China’s unsurpassed demand, cash reserves and willingness to invest heavily in new infrastructure make it an attractive option for foreign real estate investors, according to Gilles Assouline, president of Wuxi Iparks Creative Design & Development. In an interview with Knowledge at Wharton, Assouline spoke about why conditions in China are ripe for real estate development, and how partnering with the world’s fastest-growing economy may be a requisite for survival in the current economic downturn.
An edited version of the transcript follows.
Knowledge at Wharton: Our guest today is Gilles Assouline, president of Wuxi Iparks Creative Design & Development, which specializes in the development of international real estate and leisure projects in China. Thank you so much for joining us today.
Gilles Assouline: Thank you.
Knowledge at Wharton: The topic on everyone’s mind these days is the world financial crisis and the impact that it has had on different emerging markets. Since you have such an active presence in China, I was wondering if you would speak a little bit about the crisis and its impact on the Chinese real estate market.
Assouline: Basically I believe that the crisis can be analyzed as three crises. There is a credit crisis, as you know, a credit contraction. And this is more a crisis of leverage — you know, leverage on leverage on leverage. The second crisis has to do with the derivative markets. The first one is maybe $4 trillion to $5 trillion; the second one is in the range of probably $22 trillion. And there is a kind of invisible crisis representing the accumulation of [other unquantifiable] transactions. And that may represent up to 500 times the second crisis. So this is what we can [consider] a black hole. And as an analogy, with general relativity, we can say that the derivative markets are the disk turning around the black hole. The whole story consists of not falling into the black hole and moving rather than freezing positions.
Today, as you can see, most of the investors, and that includes real estate investors, are not really moving. They prefer to remain liquid. Basically, it is not a good time to sell, it is not a good time to buy, and nobody moves. But if nobody moves, you may have not the spirit which is necessary to avoid falling into the black hole. So with respect to the emerging countries, I think that China is a particular [case] because it is, of course, affected like many other countries by the crisis, but differently. Differently because the mentality in China is different. The leverage exists, but it is not as sophisticated as it is in the United States or in the rest of the world. Basically, in China you spend what you have. And you borrow money because you know that you will be in a position to repay, because if you are a real estate investor, for example, or real estate developer, you know that you will pre-sell. And once you have secured your pre-sales, then you can go to your bank and you can ask, “Can I borrow money that I will be surely in a position to repay?” You can not generalize, but this is basically the idea.
Secondly, China has reserves in excess of $2.5 trillion, almost $3 trillion. And this is a little bit less than what we call the credit crisis, the first crisis. But this is enough for China to think differently, to think out of the box — for example, to invest in infrastructure … to join other countries in investing and taking strategic positions in China but also outside of China [in the case of] energy [and] technologies. So that puts really China in a very particular position. And allowing major investment in infrastructure allows investors … to rely on real infrastructure [when they] develop property.
Knowledge at Wharton: Can you tell us a little bit about your own activities in China?
Assouline: We have development activity and construction activity. The development activity consists today of two major projects based in the city of Wuxi. It is one of the fastest growing cities in China. We are developing, on 3,000 acres in various steps, an industrial park named Digital Animation City, which is hopefully going to be the national destination for the digital animation industry, where companies will put their headquarters on site. Within that you will find a theme park, a high tech theme park, and around that you will have retail and commercial and residential developments. That’s the first project. The second project consists of the development of a 75-floor tower overlooking the whole city of Wuxi. That will be a hybrid tower — you know, with a retail area, a deluxe shopping mall and hotels and offices and condominiums.
Knowledge at Wharton: You’re also based in Paris, or at least originally from Paris. How does the experience of developing real estate in China differ from doing it in other parts of the world?
Assouline: Well, we approach China through what we call a consortium of companies — I would say primarily French companies, putting their expertise together. And we approach China with a lot of patience. That is required in this context. When you’re dealing with China, you have to go through different levels. You start with letters of intent [regarding a] joint venture, partnership agreement, and then you create your joint venture. You apply to be able to be transferred land use rights [for the property] on which you can start your development. And you need to rely on, I would say, either a state-owned developer or a famous developer, a very experienced developer. So the local partner is essential in China.
Knowledge at Wharton: What were some of the principal challenges you faced in trying to implement these two projects?
Assouline: I would say the challenges are not really coming from China. China is providing a lot of support. China is providing support in terms of infrastructure, as I mentioned to you. If I take as an example our own development, in the last few years, the city of Wuxi built an international airport which is nine miles away from our site. [They] built a high-speed train and train station, too, [and] highways to connect the city to the site. And they basically spent more money than the total project costs. So that’s pretty impressive. Also the site is basically surrounded by 175 million people living at a two-hour driving distance from the site, and the infrastructure is there to drive the people to the site.
So I would say that everything is there in China to make this project successful. The challenge is more coming from the international financial community. There is still quite a lot of reservation regarding China. And I think that to understand China, first of all you need to spend time in China. Secondly you need to understand the mentality. And you will find extremely smart people, hard working people, and you will find also people ready to share with you the profits of their own economic growth, which is impressive. Even though we’re talking today about 8% [growth], it is still 8% of gross GDP every year, which is very impressive.
Knowledge at Wharton: Where do you see your operations in another 18 to 24 months? Where would you like to be?
Assouline: Well, I think I would like to continue to explore opportunities to develop joint ventures in China. But today we’re thinking also of developing with China, I would say, new structured instruments where Chinese companies and — why not — Chinese sovereign funds will invest side by side with other sovereign funds from the Middle East, Norway, the U.S, France [and elsewhere in] Europe, so as to share the economic growth that China is providing to the world. That would consist of investing in infrastructure but also in accompanying China in their desire to acquire strategic assets outside of China — operated by Chinese companies and by foreign companies together — and to secure a supply of, I would say, energy, natural resources and others for China. But [it would] also help people who have less demographic strengths, like those in the Middle East, for example, to invest their money properly.
The difference between China and the rest of the world, India excepted maybe, is the demand. The demand is in China. You know, you’re talking about over 1.4 billion people in China. And that represents a huge demand to be satisfied. And that’s why there is no reason to be scared about China, only reason to be happy because China is going to pull the world [along], if the world can work together, rather than taking independent positions or adversarial positions or trying to take advantage of the crisis because some asset or some companies are very much today underestimated in terms of market value. [Instead,] just take advantage of the crisis to say, “Well why don’t we think out of the box? Why don’t we think differently? Why don’t we just work together?” And we have today very nice regulation tools, we can administer structured investment funds pretty nicely. We can combine financial resources from where the money is — and that includes China, the Middle East, but also friends of friends, or some friends, just having liquidity but waiting to invest. And we can accompany China, as I said, to acquire strategic assets outside of China and to operate hand in hand with other companies. I think China is prepared for that.
We [can] think globally rather than thinking that there is a kind of synchronization of the crisis and that everybody has to protect their own position. I think if we say, “This is not the right way to do it. The right way is to work together and to invest together, to share leadership, to share control, to exchange expertise.” I think the end of the crisis is there.
Knowledge at Wharton: Gilles, thank you so much for joining us today.
Assouline: Thank you for having invited me.