Beijing's Olympics Legacy

The Chinese capital's permanent infrastructure stands to be a big beneficiary of Games-related investment

When mobile phone giant Nokia wanted to consolidate its China operations, it eschewed Beijing's plush downtown locations. As of the end of last year, Nokia's home is the Beijing Economic-Technological Development Area (BDA) in Yizhuang, a suburb in the southeast of the city.

"We have a factory here, and by consolidating operations we could have R&D and sales and marketing all located in one place," Nokia China's president, Colin Giles, told China Economic Review.

Yizhuang's BDA still lacks many of the amenities employees were accustomed to downtown. In order to sweeten the deal, Nokia provides perks reminiscent of the dotcom era, such as a supermarket, a concierge service, a gym and a shuttle bus to and from Beijing proper. But some employees—seeking clean air, convenience and lower housing prices—have already made the move to Yizhuang.

"There's a very large residential area here and to support that there are supermarkets and department stores opening up, and there is the intention to build better transportation," Giles said.

Stars of suburbia

Corporations like Nokia are at the forefront of Beijing's next phase of urban development, which is expected to see the flowering of suburbs such as Yizhuang and Tongzhou.

"The government wants to further decentralize Beijing so more people can find jobs near suburban residential areas, rather than in the central business district," said Meggie Qin, head of research at CB Richard Ellis (CBRE) in Beijing.

It is a strategy borne of necessity, as Beijing's population growth has overshot government predictions. Planners had expected inhabitants to number 16 million by 2010 but this mark was actually passed before the end of last year.

Suburban growth cannot happen without infrastructure investment, though. These areas were once considered the hinterland—lacking local employment opportunities and far enough from Beijing to make the daily commute an odious task. But that's all set to change over the next decade with the massive expansion of the city's subway network. Come 2020, Beijing's metro is expected to be 561 kilometers in length, up from less than 150 km now, making it the largest subway system in the world.

While analysts stress that these developments are inevitable in a maturing city over the course of time, there is little doubt that the Olympic Games have greatly accelerated the process. The real legacy of the games, they say, isn't so much the iconic structures—the CCTV Tower or the National Stadium, known as the "Bird's Nest"—as the infrastructure. For Beijing's population and property markets, life will never be the same again.

Record spending

The amount of cash being spent on the Olympics is thought to be as much as US$40 billion. Beijing's own projection is US$6 billion lower, but this is still nearly three times the size of Athens's budget in 2004. According to Andy Rothman, China macro strategist at brokerage CLSA, only US$8 billion of this has gone toward facilities built exclusively for the Olympics.

"The balance is being invested in Beijing's permanent infrastructure, everything from an expanded subway system to a rail link to the airport," Rothman wrote in a research note published in July.

This seems to bode well for the long-term success of Beijing's urban planning in the post-Olympics era.

Eleni Theodoraki, a lecturer in sports management at Loughborough University in the UK and an advisor to the Athens games, said that the long-term health of any Olympic city depends upon the extent to which Olympic planning dovetails with the overall city plan.

Theodoraki points to the 1992 Barcelona games as a stand-out example of effective urban planning. Barcelona officials were able to merge their Olympics-related construction into an earlier plan, which enabled them to revitalize the city's waterfront and industrial areas.

"The [Barcelona] games were used as a catalyst for the projects, it wasn't that the projects were the games," she said.

There are already signs of revitalization along Beijing's Line 5, the first of the new subway lines to open.

Retail rents along the line have begun to rise and residential prices have grown by 40%-50%, according to multiple sources.

Macroeconomic might

In addition to Olympics-related investment, Beijing can also rely on strong underlying economic fundamentals to sustain its construction boom.

Over the period of the 10th Five-Year Plan (2001-2006) the city's GDP saw average annual growth of 11.9%. Fixed-asset investment grew by a yearly average of 17.7%, reaching a total of US$159.3 billion. This was twice the amount invested over the course of the Ninth Five-Year Plan. Real estate development accounted for US$87.6 billion of total fixed-asset investment between 2001 and 2006, three times as much as during the previous five-year period.

"Our view is that many of these properties are built in response to strong genuine demand arising from high economic growth and rapid urbanization," said Lim Ming Yang, CEO of Singapore property developer CapitaLand China. "They are not built purely for the Olympics."

Bombardier, the Canadian conglomerate, is bullish about the prospect of continued infrastructure investment. The firm built the Dongzhimen-Airport rail line, the Airport People Mover at Beijing Capital Airport's new Terminal 3, and will also provide the propulsion system for Beijing's Metro Line 4, expected to be completed in 2009.

"Based on the development plans of the Chinese government, we do anticipate that investment in infrastructure will continue for years to come, particularly in upgrading urban mass transit and intercity rail," said Zhang Jianwei, head of Bombardier's China operations.

Beijing's current urban plan is not without its detractors. Neville Mars, an architect with Dutch non-governmental organization (NGO) Dynamic City Foundation, said that the subway, even at its fullest expansion, would still fail to reach one-third of Beijing's population. He also takes issue with the city's overall expansion strategy, arguing that it will create more fragmentation and damage the city's social fabric.

"The planning policies in place today are geared to decongesting the city. There's a notion that the center is extremely crowded so we need to decongest," he said. "The reality is counterintuitive. When you have a congestion problem, the last thing you want to do is to move giant empty spaces in. You shouldn't empty the city out, especially by moving people out."

In its drive to urbanize, many of Beijing's poorer residents have been obliged to relocate to the suburbs, their homes demolished to make way for new buildings. Developers are required by law to compensate the displaced, but many claim the rules are not strictly enforced and that the compensation paid is less than adequate. Estimates vary wildly on how many people have been displaced in the run-up to the Olympics, but one Swiss NGO, the Centre on Housing Rights and Evictions, claimed last year that Beijing had forcefully displaced or evicted 1.25 million of its residents.

Many more residents have moved to the suburbs for a less politically-charged reason: rising residential property prices.

Dealing with speculators

Rather than release actual price data, Beijing's municipal government provides a real estate index to demonstrate growth. The index stood at 2,292 at the end of January 2008, compared to 1,237 two years earlier. The luxury residential market provides a window into this growth. Property consultancy Jones Lang LaSalle (JLL) says prices for luxury residences—which it classifies as being priced above US$2,900 per square meter—are closing in on US$3,500 per sq m, compared to US$2,300 at the end of 2006.

Analysts are quick to note that demographics are primarily responsible for driving up residential prices in Beijing. But the Olympics did their part to whip up consumer sentiment, according to Matthew Kong, an associate director with Fitch Ratings in Beijing.

"A lot of them thought that with the Olympics, property prices were going to go up and so they should buy," he said. "But they ignored the danger of falling property prices."

Which is essentially where we are now.

Beijing's property markets are currently undergoing a correction and, as of March of this year, the residential real estate index stood at 2,300, more or less unchanged from its January level. Ben Christensen, head of research at JLL in Beijing, said the ripples created by a sharp drop in residential property prices in southern China last year were to blame for the malaise.

"Markets correct, and it's something that's never happened in China. Because the the market's so young, we haven't seen a cycle at all," he said. "It's something that investors are coming face-to-face with and a lot of developers have backed off because they don't know how to navigate this sort of adjustment in the market."

The Chinese government also chipped in by introducing austerity measures—including restrictions on bank lending, interest rate hikes and increased downpayment requirements—to dissuade speculation in property markets. Analysts generally agree that the policies have succeeded in cutting down on speculation, albeit temporarily.

CBRE's Qin said she expects speculators—and institutional investors in particular—to return to the market eventually, due to the country's strong economic fundamentals.

Waiting for a rebound

Partly to insulate themselves against volatility in a particular market segment, developers are diversifying away from their residential roots into commercial real estate. Guangzhou R&F, one of the leading players in the Beijing market, wants to develop an investment portfolio—commercial properties that are not sold off immediately but leased to tenants—that represents 25% of its balance sheet, said Adrian Chan, assistant to the company's chairman.

There are signs that developers may have gone a bit overboard in the retail and office segments ahead of the games. According to CBRE, 2 million sq m of shopping centers and department stores are expected to hit the market this year, from a base of 4.4 million, not including the low end.

"There's a little oversupply ... and, based on our information, the pre-leasing situation is not so good," Qin said.

JLL estimates that in the 2007-2008 period, high-end office and retail markets have expanded by 52% and 89%, respectively. While much of the growth in the high-end office sector was due to pent-up demand, Christensen said retailers were eager to be up and running in time for the Olympics and that it may take some time for the market to absorb extra supply.

Although vacancy rates are likely to hit all-time highs at the end of 2008—20% in the high-end office market and 25-30% in the luxury retail market—and rents may fall after the Olympics, Christensen expects these markets to recover.

Patience pays off

"In the long run, demand will be sufficient to absorb whatever space is left over and we'll see rents stabilize in 2010 and 2011," he said.

These sentiments are echoed by Lim of CapitaLand China, who describes the current market situation as nothing more than "short-term consolidation."

It is the luxury hotel sector that will suffer most visibly in the post-Olympics period. An occupancy rate of 70% is usually considered to be healthy for a five-star hotel and Fitch's Kong is doubtful as to whether developers can maintain this rate once Olympic tourism wanes.

However, hotels focusing on the midmarket may emerge relatively unscathed, according to Thomas Monahan, executive vice president for Wyndham Hotel Group International in Hong Kong. Wyndham's franchises in China include motel chains Days Inn and Super 8.

"I don't think we'll see an explosion of occupancy for the Olympics, but we won't see a big downturn afterwards," he said. "The dynamics of the country and the attraction of Beijing as a destination mean this is a market that has long-term strength."

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