February 28th, 2016
Harvard Talks Asia Real Estate
By Jane Philbrick, Harvard Graduate School of Design, Master in Design Studies '16
CAMBRIDGE, MA -- Harvard GSD Real Estate Development (RED) Club and Asia Real Estate Association (AREA) joined the Harvard-wide partnership of HBS Asia Business Club, HLS Harvard Asia Law Society, and HKS Southeast Asia Caucus/China Society to convene the 26th annual Asia Business Conference (ABC) last weekend, February 27-28. Jointly hosted at the GSD and HBS, the theme of the conference, "Disruption, Continuity, and the Way Forward," zeroed in on anxious markets bedeviled by $30/barrel crude and the looming credit crisis in China, presaging slowdown of the world's no. 2 economy. With a less seasoned and strategically focused cast of panelists -- to riff off the 2006 international best-seller Eat, Pray, Love -- ABC 2016 might have been billed, "Oil, Debt, Pray."
GSD RED Club and AREA co-organized lectures and roundtable discussions offered macro- and fine-grained analysis and perspectives on the real estate sector, the preferred investment vehicle for Asian sovereign wealth, largely in US markets. The takeaway: "Don't panic." While China's economic imbalance is extreme, allowed Dr. Jiming Ha, former IMF banker and Goldman Sachs vice chairman and chief investment strategist, Asia division, "Concern to a certain degree," he argued, "is overblown." Making his case with numbers-driven data, Dr. Ha observed, "There are actually opportunities to stay strategically involved. We don't have to panic."
Strategic positioning -- not just "dumb Chinese money" -- was the by-word of the weekend conference. Saturday's "Re:designing Real Estate" at the GSD featured panelists Christina Gaw, partner and managing principal, Gaw Capital, a Hong Kong-based real estate private equity specializing in value-added real estate investment globally, with Yixuan (Stephen) Gao, CEO, Metro Land Corporation, and Kai-yan Lee, managing director, Vanke Holdings, US. For Gaw, the strategy is finding stable assets/markets for new capital. Deploying an organizational platform of money, the company develops distinctive operating platforms in creative hospitality, creative office, biotech, and education. Gaw presented key properties such as Soho House, Chicago, an iconic building with a history, "a story to tell," in an up-and-coming neighborhood. A critical transportation link leveraged a 50/50 JV, Gaw noted, "You have to sell the exit."
Transit networks are Metro Land's first criterion, stated CEO Stephen Gao, illustrating the development, sale, and leasing company's transit-oriented strategy with recent mixed-use redevelopments that adapt working rail yards in Beijing. As the capital's population exceeds 30 million residents, Metro Land targets the 10+million subway riders as its core end users and delivers projects through an aggressive four-point business model honed to dominate the TOD niche: "1. Exploit strengths; 2. Set up a barrier to entry; 3. Follow trends; 4. Stay focused." Kai-yan Lee, managing director of the global behemoth China Vanke Co., US subsidiary, pitched against expectation, proposing a modestly scaled, "human-centric" strategy that re-thinks "building a good home" through simple design concepts of scale, life cycle, and function. His whimsical analogy for the complex development process is the octopus -- acutely perceptive, highly coordinated and responsive, flexible and adaptive. These laudable attributes notwithstanding, Lee challenges the industry to re-invent itself, "think outside the octopus," to deliver better products, build better communities, generate better financial and environmentally sustainable returns.
Sunday morning at HBS, the "Innovative Business Models in Real Estate" panel convened industry experts in global finance and development: John Jacobsson, executive vice president, The Related Companies, New York; Thomas Yoo, senior managing director (New York office), FG Asset Management, Seoul; Kate Shin, founder, WEMIT, LLC, and owner, Waterfall Mansion and Kate Shin Gallery, New York; with Stephen Gao (Metro Land), and Kai-yan Lee (Vanke) returning for a second-day stint; and Bing Wang, associate professor and co-director, GSD Master of Design Studies, Real Estate and the Built Environment, moderator. The roundtable format allowed exchange and discussion among panelists, offering multifaceted perspectives on market pulse, process, deal construction and transactions. In contrast to the buoyant optimism of Saturday's panel, where practiced reassurances on China's slowing economy readily countered would-be naysayers -- "growth is slowing as the market matures, which is to be expected, but overall the numbers are still bigger" -- the tenor of the Sunday morning table was subdued and cautious, starkly at odds with the spectacular performance of each participant in their sector. As Thomas Yoo, FG Asset Management, remarked in the luncheon keynote session, while the US economy is healthy, "a strong memory of 2008" persists. This somber recollection conspires with recognition that today's economies are global, prompting concern about exposure for US markets amidst China's extreme and unsustainable economic imbalance. Addressing the obvious but unspoken secondary threat, Yoo acknowledged, "If oil doesn't recover, who knows what will happen here." Perhaps already ahead of the game with his novel "thinking outside the octopus" business model, Vanke's Lee conceded, "Any party comes to an end." Cushioned by the US$40 billion Vanke raised in 2015 and the 120,000 households anticipated to move into New York's five boroughs, Vanke US base of operations, by 2019, his sang froid may be warranted. "There's tremendous imbalance between supply and demand," observes Lee, eyeing opportunity.
The 2008 domestic market collapse prompted The Related Companies to look internationally, Jacobsson recounts, "Although ultimately, we didn't do anything." Finding areas of capital coming into the US from China, Related began raising funds in Asia from China, Korea, Japan, Hong Kong, and Singapore. The company has since sourced US$1 billion through the EB-5 immigrant investor visa program, largely mezzanine debt at 6% - 7% return. EB-5 provided critical financing for the otherwise difficult to fund steel platform that spans the rail tracks at Hudson Yards, midtown Manhattan's west side, undergirding the project's 90-story, 2.7MM SF office tower. "We were able to explain that the platform was creating land," Jacobsson recalled, "EB-5 investors understood that."
FG Asset Management pursues a yield-driven strategy. "Not wealth-builders," Yoo highlights, "Singles and doubles. We're not going for the homeruns." As a small country of 60 million, approximately the population of New Jersey, "Korea sovereign wealth management," he explains, "has to go global." The focus is gateway cities with long-term equity and mezz debt investment, consistent 4%-5%-6% and 6%-7% returns; protecting principal is a chief priority. "We have a pretty good track record," Yoo affirms.
As the sole woman on the panel, WEIMIT's Kate Shin is also an outlier in her development approach, she noted, acknowledging her gentlemen co-panelists and their multi-billion dollar portfolios. A former $20 billion private equity real estate financier with Angelo, Gordon & Co., New York, Shin's content-driven, community development foregrounds creative collaboration, emphasizing process and lifestyle. To operate in the competitive New York arena, she warrants, "You have to focus on value-added. It's an emotional strategy. Together we create this amazing experience." Waterfall Mansion, Shin's acclaimed collaboration with architect Toshiko Mori on Manhattan's Upper East Side, hosts secondary programming as a high-end event venue and art gallery.
Afternoon keynotes featured three presenters: Mark Wallace, senior vice president, engineering & sustainability, UPS; Thomas S. Yoo, FG Asset Management; and Dr. Jiming Ha, Goldman Sachs, Asia division. Offering the fresh perspective of a logistics company operating in the field, Wallace identified being "part of the culture" as a key component of the company's China strategy. Wallace opened the first UPS operations in China 30 years ago, affording him a ground-up view of the emerging "New Asia." His presentation, "Logistics: Key to Asia's Second Act," highlights transition and transformation, stating, "Asia changed the world and Asia is changing." The New Asia, Wallace contends, is information and technology. "No longer the world's low-cost workshop, 'Made in China 2.0'," Wallace reports, "moves quality and service to the top of the list." With economic growth expected to double to US$12 trillion by 2020, logistics and transportation are critical and UPS is ramping up operations. "Cost-efficient countries," he argues, "must be supported by logistics." Looking ahead, he forecasts China's new middle class, a new generation of consumers with 600 million internet users, will drive e-commerce. Remarking that 2016 is the Year of the Fire Monkey, Wallace closed with undaunted determination, "Failure is not an option."
Thomas Yoo's succinct presentation on investment strategies in global real estate overviewed prevailing market metrics charting modest growth world-wide, low inflation, affordable housing and energy costs, and rising though cautious consumer confidence. Drawing comparisons between current conditions and those preceding the 2008 financial collapse, Yoo acknowledged that as in 2006, CMBS comprised half the market in 2014. However, new regulations such as Dodd Frank, Basel III, Risk Retention, and FIRPTA requiring skin in the game and stricter scrutiny on lending practices, he emphasized, safeguard investment. Despite these regulatory brakes on the industry, real estate now is very attractive, with Manhattan the preferred market for foreign capital by a staggering three-fold multiple (US$44.1 billion) in 2015. Yoo showcased a recent project with developer Edward Minskoff in New York City's burgeoning tech hub, 51 Astor Place, designed by Pritzker-Prize winning architect Fumiko Maki. Forecasting future opportunities, Yoo identifies a "huge wall of CMBS refinancing" coming due, which he estimates at $250 million. He advises against pursuing small-scale brokerages, where regulatory constraints make survival unlikely -- "don't look for a job there," Yoo quips, "unless you like a challenge."
The final speaker of ABC 2016's real estate-themed programs, Dr. Jiming Ha, Goldman Sachs, Asia division, presented his economic analysis with the surgical precision and detachment of a pathologist conducting an autopsy. Not unwarranted given the dearth of reliable data generated by China, a practice of misrepresentation with the habit of history. In the 1950s, Ha relates, "Local level growth was artificially inflated in order to surpass UK economic performance; now it is inflated to surpass the US." Ha set forth his mission bluntly, asking, "What are China's fundamental problems? Can they be solved?" Data quality, he acknowledged, is "very problematic."
Addressing the simmering anxiety of attendees, Ha repeated assurances that US exposure is "quite limited, approximately 6%." He calibrates German and Australian bank exposure at 10%. Ha then proceeded to catalogue the monumental, entrenched, and pervasive challenges China faces: credit crisis, negative demographic dividend (a legacy of the One Child policy), diminishing foreign reserves, currency instability, and overheated property markets ("China tried to be landlord for the country," he laments with open incredulity). Among the urgent reforms needed, Ha singles out "Hukou," an urban residency system intended to channel incoming migrants toward less desirable third- and fourth-tier cities through social benefit eligibility restrictions in housing, health care, and education. SOEs (State-Owned Enterprises) must be privatized and, if not economically viable, shut down -- not monopolized, which is China's current and flawed remedy. Environmental reform is urgent. Ha estimates air and water remediation will cost US$305 billion; soil clean up, another US$1 trillion. Currency depreciation over the next two years, he forecasts, will begin in September and October 2016, after the Hangzhou G20 summit and the IMF-approved reserve currency status for the Yuan goes into effect. "The Chinese government doesn't want the currency to collapse before that," Ha infers. Until then, despite recent tightening, massive outflows of capital from China will continue, with much of it finding safe harbor in US real estate, especially New York City. Against this bleak backdrop, Ha identifies strategic opportunities in healthcare ("Health is Wealth"), elder care, tourism, entertainment, sports and fitness, and e-commerce.
Assurances of limited exposure to China's inevitable and very likely hard and protracted landing aside, recognition that the disproportionate influence of Chinese capital in US real estate will not be easily replaced fuels concern that the US property market is poised for a domino-effect downturn. With so much Chinese capital outflow priming development, when the spigot runs dry -- and it will -- do we discover a fortuitous harmony of demand balanced by opportunity, or merely paper tiger opportunism?
A specter of Chinese-style, vacant ghost towns looms amidst the development frenzy of Wall Street, midtown, and the west side. Zombie economy begets zombie city. The currency clock is ticking.
Jane Philbrick is an artist and Master in Design Studies candidate '16 at the Graduate School of Design, Harvard University, with a concentration in Critical Conservation. She is a member of the Harvard GSD Real Estate Development Club (Director of Communications, Fall 2015). Jane also writes for the Harvard GSD Loeb Fellowship blog.