IN A SELECTED MAJOR CITY

Transcription

1 A MARKET ANALYSIS OF CURRENT CHINESE REAL ESTATE MARKET --AMERICAN-STYLE SINGLE HOUSE IN A SELECTED MAJOR CITY Ning Guo M.Eng., University of British Columbia, 2003 PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION In the Faculty of Business Administration O Ning Guo 2004 SIMON FRASER UNIVERSITY July 2004 All rights reserved. This work may not be reproduced in whole or in part, by photocopy or other means, without permission of the author.

2 APPROVAL Name: Ning Guo Degree: Master of Business Administration Title of Project: A Market Analysis of Current Chinese Real Estate Market--American-style Single House in A Selected Major City Examining Committee:. - Dr. Gary Mauser Senior Supervisor Professor, Faculty of Business Administration Dr. Bert Schoner Supervisor Professor, Faculty of Business Administration Date Approved:

3 Partial Copyright Licence The author, whose copyright is declared on the title page of this work, has granted to Simon Fraser University the right to lend this thesis, project or extended essay to users of the Simon Fraser University Library, and to make partial or single copies only for such users or in response to a request from the library of any other university, or other educational institution, on its own behalf or for one of its users. The author has further agreed that permission for multiple copying of this work for scholarly purposes may be granted by either the author or the Dean of Graduate Studies. It is understood that copying or publication of this work for financial gain shall not be allowed without the author's written permission. The original Partial Copyright Licence attesting to these terms, and signed by this author, may be found in the original bound copy of this work, retained in the Simon Fraser University Archive. Bennett Library Simon Fraser University Burnaby, BC, Canada

4 ABSTRACT The purpose of the paper is to provide an overall guideline for foreign (especially Western) real estate developers who plan to enter Chinese real estate market to develop American-Style houses. The paper begins with an analysis of business contexts of modem China, followed by a general analysis of current Chinese real estate market; then a Chinese major city, Tianjin, is selected as a platform by specific criteria to make in-depth analysis of a local real estate market, especially the local house market; after that, the paper presents Chinese culture issues for better understanding Chinese customer behaviors; finally, the paper ends with a brief analysis of how to do business in China including barriers and suggestions. The methodology of the paper involves information collection and analysis. Secondary data is the only source of information used in this paper. All of the collected information comes from books, journal and magazine articles, research studies, online articles, industry reports, and government published information.

5 EXECUTIVE SUMMARY China is a new grown-up giant and the final biggest under-explored market in the world. After over 25 years economic reform, China's economic and political environments have made great improvement and are still getting better. China's GDP had reached 11,670 billion RMB (1,400 billion USD) by the end of If measured on a purchasing power parity basis, China stood as the second-largest economy in the world after US. The International Monetary Fund and the World Bank reported that China is expected to become the world's largest economy by the year The fast development of economy results in an increasing demand for housing. Currently, Chinese real estate industry is growing quickly. In major cities, it represents more than 50 percent of the total investment in fixed assets. Chinese government has taken the real estate industry as a new drive for the country's economic growth, and has taken various measures to support the industry. China's successful accession to WTO and win of 2008 Olympic bid also provide strong motivation for the Chinese real estate market. This paper is mainly address the market analysis of American-styled house in the Chinese real estate market. House is a high-end real estate product for Chinese customers. However, the development of Chinese economy is highly imbalanced. Major cities in eastern costal areas are the highest economically developed regions in China. An eastern costal major city, Tianjin, is selected as a platform by following specific criteria to make an in-depth analysis of the local market. Tianjin's profile is presented from aspects of history, education, culture, and economic and social contexts. As one of the four municipalities directly under the Central Government in China, Tianjin is a northeast costal city close to Beijing. With over 10 million population, Tianjin, one of the biggest industrial and port cities in China, is enjoying the fruit of high economic growth. The fast

6 economic development has been generating high demand for real estate products, including the high-end product, house. Tianjin local developers began developing house projects in early 1990s but did not reach their prior expectation then. VANKE was the first company to develop big-scale townhouse project in Tianjin market in 1998 and achieved admirable success. After 10 years market practice and competition since the first trail, local developers have accumulated valuable experience, and increased their marketing skills. In the early years of 21" century, several local real estate giants commenced a new tide of house project development nearly at the same time; hundreds of thousand square meters of houses were under development in the best areas of the city. Five major local players and their projects are analyzed and market share estimation is provided in this paper. To do business in China, Western investors must understand Chinese customers; to understand Chinese customers, the first step is to understand Chinese culture. Confucianism and Taoism are two ancient doctrines directing Chinese thinking. Guan xi is one of the most important determinants for successfully doing business in China. Feng shui is a special product of Chinese culture, which is especially related to real estate industry. Together with them, other important Chinese culture factors are shown in this paper to help foreign investors know Chinese customer behaviors. For foreign investors, doing business in China not only brings opportunities but also challenges. Local language, culture, and ways to do business all probably are barriers for them. To lower the risk, the paper provides Wang and Zhang's 'Six Ps' as suggestions for foreign investors to prepare themselves before entering the Chinese market: Patience, Power, Predisposition, Personnel, Protection, and Perspective.

7 DEDICATION I dedicate this project to my parents, Mr. Guo, Changxing, and Ms. Meng, Lingrnin, who are living in Tianjin, China, and to my wife, Rong Su, who is pursuing her master degree in University of British Columbia. It is their love and support that make me successfully finish the project and complete two master degrees in three years in Canada. Everything is possible with love.

8 ACKNOWLEDGEMENTS I would like to thank all professors who have instructed me in the two graduate programs both from SFU and UBC for qualifying me to do this project. Especially, I would like to thank Dr. Gary Mauser, Dr. Bert Schoner, and Dr. Steven M. Kates for their direct guidance and advice. In addition, I would like to thank Thesis Assistant, Penny Simpson. vii

9 TABLE OF CONTENTS APPROVAL... ii... ABSTRACT... ill EXECUTIVE SUMMARY... iv DEDICATION... vi. ACKNOWLEDGEMENTS... vn... TABLE OF CONTENTS... viu LIST OF TABLES... x CHAPTER ONE: INTRODUCTION... 1 CHAPTER TWO: ANALYSIS OF CONTEXTS IN MODERN CHINA Introduction Economic Context Political Context Investment Environment... 4 CHAPTER THREE: GENERAL ANALYSIS OF CURRENT REAL ESTATE MARKET IN CHINA Introduction China's Real Estate Market Development Current China's Real Estate Market Profile WTO & Real Estate Olympics & Real Estate CHAPTER FOUR: SELECTION OF A CHINESE CITY Introduction Criteria Major Cities Economic Development Potential For Real Estate Investment City Overall-Competitive-Advantages Average Land Price Hot Cities For Job Author's Familiarity Conclusion CHAPTER FIVE: TIANJIN Introduction Tianjin Profile History Education Culture Economic Context Social Context Vlll

10 CHAPTER SIX: ANALYSIS OF CURRENT HOUSE MARKET IN THE SELECTED CITY Introduction Tianjin's House Market House Market Development Location Price Tendency I 6.3 Big Local Players SUNCO I VANKE RENAI ASIA RESOURCES SONGJIANG CHAPTER SEVEN: ESTIMATION OF MARKET SHARE Introduction Customer Profile Market Share Analysis CHAPTER EIGHT: CHINESE CULTURE Introduction Confucianism Taoism Agrarianism Mianzi (Face) Collectivism Guanxi (Personal Connections) Jiejian (Thrift) Feng Shui CHAPTER NINE: HOW TO DO BUSINESS IN CHINA Introduction Barriers Suggestions "Patience: Psychological Preparation" "Power: Financial Strength" "Predisposition: Preparation in Business Policy & Social Relationships" "Personnel: Recruiting the Right People" "Protection: Legal Protection" "Perspective: Culture Sensitivity" CHAPTER TEN: CONCLUSION REFERENCE LIST... 61

11 LIST OF TABLES Table 1: GDP of Tianjin (Tianjin Bureau of Statistics, ) Table 2: GDP per capita of Tianjin (Tianjin Bureau of Statistics, ) Table 3: Real Estate Investments in Tianjin (Tianjin Bureau of Statistics, ) Table 4: Fixed Assets Investment in Tianjin (Tianjin Bureau of Statistics, ) Table 5: Direct Foreign Investment in Tianjin (Tianjin Bureau of Statistics, ) Table 6: Tianjin Population Distribution by Age (Tianjin Bureau of Statistics, 2000) Table 7: Employment/Labor Force in Tianjin (Tianjin Bureau of Statistics, 2000) Table 8: Numbers of Marriage and Divorce in Tianjin (Tianjin Bureau of Statistics, 2000) Table 9: Relationship of Education and Income in Tianjin (Tianjin Bureau of Statistics, 2000) Table 10: Annual Income Pattern of Tianjin Employment Population (Tianjin 29 Bureau of Statistics, 2000)... Table 11 : Main Factors of Peninsula Azure Bay (Sofun.com, 2004a) Table 12: Main Factors of New City Town (China Vanke Co. Ltd., 2000, and Sofun.com, 2004b) Table 13: Main Factors of Crystal City (China Vanke Co. Ltd., 2003, and Soufun.com Ltd., 2004~) Table 14: Main Factors of RenAi Haojing Manor (RenAi Group, 2003b, and Soufun.com Ltd., 2004d) Table 15: Main Factors of City House (Asia Resources, 2004, and Soufun.com Ltd., 2OO4e) Table 16: Main Factors of Xi'an International (Songjiang, 2003, and Soufun.com Ltd., Table 17: Annual Disposable Income per capita of Tianjin Citizens (Tianjin Bureau of Statistics, ) Table 18: Amount of Savings of Tianjin Citizens (Tianjin Bureau of Statistics, ) Table 19: Living Area per capita in Tianjin (Tianjin Bureau of Statistics, )

12 CHAPTER ONE: INTRODUCTION China has achieved a great success in her economic reform since late 1970s. Measured by a purchasing power parity basis, in 2003, with a GDP of $5,000 per capita, China already stood as the second-largest economy in the world after US, and her economy is expected to continue growing at 7% per year at least over next decade. Considering her huge population and increasing purchase power, China is considered by foreign investors as the final and largest market in the world. Real estate industry has become one of the most important contributions to China's economy. The growing economy generates a strong demand for housing products and makes them affordable for more and more Chinese people. Especially, in relatively economically developed major cities, real estate market is hot. In recent years, even the high-end real estate product, house, has already accepted by lots of residents in these major cities. American-styled house means single house with yards and garage, and is thought as an ideal dwelling by most people in the world. This paper provides a market analysis of Americanstyled house in current Chinese real estate market, specifically, in major cities' markets. A major city is selected as a platform for an in-depth analysis. For generalization, one of the four China's municipalities, a northeastern costal city Tianjin is selected, rather than the two hottest Chinese cities: Beijing, the political capital of China, and Shanghai, the economic capital of China. Chinese culture is so different from others in the world, but directs the ways of Chinese thinking, doing business, and customer behavior. Foreign investors should familiarize themselves with Chinese culture before entering Chinese market. This paper introduces some key points of Chinese culture and provides foreign investors with suggestions of how to do business in China.

13 CHAPTER TWO: ANALYSIS OF CONTEXTS IN MODERN CHINA 2.1 Introduction For foreign investors who plan to begin their business in China, the first step for them is to understand China's economic, political, and investment contexts. This chapter is designed to briefly but informatively and objectively provide the information about the three contexts to give them an outline of the current Chinese business environment. 2.2 Economic Context After over 25 years economic reform, Mainland China (For short: china)'^ GDP had reached RMB 11,670 billion (USD 1,400 billion) by the end of 2003, which made China become the 6th largest economic entity in the world. According to China's official statistics, the average annual GDP growth rate between 1979 and 2002 is 9.35%. It is predicted by some authorities that China would become the 31d in next 10 years after US and Japan if follows current annual growth rate, 7%. If measured on a purchasing power parity basis, in 2003, with 1.3 billion people but a GDP of just $5,000 per capita, China stood as the second-largest economy in the world after US (The World Factbook, 2003). The International Monetary Fund and the World Bank reported that China is expected to become the world's largest economy by the year 2015 (Wong and Maher, 1997). Factors supporting this view are outlined in a China-Windows' report: Two main attributing factors supporting much of China's rapid economic growth are: large-scale capital investment (financed by large domestic savings and foreign investment) and rapid productivity growth. Economic reforms led to higher efficiency in the economy, which boosted output and increased resources for additional investment in the economy. In addition, the private sector, consisting of semi-private township and village enterprises, and private companies and farmers should be credited for the speedy development of China's economy. The private enterprises account for 60% of China's GDP, up from nearly zero in (China-Windows.com, 2004a)

14 However, China's economic development is special, somewhat like US'S about one hundred years ago: the development is highly imbalanced. Eastern China is relatively developed, but Western part is underdeveloped; urban areas are relatively developed, but rural areas are underdeveloped. The top 9 developed provinces with 32% of China's population are all on the eastern side, and the total GDP of these 9 provinces accords for 60% of China's GDP in GDP per capita of urban areas in China was RMB 18,322.9 (USD 2,216) in 2001, which is 2.4 times of that of overall China (National Bureau of Statistics of China, 2002). 2.3 Political Context Since People's Republic of China was founded in 1949, China's official state ideology has been alleged to be Marxism-Leninism-Mao Zedong Thought. The Chinese Communist Party as the only one party eligible to govern the country has enjoyed the power for over 50 years since "China's political structure is often referred to as an authoritative one-party state by Western governments and, in particular, popular media. The reality is much more complex" (Sinomania, 2004) is a very important year for current China history, in which a far-reaching program of reform designed by Deng Xiaoping, the former China's leader, commenced. The reform is even called by some Western scholars as 'China's second revolution'. It marked a major turning point in China's modem political history, as it was intended to make China's institutions and political process supportive of the Four Modernizations, a national program of social and economic development (Bunge and Shinn, 1981). This reform in economic and political systems began with a policy of 'socialism with Chinese characteristics'. The purpose of the reform is mainly on increasing productivity by encouraging more economic openness and foreign trade. However, the reform at first focused more on economic side than political one. With deepening the economic reform, relative lag of political reform baffled the fast development of economy. Chinese government realized this situation, and accelerated the political reform process. One

15 significant step currently made was raising the principle of the 'three represents' for the Chinese Communist Party. The main principle of the 'three represents' is that the party should represent 'modem productive forces; advanced culture; and the fundamental interests of all the people'. Most political analysts think that it heralds a radical change to the party's role in Chinese society and the party's function will be to serve the increasingly powerful forces of business and industry in China along with her traditional role of furthering the interests of ordinary workers. The party first time called for successful entrepreneurs to join the party in its history; and the so-called 'capitalist' entrepreneurs may even join the party's powerful central committee. This is definitely a great improvement for the party and for the country, and is a significant political issue in China due to the party's absolutely predominant political position in the country (Young, 2002). Things are getting better, no matter economic side or political side. Chinese government and the governing party are all trying to find the best way to maximize all Chinese people's benefits. They are convinced that the way is to create a political context most fit for the economic development requirements and people's needs. 2.4 Investment Environment China is one of the most compelling economic stories of the time. Its immense potential of domestic consumer market, seemingly inexorable pace of economic reform, rapid growth-up of domestic purchase power, cheap labour cost, abundant and low-priced resources, and numbers of tempting successful cases all contribute to China's magic as a huge sponge to absorb the world's investment inflows. China's foreign direct investment (FDI) inflows surpassed those of the United States in 2002, making China the world's leading destination for foreign fund. The 2002 annual increases in both contracted and utilized FDI, of 20 percent and 12 percent, respectively, were particularly striking in light of the fact that overall world FDI flows declined in 2002 for the second consecutive year. (Global FDI fell 50 percent in 2001 and an estimated 25 percent in 2002). China's strong FDI inflows reflected new market openings tied to China's WTO entry, new

16 opportunities related to preparations for the 2008 Beijing Olympics, and the government's push to build up the nation's infrastructure (The US-China Business Council, 2003).

17 CHAPTER THREE: GENERAL ANALYSIS OF CURRENT REAL ESTATE MARKET IN CHINA 3.1 Introduction After the general introduction of the business contexts of China, this chapter focuses on Chinese real estate market. Since China's economic reform over two decades ago, China's real estate industry has experienced great progress. In recent years, real estate industry is growing rapidly in Chinese major cities, and has become one of the hottest sectors for investment. China's accession to WTO and successful 2008 Olympic bid are expected to be strong drivers for real estate market. 3.2 China's Real Estate Market Development Since People's Republic of China was found in 1949, the country's real estate industry has experienced four periods of development. The first period is from 1949 to 1984, and identified as 'dormancy' period, during which there was nearly no true real estate business because of government's forbiddance. The second period is from 1984 to early 1990s. This period is called as 'revival' period. Chinese central government decided to put forward an idea of 'developing' real estate industry. Commercial real estate development began appearing from the earliest opened costal cities then extending to internal cities. Most of early birds easily dig out their first barrel of gold because of lack of competition and government housing allowance for buyers. The third period is from mid 1990s to the end of 2oth century. This period is named as 'overheated' period. The high growth of economy ignited people's demand for housing. The early birds' legends of success spurred investors to plunge into the real estate golden mine. The fourth period began from the early new century and still goes on, which is called 'consolidation' period. After over 15 years market practice, Chinese local real estate developers are becoming

18 experienced. Chinese customers are also getting rational. In a word, the market is becoming more and more mature and standardized (Tse, 2002). China's real estate industry has achieved a great progress in past 20 years. The private home ownership has reached up to 60 percent in urban area, but the number was nearly zero 20 years ago. "China is perhaps the most successful country in the world to have developed a private housing market in such a short period of time" (China-Windows.com, 2004b) is a year worth to remember in Chinese real estate history. Before this year, China's urban employees enjoyed the welfare housing system. All employees from state-owned organizations had a right to be allocated housing from their organizations that in nature are owned by government. It is June 29, 1998 that Chinese government's 'new' policy: abolishment of welfare housing allocation took effect. The purpose of the policy is to stimulate the domestic economy, accelerate marketization, and eliminate unfairness. Since then, the private real estate market has experienced remarkable growth (China-Windows.com, 2004~). 3.3 Current China's Real Estate Market Profile Currently in Chinese major cities, real estate industry is growing with high rate, and has become one of the hottest sectors for investment. In major cities, real estate represents more than 50 percent of the total investment in fixed assets. In 2002, 47 of the top 100 millionaires from Mainland China listed in Forbes were engaged in real estate. Currently, there are more than 20,000 development companies, 20,000 real estate agencies and brokers and more than 30,000 property management companies. Public companies switching to development have reached 348, about 29 percent of total public companies (Wang, 2003, p 14). In recent years, the real estate business has become a major component of local economy. All local governments in China have worked out policies for the reform of urban housing system to promote commercialization of housing and healthy development of real estate business. The main purposes of the policies are: (1) to accelerate marketization of the real estate investment

19 structure by encouraging diversified investments by government, social organizations, enterprises and individuals; (2) to promote construction of economical low-cost housing for most urban residents with mid-low income; and (3) to establish a housing savings accumulation fund system to help urban residents buy their dwellings by requiring employers and employees to save a proper proportion of their income to their own housing fund account every month; (4) to encourage privatization of previously assigned state-owned housing by raising rents for stateowned housing while selling the existing state-owned housing at cost price; (5) to enhance mortgage loan system (China Internet Information Center, 2000). Chinese government has taken real estates industry as a new drive for the economic growth, and has taken various measures to support the industry. In 2001, total investment in real estate reached to RMB80 billion in China, accounting for 25 percent of the social fixed asset investment that year (People's Daily, 2001). Chinese real estate sector is experiencing the best development opportunity ever in history. From 1998 to 2002, the average growth rate of investments in Chinese real estate industry was about 20 percent. Only from January to October 2002, the growth rate of investments in real estate was up to 29.8%; the growth rate of housing construction completion was 27.5%; and the growth rate of housing sales was around 27.6% (People's Daily, 2003). In 2003, investment in real estate contributed to a substantial 18.3% of China's total fixed asset investment, approximately RMB1,010.6 billion or USD122 billion (Jones Lang LaSalle, 2004). China is expected to increase 5.5 to 6 billion square meters of housing floor space, or 70 million units of housing in the coming ten years. As people's living condition has been being improved continuously, the real estate market is going to keep growing stably and housing consumption is going to keep driving local economic growth (People's Daily, 2001).

20 China's real estate market as a whole still has huge space to develop, although some observers were concerned that some cities, like Beijing and Shanghai, are overbuilt. Actually, the whole market is far away from maturity. > First, from international point of view, real estate market usually keeps booming before GDP per capita reaches USD8,OOO. Nevertheless, China's GDP per capita only passed USDl, 000 in Even though measured on purchasing power parity basis, GDP per capita is USD5, 000, which is still under this number. > Second, urbanization rate of the world on average is 50%, and that of developed countries is around 75%, whereas the rate of China is only 38% currently, which is only about half of the rate of developed countries. The urbanization process is still going on and will be accelerated in the following decades. It is expected that around 20 million people will move to urban areas each year in the following years. The demand of the new urban immigrants for real estate would exceed the demand of current urban residents for increased amount of improving their residential situations. Third, the amount of consumption on real estate of Chinese urban residents is only 10% of that of their total consumption; whereas the number would be much bigger in developed countries. In China, total consumption only contributes 50% to the GDP, but in US the contribution is 80%. > Forth, the current housing floor space for each urban resident is 22 square meters on average in China, which is expected to increase to 30 square meters or more by Nevertheless, in US, the housing floor space per capita is around 67 square meters and in Europe, the number is about 37 square meters.

21 > Fifth, home loans and mortgage only accords for 10% of total loans in Mainland China, whereas this number is 40% in US and 50% in Hong Kong. Besides, people have desire to improve their living conditions. All of these will generate huge demand for new real estate projects and stimulate real estate development. Therefore, space for growth is very large (Zhao, 2003). 3.4 WTO & Real Estate China's successful accession to the WTO in 2002 has a positive impact on China's real estate market as a result of increased business activity, enhanced market-oriented business operation, more fair market directed by international business rules, and more systematic development of China's economy. China's accession to WTO makes China more attractive to foreign investors because of her market would be more internationally normative. The accession would further expedite China's economic development. As a result, more and more people can afford their dreamed housing. "In 2002, China's first year of WTO membership, investment in real estate rose by 21.9% to Rrnb773.6 billion, among which investment in commercial residential housing accounted for 68.1%, up 23.1% from the prior year" (China Law & Practice, 2003, pl). China's accession to WTO would not only provide enormous business opportunities to foreign investors, but also means that China would must follow international business rules. China would play an increasingly important role in the flow of international real estate investments both outward and inward-bound although the impact could be gradual and unevenly spread among different regions (China-Windows.com, 2004d). While China's WTO accession has created greater opportunities for foreign investors in the market, who in general find themselves on a more equal footing with domestic players, the country is certainly not immune to the cyclical nature of the global real estate market and China's government is not yet beyond attempts to micro-manage sub-sectors of the industry (China Law & Practice, 2003, pl).

22 3.5 Olympics & Real Estate Besides China's accession to WTO, China's successful 2008 Olympic bid is expected to be another strong driver for real estate market. The National Statistical Bureau expects the games will boost China's GDP growth by a mere % per year from 2002 until US investment bank Goldman Sachs has similar predictions of a 0.3% increase every year until a cumulative gain of USD32 billion at prices averaged over the period. However the impact on Beijing will be profound, says Melinda McKay, senior vicepresident of research for Jones Lang LaSalle and co-author of the report, 'Reaching Beyond the Gold: The Impact of the Olympic Games on Real Estate Markets'. She says that while three out of the past four Olympic host cities saw a net contribution to their GDP of just 1-3%, Beijing's successful bid would have a far-reaching affect (Leary, 2001, p61). Chinese government would invest heavily on infrastructure projects, including preparations for 2008 Olympic Games in Beijing and few assistant cities like Tianjin and Qingdao, which in turn would create a more desirable 'hard environment' for foreign investment. In the first half year of 2002, investment in fixed assets grew 21.5% in China up to RMB1.45 trillion (USD175 billion) (Young, 2002).

23 CHAPTER FOUR: SELECTION OF A CHINESE CITY 4.1 Introduction Owning the third largest landmass in the world, Mainland China has 31 provinces including 4 province-level municipalities. China's economy is highly imbalanced: urban areas are more economically developed than rural areas; and eastern costal regions are more economically developed than inner regions. House product is a high-end real estate product in China. Therefore, the potential market would be focused on a costal city. Seven criteria are used to evaluate and select a city as the platform for in-depth analysis of a local real estate market. Finally, a Chinese northeastern major city, Tianjin, is selected. 4.2 Criteria Major Cities Politically, each Chinese city is composed of urban area and rural area. By the end of 2000, China had 663 cities, of which 13 had populations of more than two million each in the urban area; 27 had between one and two million each; 53, between half and one million each; 218, between two hundred thousand and half million each; and remaining 352, less than two hundred thousand each (China Internet Information Center, 2001). The 13 cities with over 2 million population in their urban areas are: Shanghai with 9.862million population, Beijing with million, Chongqing 6.609million, Tianjin million, Wuhan million, Harbin million, Shengyang million, Guangzhou million, Chengdu million, Nanjing million, Changchun million, Xi'an million, and Dalian million (China Internet Information Center, 2001).

24 From political point of view, China has four province-level cities, called 'Zhi Xia Shi' that means municipalities, which are directly under the Central Government. They are the four biggest cities in China, with urban population over five million each: Shanghai, Beijing, Chongqing, and Tianjin. In addition, there are 15 big cities, so called 'Ji Hua Dan Lie Shi' that means listed cities with autonomous economical planning authority, which are the vice-provincelevel cities. Mainland China has 31 provinces including 4 municipalities. Each of the remaining 27 provinces has its own capital. Therefore, China has 27 province capitals plus 4 municipalities. These 31 big cities are of course major cites. Besides, there are 5 vice-province-level cities, which are neither any of the 27 province capitals, nor the 4 municipalities. As a result, the major cities are defined as the cities that satisfy the requirement of either municipalities, vice-province-level cities, or province capitals. So, totally, there are 36 major cities in China. Of course, the 13 most populated cities are all included in the major cities Economic Development As mentioned earlier, the development of Chinese economy is highly imbalanced. Eastern costal areas are economically developed than western and central areas. Since the beginning of economic reform in 1 WOs, China has gradually formed three big regional economic circles fkom north to south along China's east coast: Bohai sea circle economic circle, Yangtze River Delta economic circle, and Jujiang River delta economic circle. Except Fujian Province, the most economically developed provinces are all included in the three circles. According to National Statistics Bureau, the three big economic circles' GDP, industrial added value, and export trade accorded for 61.2%, 58.3%, and 86.5% of those of Mainland China respectively. Whereas, the three big circles only cover 9 provinces out of Mainland China's 31 provinces: 8 of them are China's most economically developed provinces, plus Hebei province.

25 House is a high-end real estate product for Chinese customers currently. As a result, only major cities have high potential as target market to promote such high-end product. Major cities in the developed eastern costal areas are the highest economically developed regions in China now. Therefore, a major city in these three big coastal circles will be selected as a target context. The three economic circles include 13 major cities from north to south in the costal areas: Dalian, Beijing, Tianjin, Qingdao, Jinan, Nanjing, Shanghai, Ningbo, Hangzhou, Fuzhou, Xiamen, Guuangzhou, and Shenzhen. According to National Statistics Bureau, in 2003, the ranking of disposable income per capita of the 13 cities is as follows: Shenzhen RMB23,906, Guangzhou RMB 15,003, Shanghai RMB 14,868, Ningbo RMB 14,277, Beijing RMB 13,883, Xiamen RMB12,915, Hangzhou RMB12,892, Jinan RMB11,013, Tianjin RMB10,3 13, Nanjing RMB10,194, Fuzhou RMB10,183, Qingdao RMB10,074, Dalian RMB9,lOl Potential For Real Estate Investment China's three real estate research authorities, Development Research Center of the State Council of China, the Institute of Real Estate Studies of Tsinghua University, and SouFun Academy, made a through and objective research on real estate investment potential of 35 major Chinese cities. Tens of factors were used as variables and criteria to evaluate the cities' potential for real estate investment. Shanghai and Beijing, the two biggest cities of China, took the top two positions, and Tianjin was ranked at loth (SouFun.com Ltd., 2003) City Overall-Competitive-Advantages Another authoritative report is Chinese City Overall-Competitive-Advantages Ranking Two hundred and sixty six cities were evaluated by twelve comprehensive criteria: human resource, finance, technology, city structure, infrastructure, geographic location, environment and weather, culture, laws and regulations, government administration, entrepreneurship, and

26 openness. Tianjin was at the 5th position after Shanghai, Beijing, Shenzhen, and Guangzhou (World Executive Institute, 2004) Average Land Price A city's land price directly determines the total costs of real estate development in the city. It also reflects the demand for real estate projects in the city. According to National Statistics Bureau of China, Tianjin's land price on average was 6th high in 36 major cities in The two top high cities were Beijing and Shanghai (The International Institute for Strategic Studies, China, 2004) Hot Cities For Job A city's ability to attract people to come for job is an important determinant for the city's development. It also shows the potential of real estate demand, since economic development boosts demand and new immigrants generate new demand as well. Based on statistics from ChinaHR.com, the top 12 hot cities for job in 2003 were: Beijing, Shanghai, Guangzhou, Shenzhen, Nanjing, Tianjin, Chengdu, Hangzhou, Shenyan, Xi'an, Jinan, and Ha'erbin, among which Tianjin was listed at the 6th. Most of the job hot cities are from the three big economic circles. Beijing and Shanghai enjoyed the top two positions again (ChinaHR.com Corporation, 2003) Author's Familiarity For an in-depth analysis, nothing is better than familiarity. The author had lived in Tianjin for over 26 years and he had worked in the real estate industry in this city for over 4 years. The author's familiarity with the real estate industry in this city is a very important determinant for city selection.

27 4.3 Conclusion Based on the evaluation above, and for generalization, Tianjin is selected as the target city. Tianjin is one of the top Chinese major cities, which has a high potential for such high-end real estate product as house. Not like Beijing and Shanghai, both of which are the two hottest cities in Mainland China now not only for real estate investment but for everything else, even both of which are overbuilt said by some observers, Tianjin as another top major city directly under Chinese central government, still has huge market potential for real estate investment. The author's familiarity with the city finally makes the decision more reasonable.

28 CHAPTER FIVE: TIANJIN 5.1 Introduction With 600 years history and over 10 million population, Tianjin is one of the earliest and biggest industrial and business central cities in China. As the closest port city to Beijing, China's capital, Tianjin is located in Beijing-Tianjin area, which is considered as the region with the highest density of intellectual resources in China. Tianjin's location determines its particular experience in its history, especially in modern history, and then affects its local culture. Finally, the city's current economic and social contexts are presented in this chapter. 5.2 Tianjin Profile Tianjin, one of the four municipalities directly under the Central Government in China, is located in the northeast of the North China Plain and is the biggest closest coastal city to Beijing, the capital of China. The city is one of the biggest industrial and port cities in China and it is also known as 'the diamond of the Bohai Gulf. Tianjin covers an area of 11,000 square kilometres and has a population in excess of 10 million people (TravelChinaGuide.com) History Tianjin has a long and illustrious history, from an ordinary fishing village to the most important trade center in Northern China. Tianjin was considered to be one of China's most important military fortresses in the Yuan Dynasty ( ) due to its particular geographic location as access portal to Beijing, the national capital. Its name, 'Tianjin', was graciously bestowed by the Emperor Zhudi in the early years of the Ming Dynasty ( ). Tianjin means 'the place where the emperor crossed the river'. The city of Tianjin was found in 1404 and until this year, 2004, the city is exact 600 years old. After the Opium Wars in mid 1800s, Tianjin

29 was further expanded to become the second largest business and communications center in the country. By the end of the 19th century, the city had grown into a bustling center for international commerce and one of the most advanced industrial cities of China (Chinacitynet.com, 2002). Tianjin's location in the middle of North China's gold coast was a natural setting to be developed as a trading port. Today Tianjin has China's largest container wharf and ships from every country of the world use its facilities. Major domestic and international airlines serve the coastal international airport (Chinacitynet.com, 2002) Education The population of Tianjin is about 10 million, and the overall quality of Tianjin people is among the best in the country. Tianjin is rates as number 3 among major Chinese cities with comprehensive Hi-tech capabilities right after Beijing and Shanghai. Tianjin has 37 universities and colleges, 18 of which have the qualification to award degrees. By the end of 2003, the number of undergraduate and graduate students was 245,213, among which graduate students was up to 20,657. A system of higher education has been formed in Tianjin to provide a balanced composition of professional training. (Tianjin Window Network Media Inc., 2004). Beijing-Tianjin area is considered as the region with the highest density of intellectual resources in China. Tianjin itself possesses over 150 research institutions and more than 600,000 professional personnel. By the end of 2004, the years of education of new labour force is expected to be 14 years on average. Tianjin's human resource advantages can provide foreign investors with qualified personnel (Tianjin Window Network Media Inc., 2004) Culture As one of the biggest Chinese business port cities for over one hundred years, the busy trading activities have endowed Tianjin with enormous vitality. Tianjin is located at the lower end of nine tributaries merging into the Haihe River, which as one of the longest rivers in China flows

30 through the city. Tianjin has honest and simple social customs and morals. Tianjin's local culture has both the features of old inner city: conservative and honest, and of the riverside: warmhearted, vigorous, and straightforward. Due to Western countries' invasion in 1800s, Tianjin experienced many European cultures whose integration within a Chinese society has made Tianjin's urban culture uniquely enchanting (Tianjin Enorth Netnews Co. Ltd., 2001). Tianjin, like many other Chinese coastal cities, harbors a history heavy with military squabbles. Because of unique location that Tianjin is the closest coastal big city to Beijing, the capital of China, Tianjin was one of the most desirable cities foreign invaders wanted to occupy in old China. After Opium Wars in mid l8oos, totally nine invaders: Great Britain, France, US, Germany, Japan, Russia, Italy, and Austria, swarmed through Tianjin's streets and claimed residency. These nine invaders' claimed residency was up to 1,556.7 hectares, which was 9.98 times of the area of old Tianjin city. Though a source of local loathing, the over-half-century occupancy did colour the city with a mosaic wonder of architectural and cultural influences. The bright side is that it brought Western advanced technology and ideas which in turn accelerated the city's modernization. Even by now, you still can find over one thousand western-styled buildings of that time in Tianjin. With a combination of traditional Chinese cultural architecture and the rich mixture of architectural cultures from other parts of the world, Tianjin is known as the 'World Museum of Architecture' (Tianjin Daily, 2004).

31 5.2.4 Economic Context Tianjin is located in one of China's three economic circles, Bohai Economic circle, and is adjacent to China's capital, Beijing. Tianjin is one of the most developed cities in China and has enjoyed high economic growth rate for decades. GDP of Tianjin doubles nearly every 7 or 8 years after China began reform its economy over 20 years ago. Table 1: GDP of Tianjin (Tianjin Bureau of Statistics, ) GDP of Tianjin (Billion RMB)

32 Table 2: GDP per capita of Tianjin (Tianjin Bureau of Statistics, ) GDP per capita of Tianjin (RMB)

33 Real estate investment is one important component of local economy. Due to the fast local economy growth and corresponding increasing demand for housing, real estate investment grows dramatically, even faster than GDP. Table 3: Real Estate Investments in Tianjin (Tianjin Bureau of Statistics, ) Real Estate Investements in Tianjin (billion RMB)

34 Table 4: Fixed Assets Investment in Tianjin (Tianjin Bureau of Statistics, ) Fixed Assets Investement in Tianjin (billion RMB)

35 Since 1978, when China opened her door to the world, Direct Foreign Investment has increased considerably. Especially, as an important port city, Tianjin would attract more foreign investment than ever after China entered WTO in Table 5: Direct Foreign Investment in Tianjin (Tianjin Bureau of Statistics, ) Direct Foreign Investement in Tianjin (billion USD)

36 5.2.5 Social Context According to the 5th National Census in 2000, Tianjin Municipality had 100,088 thousand population, and 303,170 thousand families (Tianjin Bureau of Statistics, 2000). This is a huge market. More importantly, this real estate market still has so much space to exploit. It is a developing market. Percentage of people in labour age (15-65) is 74.93% of population in Tianjin (Tianjin Bureau of Statistics, 2000). There is enough labour resource to support the growth of economy and consumption. Table 6: Tianjin Population Distribution by Age (Tianjin Bureau of Statistics, 2000) Age Composition W Oover 65

37 Table 7: EmploymentILabor Force in Tianjin (Tianjin Bureau of Statistics, 2000) Percentage of Employment Population in Labor Force Population El Labor Force W Employment

38 New couples are a main source to buy a residence. The number of marriage is huge. Besides, the number of divorce kept stable recent years, but little increased. Table 8: Numbers of Marriage and Divorce in Tianjin (Tianjin Bureau of Statistics, 2000) Marriage and Divorce n (couples) llnumber of Divorce

39 Statistics show that average annual income is positively proportionate to schooling level. Analysis on this can help to identify target market. Table 9: Relationship of Education and Income in Tianjin (Tianjin Bureau of Statistics, 2000) - - Population Educational Composition Less than grade 9 Secondary school graduation certificate College Diploma Above (include College Diploma, University Degree Average Annual Income in Employment Population (RMB) 1 College Diploma Above include University College Degree Diploma, Secondary school graduation certificate Average Annual Income in Less than grade 9 I I

40 Pattern of annual income is also good factor to help analyze the market. Even though the following numbers are from statistics in 2000 and the income grows significantly these years, they still can show the idea. Table 10: Annual Income Pattern of Tianjin Employment Population (Tianjin Bureau of Statistics, 2000) Estimated Employment Population Annual Income Pattern

41 6.1 Introduction CHAPTER SIX: ANALYSIS OF CURRENT HOUSE MARKET IN THE SELECTED CITY Westem-styled houses first appeared in Tianjin as early as late 1800s, when nine foreign invaders claimed residencies in this city. Tianjin local developers tried to develop house projects in early 1990s and did not achieve their expectations. In early new century, the local developers had accumulated market experiences and capitals; local growing economy also made people pocket deeper than ever. Several local real estate giants commenced a new tide of house project development nearly at the same time; hundreds of thousand square meters of houses were under development in the best areas of the city. Five major local players and their projects are analyzed in this chapter. 6.2 Tianjin's House Market House Market Development Tianjin local developers began developing house projects in early 1990s in Tianjin. They were called as predecessors in Tianjin house market by local peers. Most of the projects done in this period are single houses. The major three of them are NINGFA Garden, TIANBEI Villa, and HOUTAI Villa. These predecessors still enjoy their reputation even today, because they made the first try to touch the high-end real estate market. However, due to lack of experience and information in developing house projects, the finished products and sales did not reach their prior expectation. Since late 1990s, Tianjin house market began to have a stable growth. The first large- scale house project is VANKE's New City Town, which is a townhouse project developed in