. Maybe right now importing electronics and foodstuffs from the Pearl River Delta is cheaper than making it yourself unless you have that cluster. You have to look at the raw material, the processes and everything. What is interesting from Michael Enright's study for us, and I tend to agree, is that Chongqing shouldn't be focusing on export markets but focus on the domestic market to get things started – and when you build up your competitive edge then you can export certain items. So I'm now helping the government to look at all these issues. With over 300m people [in China's southwest], it's already a huge market to exploit. So now, we're in the process of relocation and it seems it's going smoother than in cities like Shanghai and Hangzhou. The environment is much more backward there and people are worried that, if they don't take the money, they might miss the boat because there are a lot of developments that have just stopped halfway. And property prices haven't moved the way they have in Shanghai.
Q: An Indian economist once remarked that China can move faster than India because you don't have to negotiate over every square inch of activity as you have to in India?
A: That's starting to be more difficult in China as well. Many of the people we have to relocate are actually squatters without any title to the land. But the government still insists we have to compensate them. We have this project [in Shanghai] with one family still there demanding a huge price but the [local] government is not taking a hard line. But I said, you will have to, because we're now finished the foundation and going into superstructure – and that one family is still there. They know how to make use of the media, going to Beijing and launching their complaints. But at least we try to do everything above board – we don't grease any palms, we don't take money away from people, we pay everything. Actually this current leadership is very people-oriented. When the premier toured Xintiandi, I toured with him. It was supposed to be on a pre-arranged route but he kept wandering off to talk with people. That's their mentality – both the president and the premier – and that's the biggest difference in leadership: their determination to look after people, especially the underprivileged. So that puts a lot of pressure on local government – if they don't handle relocation properly, people will go to Beijing and complain and the local government could get into trouble.
Q: How many people are you relocating in Chongqing?
A: 12,000 families, plus a lot of big factories. Factories are easier, because you can talk about compensation and the government typically gives them a piece of land somewhere. But with families, some will say they have been living here for decades and won't move until you pay such and such an amount. But these squatters have nothing ? no gas, no water, no drainage, no nothing.
Q: So what is your investment – do you get land for free?
A: No, no, no. We pay for the relocation – the bulk of the land cost is relocation, then we pay a land premium to the government, which, compared to the relocation cost, is minor, maybe one quarter.
Q: What does relocation cost?
A: Every site is different. In the heart of town in Shanghai, you could be talking about RMB20m per acre. In Chongqing, it's a million something per acre. But property prices in Shanghai are getting very high. In the first phase of our [top-end] residential development in Xintiandi, the second-hand market is transacting at US$5,000 per sq m. And people are still chasing to buy. In the second phase, we're building 650 units and we now have over 2,000 people registered.
Q: Prices are driven up by China's urbanization policy, right?
A: By 2020, the official policy calls for 55% urbanization. That puts a huge demand on construction. Just in Chongqing alone, they're talking about 5m more people to be urbanized. If you give them each 25 sq m living area, you're talking about 125m sq m! It's mind-boggling, but it's all happening.
Q: Morgan Stanley's Andy Xie says all these people pouring into cities is all very well, but they don't have any money.
A: Shanghai controls people coming in quite rigidly, which is why law and order there is probably the best in China. Right now the population is 16.7m and by 2010, they're looking at 20m. There's not much space to develop any more, particularly in the city center where the government is trying to reduce building heights and reduce plot ratios and have more open space – so prices will just have to go up. There's no supply. And the austerity measures just push prices higher: with tighter control, developers are not getting credit from the bank.
Q: So the market just keeps getting rosier?
A: Well, the economy is growing so strong. In the first three quarters [of 2004], Shanghai grew by 14.3%, Chongqing by 13 point something, Hangzhou by 15 point something. Property prices and economic growth go in hand over the long term.
Q: Yes, but that theory gets a shake every now and again.
A: Yes, but that's how you make money, knowing when to come into the market and when to sell. It's all about timing.
Q: Where should Shanghai prices be relative to Hong Kong prices?
A: Shanghai has had double-digit growth for the last 12 years. The next 12 years will be double-digit. If you look at Hong Kong, London, New York, I don't think you will see a quarter of that growth, so Shanghai is going to catch up. And also, if you consider the role Shanghai will play as a financial center in China and in Asia, I think that will further enhance the price. I notice more and more people from outside buying property. In our first phase in Xintiandi, 25% were from Taiwan, and 46% from Hong Kong – not just Hong Kong Chinese, but expats. Everybody wants a piece of the action in Shanghai because they see the prospects for the city – so prices will go up further.