Over the past few months, a sharp decline in housing prices has swept across China’s major cities. Now at a time when most people are subscribing to a wait-and-see attitude toward the property market, let’s take a look at how China’s real estate industry has developed over the past thirty years. It took 30 years for China’s living quarters per capita rose from 3.6 square meters to over 20 in urban areas. Thirty years ago, there was no housing market in China. All houses were built by the governments and then distributed among workers as part of enterprises' welfare programs. In 1992 in order to reassert his economic agenda, Deng Xiaoping made a speech during his tour of South China. His idea led to China's first property boom in Hainan. Over 20,000 developers rushed in, forcing house prices to 7,500 yuan per square meter in 1993. The bubble soon burst in 1995, leaving over 30 billion yuan bad debts to four state-owned banks. However, the setback would not dampen China's determination. After several years of policy adjustment and exploration, the property market rebounded nationwide. What was the driving force pushing China down the path to housing reform? How much longer does China have to wait to achieve a healthy and mature property market?

To discuss these issues, we caught up with Zhangxin, CEO of SOHO China. Zhang Xin was born in Beijing in 1965. She graduated with a Masters degree in Development Economics from Cambridge University in 1992. After that, she ventured upon the career that took her to Wall Street when she worked for Goldman Sachs and Travelers Group. In 1995, she co-founded her own real estate company SOHO China in Beijing with her husband Pan Shiyi. In 2007, Zhang Xin was selected as one of “Ten Women to Watch in Asia” by the Wall Street Journal.

Commercial real estate

Q: Welcome to the Main Talk, Miss Zhang. Thank you for being here. We know the housing bubble in Hainan Province burst in the early 90s. Would you call that time a turning point or a starting point in China’s real estate sector development?

Z: Hainan I think was more of an experiment than a nationwide real estate market. When we see the market, the beginning of the real estate market really is from the mid-90s. And with that experiment, the first generation of developers was created and then they went around China in different cities. Many of today’s major developers actually started in Hainan.

Q: In 1995, SOHO China was established. You decided to take on the different approach. You didn’t really focus on the residential market. Instead you focus on the commercial market. And you actually targeted young entrepreneurs in China and their small companies. Why did you make that decision?

Z: We started out like everyone else doing residential. Our very first project SOHO New Town, “Xian Dai Cheng”, was residential, but very quickly we realized that our project is mainly in CBD in Beijing. When we sold the first project “Xian Dai Cheng” to many of the owners, they lived there for about 1 year and they all moved out. They rented them out as small offices because they actually collect more rent this way. Then they move to somewhere that takes about half an hour drive to a much bigger space.

Q: So that was pretty much the only residential project that you did.

Z: Yes, we did. You see when we realized two things. One is of course CBD is by and large offices and retail, commercial what we called. And second is that we realized that the government policy for real estate industry is so unstable that it comes out every a few month to crack the price rising and so on.

Q: So are you saying there is much less government intervention in commercial real estate?

Z: We move away from residential because its too policy sensitive and for commercial I think CBD was master planed in Beijing to be sort of the future Manhattan. I still remember in the mid 90’s when I first met my husband, 1994 he took me there, all factory areas. He said, “Oh, this will be the CBD of Beijing.” I hadn’t even heard about the term “CBD” (Central Business District) and he said, “This will be the Manhattan of Beijing.” And I was thinking, this guy obviously has never been to Manhattan, has no idea of what Manhattan is like. This is just a bunch of dilapidated factories, right? Today, when you walk around CBD, this is absolutely the Manhattan of Beijing.

In 1994 the State Council encouraged more construction of residential houses to meet the increasing demand for better living conditions. Meanwhile, the housing fund system, spearheaded in Shanghai in 1991, was widely implemented over the country. The whole system made commercial homes affordable for urban dwellers, and in term boost the housing market in big cities like Beijing and Shanghai.

Q: You are pretty much focused on Beijing and its surrounding area. Do you have plans to expand your footprint to other regions in China maybe?

Z: Major cities we’re all interested in, but ultimately I think what drives the decision is still the margin, the scale of the project, the profitability. So those things…I think in today’s market Beijing still is the best.

Q: Why would you say Beijing offers the best margin? Give me an example or some figures to illustrate, to compare Beijing and Shanghai.

Z: Shanghai has the highest selling price per square meter selling price in China. Beijing is 40% below Shanghai; Beijing is less than 10% of Hong Kong. So both Beijing and Shanghai have a long way to go in terms of catching up to Hong Kong, New York, and London level. And that’s why investment in Beijing and major cities in China still makes a lot of sense because investors look at the potential. Cities like Beijing and Shanghai are certainly on the way to become cosmopolitan cities at an international level. From 10% to 100%, there’s a 90% growth room. So even short term fluctuations, and ups and downs of the market this year and that year, doesn’t really impact the fundamentals. The fundamentals are still there. Beijing and Shanghai are still very cheap compared to London and New York.

Housing reform

It was in 1998 that China totally abandoned its system of welfare housing allocation and initiated the commercialization of housing distribution. With the development of a housing market, prudent locals learned to purchase homes by way of mortgage and thus drove the biggest economic growth in China.

Q: You talk about the housing reform ten years ago. Do you think this commercialization really had a big impact or hit on the general public? I mean, was it easy for people to accept this idea of actually buying their houses instead of you know, having them allocated as welfare benefits?

Z: You know now of course everyone accepts it because everyone loves it. Back then, I remember back in 1996, my husband Pan and I spent the Chinese New Year writing a letter to one of the vice mayors in Beijing and talking about the importance of having a healthy mortgage market. Coz already in 1995 the central bank already issued a white paper to say that to support the mortgage lending. But no banks have regulation as in how to execute that. So we were talking to the media, writing to the government and talking to the banks. By 1998 I remember we talked to one of the construction banks district branch manager and say you know… the premier Zhu already has housing reform policy. Mortgage will be coming out you know, what would be your branch quota and so we can start doing business with you. And this branch manager said to us, “lending money to individuals buying housing? That’s unheard of! The last time we did it was in the 1950s. We lent to individuals that used the money to buy donkeys. And then we never saw the money back!” So this is how far away from then to now, right? So you know bankers, commercial bankers then you know in the 1990s really had no idea about mortgage lending. Today, of course, this is a substantial part of their businesses.

Q: It’s just amazing to see how things and attitudes have changed in just a matter of ten years. That’s not a long time! And we know housing prices actually started climbing very quickly in 2003 around that time. Who was really driving this upward trend? What were the reasons behind this?

Z: I think the real driver was Premier Zhu Rongji’s housing reform coupled with mortgage lending. That’s really the driver. And you know then, of course, fundamentally the desire to improve the living standards. It’s the real driver, right? Every Chinese wants to live better than before.

Q: So it’s still the market demand that’s actually driving the prices?

Z: Yeah. Absolutely, yes.

In 2004 the average prices of a house in China rose by 14.4 per cent. To curb soaring prices, Beijing introduced eight tough measures in both March and April of 2005. The action showed the government’s determination to cool down the investments and strengthen macro-control in real estate sector.

Q: We’ve seen a lot of macro control measures from the government, especially on the banking sector and also real estate. Is it too much? Is it still necessary at this point?

Z: I think you see a lot of go and stop, you know, left and right, often-contradictory government polices, which is, I personally think, probably unavoidable given where China is.  You know nobody has had any experience of how the reform goes. It’s all trial and error and learn from their mistakes. That’s why when the government is responding to a lot of the crisis, the policies sometimes overreact and sometimes not react enough. And that’s why you see these policies changing all the time. I think this is inevitable.

Q: Do you have any suggestions, any other suggestions, or other tools that might be also effective?

Z: I think ultimately the healthiness of the market is that the investors or the buyers will exercise their own judgment on when is a good time to buy. But when we have unhealthy market, when we have a very infant market, it’s very hard to form a mature judgment. I think that is what the government is trying to do. They are worried about the investors’ inability to make a mature judgment and therefore their come out with a lot of warning.

Q: What did you do? How do you respond?

Z: In a very volatile market like China, in a very volatile industry like real estate, we adopt a very conservative financial principle, which means we don’t leverage very highly. Last year, the market was so good. Everybody rushed to buy land and borrowed a lot of money. And this year the market is suddenly gone. Then what did you do? If you have huge debt, you would feel like being killed. But if you are more conservative…you don’t borrow so much, don’t leverage so much, and then in a downturn you can survive.

China’s property market fell in 2008 after years of economic success. During National Day, usually the best period for selling houses, sales in Beijing was down by 72% in 2007. Likewise, Shanghai saw a 40% decrease. In order to boost the slumping housing sector, the government in late October initiated a series of measures, including eliminating the stamp tax and lowering mortgage rates. However, a skeptical housing market attitude still lingers.

Q: We know a lot of countries and regions have experienced a boom and bust cycle in real estate, are we in that cycle now? What point in that cycle are we in now?

Z: In most of the developed countries the boom and bust cycle reflects the saturated market. The demand has already been satisfied. China is a different story; China’s demand hasn’t been satisfied. It has a long way to go to be satisfied. So I don’t think the boom and bust story is quite the China story. China story is its instability, you know. You grow very fast, then suddenly you see some unpredictable issues, then the government has a new policy to tackle that and it effects the market. So it’s an instability issue.

Q: Last year you offered an IPO in Hong Kong that raised about 1.65 billion US dollars. How much is it worth now?

Z: Since we went public to now, the market has probably come down on real estate sector as a whole of 50%. I think for us it is a crucial year. We are really one of the very lucky ones that we went public so late. You know we went public in October. We raised 1.9 billion US dollars. That’s a lot of cash. It can buy a lot of projects. We really didn’t participate in those land grabs last year. Land was very expensive through auctions. So this year it’s a perfect time to buy and this is a year of bargain because most of the developers or the government are selling lands with much less competition. No many developers have cash to buy. So this year actually is a great year to buy.

Innovative developer

Zhang Xin is an innovative real estate developer and the mastermind behind her project in title is the commune by the Great Wall. It is a collection of contemporary architecture designed by 12 Asian architects. The achievement was exhibited at the 2002 Venice Architecture Biennale and Zhang became the first non-architect to receive an award for her “bold personal initiative”.

Q: Now you really have a passion for architecture and art, but you as a businessperson, how to balance the pursuit of art and the pursuit of profit?

Z: Doing business is all about profit, but doing business is often bigger than just having the profit.  Real estate for example, of course, it’s about creating buildings, selling them and creating profit. As a CEO of a listed company, my job is to create profitability. But in the same time, these buildings also form part of the face of the city. And I think that Beijing is very exciting and you know, and we have of course the Commune by the Great Wall which is the beauty of that is a group, a community of architecture. You also have very iconic individual buildings like CCTV, the stadium and so on. And I think we, of course, feel hugely proud that we are all participating in this intense period of building growth in Beijing.

Q: What does wealth mean to you? You are one of the wealthiest persons in China now.

Z: Well…I think it means that we have bigger responsibility. I think last year when we went public… you know there was a lot of talk on wealth. We always discuss internally what more can we do now. We seem to have a bit more money, at least on paper, and what can we do. We set up SOHO China Foundation many years ago, and then we were donating as a charitable vehicle very ad hoc to places like tsunami and so on. But since last year, we’ve decided to focus on education. We have donated to build schools in remote provinces like Gansu and Qinghai.

Q: Can I ask how much you have donated and how much more you’re going to donate?

Z: Last year I think we donated over 30 million RMB through SOHO China foundation. This year our plan is to donate 1% of profit every year though SOHO China foundation. It’s important that we don’t only donate in responsive to the sudden disaster; that’s important we do that, but it is important that we continuously to work as part of our life. So, I actually find it’s very disturbing to hear peoples talk about “who donates how much who donates how much”. Because I think the charitable work should be long lasting; should not be too ad hoc only responsive to individual crisis. We need to do that. But importance is that we see service as part of our life and as long lasting. And that’s why SOHO China foundation’s focus on education is important.

Q: How has the opening up and reform policy changed your life, and affected your life, personal life and business life?

Z: In 1980, the very beginning of China’s open door policy, I went to Hong Kong first. I became a factory worker in Hong Kong for 5 years. I then went to England to study, and then ended up on Wall Street as a banker for a few years. And then, you know, eventually ended up in Beijing. And after I met my husband, we decided to establish a real estate company. So all this is, of course, the result of China’s economic reform. We all have one person to remember and to be thankful. That is Deng Xiaoping.

This is a photo taken in the early 1980s. with most Shanghai residents living in traditional Shikumen houses without running water. At that time, it was common to see a three-generation family sharing one room smaller than 30 square meters. And fortunately, nearly 30 years after that, we can find more and more apartments like this in our community.

                                                  ICS   Dec.21, 2008