Sustainable Palm Greasing
As Steve Dickinson very concisely summarizes in this recent post on China Law Blog, the government is actively expanding their control over foreign investment in China’s real estate market. That isn’t to say that real estate is completely off limits for foreign players, but rather that the Central Government has put themselves in a position where they can disapprove or delay projects completely at their own discretion. In this sort of environment, with many opportunities remaining, especially in Tier II cities, foreign developers and investors will be actively seeking ways to create incentives for the government to support their projects.
One excellent approach that stands out clearly in my mind is the development of sustainable buildings. The numbers related to energy use / waste in China’s commercial buildings are clear – office buildings consume approximately 25% of all electricity in the country and about 80% of China’s power is generated by heavily polluting, coal burning power plants. As such, the development of a sustainable building sends the message that the community where it is being built is taking progressive action to cut back on energy use and pollution, and this is great PR for any politician and for China as a whole.
Luckily for foreign developers, their domestic counterparts still avoid sustainable projects. One factor is that they are not familiar with the technology and the process that goes into such a development. Another key factor is that they are deterred by the fact that making a building sustainable drives up construction costs by 2% to 5% (even more if the developer doesn’t know what they’re doing) depending on how sustainable it is. A final factor is that there still isn’t strong demand from domestic end users (apartment buyers and office tenants) for sustainable space, especially if it costs more.
This creates an unfilled niche – one that the government desperately wants to fill and one that foreign developers have the capabilities and financial strength to fill (with little if any added cost passed along to the buyer). In Beijing, we are already seeing several LEED (the American system for rating sustainable buildings) certified projects entering the market, but the Capital is only the tip of the iceberg. The vast majority of construction in China is happening in provincial capitals and smaller cities and these are the areas that foreign developers are most keen to establish a presence – margins are higher and land is in greater supply. Perhaps sustainable building is the “palm grease” that these developers need to get government support and continue to succeed in China’s increasingly impenetrable real estate market.