CCIM Feature

Finding a Foreign Focus(1)

Building a business in a foreign country is not the easiest path to take in commercial real estate, especially in a place like China that offers so many barriers to entry: language, political structure, and cultural disposition to name a few. Yet Dianne Willoughby, CCIM, has done it by developing business traits not always associated with commercial real estate: understanding, a lack of assumptions, and patience. "In China, things take time," she says. "In time, all unfolds."

Willoughby’s company, Acquisition Research Corp. of Honolulu, has an office in Beijing and plans to open offices in Shanghai and Hong Kong this year. Her clients include large Chinese government-owned and private real estate development firms. She spends about 35 percent of her time in China and another 5 percent in Hong Kong. "By dollar value, about 90 percent of my work is China-based," she says, adding that the "scale of projects in China typically is much larger than I normally see in Hawaii."

World’s Next Superpower
While doing deals in the Middle Kingdom requires a different approach, similarities also exist. "Relationships are important in China," Willoughby says, just as in the United States. "My most important relationships are with government officials and bankers. Also important are the relationships with joint venture partners and potential partners. Developing these takes time and it takes ‘being there’ for the long term."

How long is long term? Although analysts have promoted China as the next world superpower for almost 20 years, recent advances in technology and attitude are bringing this promise closer to reality. Pursuing a market of 1.2 billion consumers, American companies have invested $21 billion in China since 1978, according to a recent story in U.S. News & World Report. Its growth rate is among the fastest in the world. And many expect China’s highly educated work force of around 19 million soon to dominate the technology industry, according to a recent Time magazine article.

In China, Willoughby spends half her time sourcing money for others as a broker and the other half working on developments in which her company has invested. Currently she is focused on "two primary markets: affordable housing and seniors housing — the continuum from independent living, through assisted living, to skilled nursing. Both of these are emerging markets in China," she says.

She is involved in a $90 million, 900-unit affordable-housing development in the Nanshi district of Shanghai. "The project will redevelop two city blocks that formerly contained substandard housing," she says. "As the foreign joint venture partner, my company is primarily responsible for arranging the construction financing. The Chinese partner is part of the Shanghai city government and is contributing the land. All of the design and engineering work was done in China, and the construction will be done by a city-owned construction company."

Privatizing Housing
Her location and timing are on the mark. Shanghai, at 13 million people, is China’s largest city and is experiencing a rebirth as "the Manhattan of 21st-century Asia," according to Time. Shanghai has spent almost $19 billion on infrastructure improvements, including highways, rail lines, fiber-optic phone lines, a sports stadium, a museum, and a performing-arts center.

But in view of a skyline of more than 1,000 new skyscrapers, many Shanghai residents still live in meager surroundings. "More than 60 percent of the residential dwellings in 1990 were without indoor plumbing or electricity," Willoughby says. "Each person may have 10 sf of personal space."

The city is eager to develop these substandard areas and provide "clean modern housing" for private ownership, she says. Last year, China’s central government ended the long-standing tradition of providing free or subsidized housing. Now, "All people are encouraged to buy their own homes," Willoughby says. "The Bank of China has made home mortgages available for the first time, and as a result, home building and related industries like home decorating are taking off."

But there are major differences from U.S.-style development. "The cost of developing housing or anything else in most cities includes the cost of relocating the current residents and expanding the infrastructure to accommodate the new buildings," she says. Currently her project is at the stage of relocating more than 111 families that formerly lived in the neighborhood. "Each of these families will receive a relocation allowance, which they can use to make a down payment on a new home," she says.

Willoughby also is negotiating to co-develop a retail center in Shanghai with an American and a Chinese partner. With another American partner, her company is developing a community of single-family homes to rent to foreign expatriates in Shanghai’s newly redeveloped Pudong district. "We also represent many, many Chinese government and private enterprises that are seeking [U.S.] technical partners for specialized projects in China such as distribution centers, a network of transportation hubs, wholesale markets, and food-processing facilities," she says.

U.S.-Sino Relations
U.S.-Chinese relations have cooled in recent months due to the bombing of the Chinese embassy in Yugoslavia and the charge that Chinese spies stole U.S. nuclear technology secrets. However Willoughby says the fallout mostly has been on the American side: "The bombing and spying reports have done much more damage to my ability to bring Americans to China than they have done damage to the Chinese interest in having the Americans come. The Chinese seem to be particularly good at compartmentalizing politics and business in separate boxes," she says.

She has represented several Chinese investors seeking U.S. investments and closed on a purchase of an office building last year. "I think this type of activity will increase, assuming that relations between China and the U.S. don’t deteriorate further," she says.

To spur Chinese investment in the United States, Willoughby’s company has joined with the China Business Travel Bureau in Beijing to promote specialized U.S. real estate investment tours. The first trip, scheduled for September, includes San Francisco, New York, Washington, D.C., and Honolulu.

Willoughby hopes to do three or four tours each year and is looking for cities where the "market offers the opportunity for good value for new investors." To qualify for visas, investors must post a bond of 100,000 renminbi (about $12,500) that is refunded when they return to China.

Investment Criteria
Although bullish on the biggest of the Asian tigers, Willoughby cautions that "investing in Chinese real estate is still not for conservative investors. The body of law is small, but growing. It’s not possible to own land outright, but you can purchase the land-use right for a period of years. Owner-user property makes sense for a lot of multinational companies like Motorola, General Motors, and others."

Her personal criteria for Chinese investments are: "Does the project have the support of the Chinese government? If the answer is no, forget it. Can I be sure that I won’t lose money? I’m not looking for windfall profits, I just don’t want to get burned. And, will my investment improve the lives of the Chinese people?"

Yet even investments that meet those standards must be transacted with a clear understanding of Chinese cultural practices. "Never assume you know anything in China," she says. "Every time I hear a horror story about a foreign investment that got into trouble in China, it can usually be traced to assumptions that were not in sync."

Perhaps patience is the biggest asset. "In the U.S.," she says, "people expect things to go fast — quick decisions, quick action. People who are not Chinese who go to China looking for a fast killing will suffer. I’m in China for the long term. I want to take part in its development and play a small role in helping to improve the quality of life for the Chinese people."

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