If You Build It They Will Come
Jeff LoCastro, August 18, 2011
Founder & President, NCCREA
There is no Ray Kinsella (Kevin Costner) and China is definitely not Iowa.
But there may be a Field of Dreams as the Chinese have universally
embraced their own notion "if you build it they will come" expansion for
the sake of expansion It is in full tilt in China.
This is no more evident than in the spec construction of new Chinese
cities. These cities are what I have coined as Field of Dreams cities or
simply FOD's. To be clear: these FOD's are not "plans" to rehab, revitalize,
or restructure exiting cities. These are currently active constructions of
brand new cities accommodating millions of people. This has given rise to
an entirely new definition of the concept of, "spec." Most of these
new cities built during the last six years – some twice the size of Los
Angeles, don't even have a name, but all of them with world-class
facilities: sports arenas, stadiums, concert halls, museums, art galleries,
libraries, police and other civic building, modern and architecturally
interestingoffice building and office parks, housing for hundreds and
hundreds of thousands. The problem is, nobody lives in them.
In fact, according to satellite
images recently published
by the Business Insider, there
are more than half-a-dozen
newly built FOD's in China that
are entirely empty. Some of
these FOD's have a contingent
force of police and traffic cops
who stand in intersections literally waiting. Cities with sprawling
housing developments and skyscrapers in the world's most populous
country should be busy and swarming with people. On the contrary,
elaborate public buildings, apartments, office buildings, open spaces
that are left completely empty. The traffic lights signal stop and go
to ghost traffic, the landscape crews clip and trim for no one, and
the street sweepers walk with their ever present grass brooms sweeping
streets where no one ever walks.
According to a recent government report, there are more than 70 million
uninhabited houses in China and since 2007 they are building an average
of 10 new cities every year. If that doesn't send you reeling, the 12th
five-year plan lays out a protocol to build 20 cities per year for the next
One such city is Thames Town,
built as a replica of an English
village, at the cost of $9 billion.
It was built in 2006 as part of
Shanghai's "One City, Nine Town"
initiative, an attempt to
decentralize the city. Today, it's
a ghost town, with empty
shops, almost no residents and unused roads. It has an artificial lake and
a few tourists whose photography of the building there are the only
sign of human life.
In Q4 2010, Forensic Asia Limited first reported the empty Chinese cities.
And in the six months since the report, the country has built about six
more FOD's predominlay in eastern China.
Central planning is central planning and no one at NCCREA is suggesting
that it's the model to be followed. What is suggested is that the
concept and the scale is mind-blowing. "China consumes more steel,
iron ore and cement per capita than any industrial nation in history. It's
all going to railways that will never make money, roads that no one drives
on and cities that no one lives in. It's like walking into a forest of
skyscrapers, but they're all empty," Gillem Tulloch, an analyst for Forensic
Asia Limited, said of the empty city of Chenggong.
Real estate developers who professionally came of age in the mid to late
1980's understand the impossibility of the concept of Spec. Beginning in
1989 or so, you better have a tenant, a solid letter of interest, or the
lender must be able to literally see (without the use super x-ray vision
or the aid of a tarot card reader) the frenzy around the market you are
entering and the product in which you intend to build. If they don't
see potential tenants panting, tongue wagging with a crazed look in
their eyes indicating (to the lender at least) a desperate need for space,
its unlikely you'd get the financing. In the mid to late 2000's, not even a
a stack of letters from potential Fortune 100 tenants exalting the notion
of if you build it we will come was enough to necessarily get it done.
And even crazy stuff such as lenders conducting personal interviews
with the potential tenants was not always enough to make it happen.
So to see, not just a building going up on spec, but rather massive
cities without even a whisper of promise is to some beyond
comprehension. To build an entire metropolis just "because" is outside
of most developers universal reality.
There are three main factors
driving FOD development.
The first is the Chinese
version of Manifest Destiny.
The Chinese are on a
frenetic pace to expand,
to grow, to consume, to
compete. And they believe
it is their destiny. For the Chinese economy to move from "developing"
status to "developed" status they need thriving cities. To have thriving
cities, they need more cities. Shanghai, Beijing, and Guangzhou are
bursting and at many times during the day their citizens find it complete
gridlock. With the absolute and relative cost of labor significantly lower
than the developed world, they can also afford this wild no-holds-
barred expansion. So smartly, while they can afford it they are doing it.
The big question is the execution of the populating of these new cities.
That quotient is a little behind schedule. Which is the other problem:
there is no schecule.
Second are the infrastructure issues in China's existing cities. Much of
the small to mid-size cities (so everything with a population smaller than
Shanghai, Beijing, and Guangzhou) have infrastructure that at times is
barely functional. Sewage, trash, and other basic utility systems are from
another era. Some of these inadequacies are so extreme that it is
simply easier, faster and cleaner to start over, rather than to displace
densely populated areas for decades to repair and upgrade. The Chinese
want it now. If you can do it, why not?
Third, is the government's drive to move people from the feudal towns
and villages of China's west to the more modern FOD's in the east.
Anything west of Xi'an is regarded as no-mans-land. The farther west
one goes, the farther back in time you go: 20th century, 19th century,
18th century, 17th century. The plan is transition. They plan to inspire
people to move from smaller second and third tier cities such
as Changzhi, Taiyuan, and Chengdu to the FOD's while using a the FOD's
as a release valve of sorts for the highly populated cities such as
Beijing, Shanghai, and Guangzhou. Then inspiring the more feudal
locations east into the second and third tier cities. Clearly, thus far the
pitch hasn't been too inspirational.
Essentially, it's the policy of structured unrbanization. That's very good
news for the real estate business in China. Real estate professionals rely
on expansion, on movement, on change. The more dynamic the market
the more opportunity that exists. China is the most dynamic market in
the world right now. Central Planning may be driving the expansion, but
it's the capitalists that will fill the vacuum.
The "If You Build It They Will Come" concept also creates an interesting
statistical dilemma. The current national commercial net absorption
rates do not include the current and new inventory from these FOD
cities. Inasmuch as Major League Baseball does not include attendance
statistics of a baseball diamond in an Iowa cornfield, the government
and commercial brokers in China do not include the measurement of FOD
vacancies. Those figures aren't included because the cities are empty.
But the cities are empty and therefore should be included. For all
intents and purposes the buildings "exist" but are not in inventory
because . . . well, because they are not in inventory, therefore they
don't exist. Upside-down world. (see Business In Wonderland).
Regardless, empty or full, statistical accuracy or not, it's an amazing
thing to witness. The pace of these changes are certainly nothing that
we've seen in the west in several lifetimes. Sure we have all
experienced explosive growth and new buildings seemingly coming out
of nowhere. But the storied history of full towns and cities springing-up
from sage-brush is relegated to the history books and films of the
American "old-west." At times it seems as simple as, "We need a city
over there. Great. Let's build it." In the end, all one can ask is, " If you
build it will they come?"
COPYRIGHT 2011 JEFF LOCASTRO
DISTRIBUTED BY NCCREA
CHANGZHI, SHANXI, PRC
Contact the author at: Jeff@NCCREA.com or Jeff@CaliforniaSecured.com
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