YangGuang Co., Ltd. is a public company listed on the Shenzhen Stock Exchange since 1996. In 2006, YangGuang signed an investment agreement with Reco Shine Pte Ltd., which is a subsidiary of GIC Real Estate Pte Ltd., and became the first A-share listed real estate company in China with a foreign investor being its major shareholder.
Mr. Tang Jun, Chairman, Yangguang, tells us bout his company plans and the Chinese real estate market.
Could you give us some background about your company?
YangGuang focuses on holding, investing, leasing and managing the operations of commercial real estate, while at the same time being involved with the development and management of high-end apartments, hotels, office buildings, and urban complexes. In order to establish a competitive advantage in the commercial real estate industry, our company strives to integrate commercial resources to create a model that covers investment, planning, development, and the business operations of the entire process. The company is committed to maximizing returns for investors, providing the best benefits for its tenants, and creating enjoyable shopping experience for consumers. With more than ten years of professional experience in real estate development operations, the company has set up a business scale that focuses on development around the Bohai Sea region, while at the same time emphasizing nationwide development and expansion. As of December 2010, the company owned and managed a total of 26 large-scale commercial real estate projects, covering a total floor area exceeding 1.5 million square meters. Taking into account all these accomplishments and plans, YangGuang is steadily marching towards the ultimate goal of “becoming China’s leading commercial real estate group”.Transformed from a residential housing real estate dealer to a commercial real estate dealer, YangGuang is endowed with competitive advantages that are lacking in traditional commercial real estate dealers, for instance, concept of innovative capital operation, whole value-chain operating mode, rich product development and operation, sound partnership resources, and professional real estate development team etc.As far as capital operation is concerned, YangGuang actively explores and develops new financing channel and establishes “finance + real estate” business mode, which provides commercial real estate operation with abundant fund guarantee. The company has already established long-term successful project cooperation with GIC RE, and will still expand the scale and scope for future cooperation. At the same time, the company has also established commercial real estate funds and is actively developing financing channel.With regard to business operation, YangGuang exerts itself to build the entire value-chain operating modes, covering investment, planning, development, leasing and operation. Through the entire value-chain system management and effective key aspect control and organic inter value-chain synergy, the company has formed core competitiveness. Meanwhile, YangGuang selects retail commercial real estate as its main business orientation, for among numerous commercial real estate classifications, retail commercial real estate has relatively convenient for redevelopment and improvement. If also supported by appropriate operation management, its long-term return will be quite considerable.After many years of development, YangGuang has accumulated rich product development experience; the three product brands, namely, the “Life Square” (阳光新生活广场), the “Shine City” (新业广场), and the “YangGuang Center” (阳光新业中心), which have been created through standardization process, cover the main types of commercial projects, and will be improved and upgraded continually in the process of product replication. The current successful commercial real estate development case in places, such as Beijing, Tianjin, Qingdao, Chengdu, and Shenyang etc., enabled the enterprise to have accumulated mature product development experiences.
Moreover, YangGuang has established strategic cooperative partnership with numerous international and domestic well-known brands, such as Carrefour, Wal-Mart Stores, Watsons, Ito Yokado, Gome, and Suning etc., and the stable and quality customer resources have ensured completion of investment promotion of commercial real estate projects in advance, endowing the company therefore with a complete operation system.Like all successful enterprises, YangGuang has a powerful team of commercial real estate management. At present, YangGuang owns a management team with several hundred members, and it will continue to grow along with increase of the number of commercial projects. Relying on its own professional team of commercial real estate management, YangGuang itself controls all aspects from development and investment promotion to later stage operation management. This is also the whole value-chain representation and preparation for output of future commercial real estate management operation.
Where to invest in China? Does the biggest potential lie in second – and third-tier cities rather than in first-tier cities?As far as commercial real estate is concerned, the best region for investment in China is still concentrated on cities, and whether in the first tier cities or the second and third tier cities, they all have opportunities. As early as in 2007, YangGuang developed a Bohai rim region strategy, while at the same time paying close attention to the balanced development in the national market. After carrying out an in-depth assessment in key areas, and taking expansion from one single project to more opportunities which cover the entire area as our layout strategy, we have currently mapped out and identified 10 cities covering the four major areas of China, and developed complete strategies for steadily expanding our projects. The layout cities include: Beijing, Tianjin, Qingdao, Shenyang, Chengdu, Xi’an, Zhengzhou, Yantai, Shijiazhuang, and Tangshan. In the future, in regions such as the Bohai rim region, North China, Central China, Northwest China, and Southwest China etc. where branch companies have already been set up with also project establishment, we will further strengthen and consolidate our basis. With respect to the Yangtze River Delta, Zhujiang River Delta, the Southwest Region and the Northeast Region of China, we will also actively search for quality resources conforming to our corporate strategy, and wait for opportunity for expansion.With respect to potentials, though the second and the third tier cities have indeed enormous opportunities for development, the first tier cities have also great space and opportunity for development. Even though the first tier cities have relatively less opportunities and a relatively higher threshold, with growth of population, they will certainly form many “emerging urban districts”, and these urban sub-centers are precisely where the potentials of the first tier cities lie, such as one of our commercial projects in Tongzhou District, Beijing (Tongzhou Life Square). In 2006 when we purchased this project, though it had advantageous geographical location and consumption potentials at that time, as a commercial real property, it had problems in architectural structure, retail format planning, brands level etc., which made it unfavorable for business operation. After purchase, the company re-planned its retail format, making it more reasonable. With these improvements, performance of this project has realized steady growth, and the sales volume of the anchor tenants and secondary anchor tenants also achieved steady increase. Within just a short period of three years after redevelopment, the rental income for the two years, namely 2008 and 2009, increased by 43% and 11% respectively on a year-on-year basis, and with impact of the 2009 financial crisis, it still achieved a steady growth.While making its layout in the suburbs of the first tier cities and in the second and the third tier cities, YangGuang hasn’t given up its steps of overall arrangement in the first tier city urban core areas. At present, the company has already been entrusted with the management of certain large-scale business project located in the Beijing core CBD area (Beijing International Center). At the same time, in the core area of Tianjin, a landmark “Tianjin YangGuang Center” is also in planning.As China’s real estate market is a typical “policy market”, one should pay attention to policy orientation. It is clear from the 12th five-year plan that, in the next 4-5 years, the second and the third tier cities will be the focus of national development. Adapting to the general background of the times, YangGuang had already started to gradually make overall arrangement in the second and the third tier cities as early as several years ago. With mega cities as support, small and medium cities as focus, the company has been vigorously developing the second and the third tier cities, helping to build some urban commercial centers with sustainable operation ability, building commercial ecological circle, and bringing harmonious local economic and social development. For instance, not long ago, YangGuang had reached an intent of cooperation with Beiguan Village of Xi’an city concerning reconstruction of the old marketplace of the urban village, and the project will be reconstructed into a local large-scale commercial complex.
What are the best market entry strategies as a foreign investor, developer, and retailer?At the early period of their market access, overseas investors, developers and retailers may consider finding a domestic cooperative partner in China and, through cooperation with local enterprise, steadily develop their business.With respect to the mode of operation, investors and developers may consider participating in cooperation with domestic enterprises by means of project cooperation or capital injection. For instance, the cooperation between YangGuang and GIC RE, in 2006, YangGuang entered into a strategic investment agreement with Reco Shine Company, a subsidiary of GIC RE, becoming the first domestic A-share market listed real estate company that has introduced international strategic investment into China. In 2007, after completion of private offering of additional shares, we conducted large-scale, extensive and in-depth cooperation with GIC RE. For instance, in 2008, we together completed large-scale overall acquisition towards 18 projects of the Home World (家世界), and both parties jointly held commercial property assets, which became a typical case of cooperation between overseas investors and domestic developers in the commercial real estate market.For access to the China market, overseas retailers may borrow lessons from the cooperation between YangGuang and Ito Yokado. YangGuang implements order-type of thought for commercial real estate development. In its very beginning of cooperation with Ito Yokado, YangGuang first defined its intention of shop setup and location requirements, and carefully examined and recommended appropriate projects. In its very beginning of design, construction and investment promotion, YangGuang “customized” the projects in strict accordance with the advanced Japanese concepts of shopping center and the spatial layout, architectural structure, public support, fire fighting arrangement, as well as traffic and people flow of commercial complex per requirements of Ito Yokado, and realized the maximum and perfect harmony and unity between the shopping environment and customers, and between customers and the architectural structure, thereby ensuring operation of the moved-in tenant in accord with their wishes and convenience and comfortable shopping of consumers. This kind of mode of commercial customization of YangGuang can ensure quick opening by overseas retailers of the China market and, at the same time, retain the local features and characteristics of overseas enterprises, it is therefore highly welcomed by various leading domestic and overseas retail enterprises and brands. At present, YangGuang has already established long-term strategic cooperative partnership with a number of large-scale domestic and overseas retailers, such as Ito Yokado, Carrefour, Vanguard, The Home Depot, and Wal-Mart Stores etc.
What are the major challenges as a foreign investor? How do you manage risk?In recent years, with continuous deepening of the opening-up of China’s business market, foreign capital business enterprises have landed in China one after another, and while bringing bout opportunities, the China’s market is also hidden with enormous challenges.Failure to adapt to the local circumstances and conditions is a major trouble for foreign capital. First of all, from the policy environment point of view, although a series of new policy measures to promote mutual investment have already been launched in recent years, for instance, the gradual lessening of restrictions on the percentage of shares of foreign investment and allowing domestic market listing of foreign enterprises etc., China nevertheless still has certain restriction policies on foreign investment and acquisition etc., and relative to local enterprises, foreign investors have certain threshold to cross. At the same time, many relevant policies and evaluation systems in China are somehow different from that of foreign countries. Moreover, with respect to market space, industrial support, and labor quality of China etc., there are still certain differences from that of foreign countries, and many overseas business models are not applicable to China at all.With respect to control of risks, overseas investors may search for reliable partners to gradually adapt to the rule of the game of the China market. For instance, GIC, the strategic investor of YangGuang and also one of the world largest fund management companies in the world, manages over USD 100 billion assets in the world, and its steady and robust investment style makes it select global-wide partners with deliberation, and at present, YangGuang is its only strategic cooperative partner in the field of retail real estate in China. As far as YangGuang is concerned, GIC is its financial investor on the one hand, and on the other hand, it also brings about the most advanced international project management and operation experience for YangGuang, and dissolved many worries in project development and operation. This multi-dimensional mode of cooperation can reduce risks of overseas investors and obtain stable investment return and, at the same time, enable fast development of local enterprises.From another point of view, as a local developer with certain basis, in the “policy market” environment of China, YangGuang is endowed with unparalleled advantages of foreign enterprises. We can, with sound government relations, maintain and get quality project resources; through control of project startup and completion schedule, ensure the time of project opening; through scientific mode of retail format planning and the accumulated investment promotion resources, ensure overall project business benefits; and through strengthening business operation ability and extent of promotion, ensure enhancement of business project operation and increase of rental income; and through whole value-chain control of the whole commercial real estate industry, minimize its own and investor’s return risks.Moreover, as far as overseas investors are concerned, if they are not interested in direct enterprise investment or worried about the withdrawing system, they may consider searching for inland powerful cooperative partners to access the domestic commercial real estate market by way of commercial real estate funds or commercial real estate trust through help in financing. For instance, YangGuang has also set up its own fund company, and it has had already some attempt in this type of business operation. The fund company is now in sound operation, and in the future it will be the focus of our business development.