There is only one renewable energy source capable of providing the power this planet needs on a scale that will meaningfully reduce CO₂ emissions over the coming century: Solar power.

To many, this statement may seem a bit out-of-step with current market trends. The current rage is of course wind power. Companies across the globe have proven that wind turbines can deliver energy at a cost competitive to fossil fuels, providing a nice supplement of green energy to the power grid.

But here’s the problem with wind power: Current global energy consumption is about 15 terawatts (TW) annually and growing. But scientists estimate that the maximum practical electrical generation potential of wind for the entire planet is just 2-4 TW. Moreover—at 1.5 megawatts per windmill—you would need a whole lot of windmills to get anywhere close to that amount of capacity.

To put it in perspective, to meet just one fifth of our current global energy demand, we would literally need to have turbines covering 27% of the planet’s land area. If you think about that for a second, it’s actually quite a frightening concept. No matter where you went, you would see windmills, transforming them into a serious eye sore. So, windmills are great, but they will always be a secondary source of our planet’s energy needs.

All other renewables—hydroelectric, geothermal, ocean (tides), biomass—suffer similar constraints, with the exception of solar. Our planet receives 1.2×10⁵ TW of solar energy annually (an astronomical figure). Practically, we can only use about 600 TW of it, but that is still 40 times global energy consumption—plenty. Moreover, we wouldn’t have to cover the entire planet with solar panels to get it.

The staggering amount solar energy the earth receives makes it too compelling an opportunity to ignore; over the next century someone is going to tap into solar in a big way, it’s just a matter of who and when.

Spotting this trend, the geniuses at Goldman Sachs have started buying up as much of sunny Southern California as they can get their hands on.

But while the value of California desert real-estate has already skyrocketed from USD 500 per acre to upwards of USD 10,000 per acre, the Tibetan Plateau—which combines high altitude and sunny skies—is a relatively untapped wilderness for solar prospectors.

Moreover, China is already an epicenter for solar technology. It is the largest consumer of solar power, with solar water heaters common across the country, and it is home to some of the largest global solar players, including famed Suntech. Because the industry is relatively immature, there will be many technological developments, new patents and acquisitions over the coming decade, and much of that activity will probably occur in China.

Goldman isn’t sitting back in China either; yesterday it was reported that Goldman has taken a major position in Himin Solar Energy Group, one of China’s largest solar players. Clearly the investment bank is betting on solar, but with so much sustainable energy out there, other people should take note and start getting a piece of the multi-trillion dollar pie.

After news was released that housing prices in Shenzhen andGuangzhou dropped in the first 11 months of 2007, a flurry of articles have been released about the issue.  Some reports, such as this article in the International Herald Tribune, see it as a sign that the entire Chinese housing market is slowing.  But, the article seems to have completely lost track of theChina context.  There is little doubt that after years of rapid growth in South China, the drop of housing prices is important.  But, instead of triggering fears of a housing crisis on the scale of what we are seeing in the US, it is likely just a natural adjustment impacting two markets, Guangzhou and Shenzhen, that have had unsustainable growth in the recent past.  

It’s interesting to note that Shanghai’s average housing sales price dropped substantially in 2005 and then was level for over a year before climbing again in 2007.  This fluctuation / adjustment not only didn’t have a lasting impact on Shanghai’s economy, but it also didn’t  impact housing prices anywhere else in China.  Thus far, the same is holding true for Shenzhen in Guanghzou.  Granted, some small brokerages, affected by lower transaction volumes, are closing down, but thus far, housing prices outside of Shenzhen and Guangzhou have continued to climb.  

One should see dropping or plateauing housing prices in China’s more developed cities as a very good sign.  Despite rising disposable incomes, many middle and lower income earners cannot afford to buy homes, which is leading to widespread public discontent and heavy handed government regulations.  It’s also critical that people not lose sight of how incredibly large and diverse China’s residential market is.  Whereas in Beijing we have apartments selling for over RMB 60,000 per sqm and Shanghai has units selling for over RMB 100,000 per sqm, the highest end units in Shenyang typically sell for RMB 6,000 to 8,000.  In Baodi, a city halfway between Beijing and Tianjin, brand new apartments sell for RMB 3,000 per sqm.    The price growth everywhere is substantial, but the vast majority of Chinese residential markets are just emerging, putting them at a drastically different point in the growth cycle than one sees in Shenzhen and Guangzhou.  

Lastly, there are several factors that suggest that China’s residential markets have decades of growth ahead of them.  The first is urbanization, which is both rampant and encouraged by the government.  The second is rising disposable incomes – the fundamental driver behind the widespread Chinese desire to improve living and conditions.  And, the third is a continued lack of investment opportunities for wealthy Chinese.  This last factor, combined with the fact that growth in the Chinese stock market is bound to slow down before too long, means that small-time investors will continue to look for opportunities in the residential market.  

One impact of the recent price drops in Shenzhen and Guangzhou is that some purchasers are now taking a wait-and-see approach in other cities, especially Beijing where some expect that prices will drop post-Olympics.  But, instead of being seen as heralding a Chinese housing crisis, purchasers actually taking the time to fully evaluate and question property investments is a healthy and important change.

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.

Will sustainable developments such as Dongtan Ecocity near Shanghai prove to be more feasible in an increasingly restricted foreign investment environment? (photo courtesy of Arup)

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.

Zara, the Spanish retailer owned by Inditex, opened their first Beijing store in The Place in the spring of this year.  The foreigners in Beijing familiar with the brand eagerly awaited the opening and after a short period of time, local consumers flooded the new store.  In the last month, Zara has pre leased space in the New Sanlitun Development as well as in the new Xidan Mall – both luxury developments still under construction – and also announced the opening of a Shenyang outlet at the end of 2007.  Based on this rapid expansion, business is clearly good, and looking at China’s demographic situation and the current state of the retail market, there are clear reasons why. 

China’s metropolitan youth and young adults (a.k.a. Chinese yuppies)  have serious fashion aspirations.  Just in the past several years of living in Beijing, I have noticed a dramatic increase in the attention that most people in Beijing pay to their appearance.  A simple search for “Zara” on a Chinese search engine brings up countless chat threads discussing their products and their competitors.  What is critical about Zara is that they are filling a niche – one that is similar to that filled by the Gap and Banana Republic in the US and one that, until Zara entered, was almost void of options.  The niche is luxury fashion at a lower price point.  Zara is famous in Europe for taking trends straight off of the runways and selling them at stores for a small portion of what luxury retailers such as Louis Vuitton and Gucci are selling them for.  The model is hugely successful in Europe and North America and has enormous potential in China also. 

The retail market is demographically driven and all major brands and department store operators are salivating over rapidly growing disposable incomes across
China.  A brand like Zara hits not only the elite class, but also is within reach of Beijing’s very large class of up and coming white collar workers.  Currently, they have a monopoly over this segment in Beijing, but they better hurry, as the American company American Apparel as well as Sweden’s H & M have disclosed ambitious
China expansions plans aiming at the same consumers. 

As I write this, the Venetian is opening its second “branch,” making Macau the home to the world’s largest casino.   This opening is apt for several reasons. Most obvious, Macau is the most lucrative gaming town in the world, last year surpassing Vegas and earning USD 6.95 billion in profits from gambling.  But while Macau may seem to be heading in the direction of Vegas—i.e. embracing the all in one entertainment-gaming-dining-vacation-convention center business model—my recent weekend in the former Portuguese colony made clear that there are still many gems off the game floor and indicated another reason why a touch of Venice seemed apt for this town.  

With elements of the East, Venice historically has been described by many travelers (of course it is easier to find notes from the more famous of these) as “an Oriental dream” (Théophile Gautier) and as possessing “the charm of color in common with the greater part of the architecture, as well as of the manufactures, of the East” (John Ruskin). Or as Henry James said when in Venice “I was in the East.” Well, I won’t go as far as to mirror James and say that when in Macau, I was in the West.  I did, however, marvel not only at the many vestiges of Portugal (including the 1970s style airport arrival hall somehow reminiscent of Guarulhos), but also at the modern day blend cultures in this city of 500,000 people.   As a Brazilian living in Beijing, my eyes are more used to Chinese-English (whatever the accuracy of the translation) signs and are jarred by the Chinese-Portuguese signs for stores, sites, and streets. That said, these are purely symbolic as no mention of the Portuguese street name will get you to your destination.  Like visitors strolling in the Venice of days past, those walking through Macau cannot help but at one moment feel like they’re in the East (think bustling downtown Hong Kong with fragrant street food and any and every item for sale) and in the next they’re in the West (think European piazza with a community church and mosaic side walks).  Now whether the Venetian Macau itself will be a nexus of East meets West is to be seen and scrutinized (do side by side Gucci and Shiatzy Chen boutiques count?). But one thing is for sure, with upcoming star sports tournaments, global conventions, entertainment galore, alongside the extravaganza on the casino floor, the Venetian will likely hark back to its roots and be in Macau “The pleasant place of all festivity,/The revel of the earth.”  

Although it is less of a popular topic now than it was 12 months ago, any discussion about the Chinese real estate market eventually seems to end with a debate over the existence of a housing bubble.  Those who think it exists tend to focus on Shanghai and the key Guangzhou cities of Shenzhen and Guangdong, pointing at annual increases in average housing prices that have reached 50% or greater.  Price growth in tier I cities has decreased since the government released new policies targeting speculation in the residential real estate market, but nonetheless the growth is substantial across China, at least in the tier I cities and those tier II cities where I have worked (Shenyang, Qingdao, Dalian, Hangzhou, and Chengdu primarily).   

My response to the housing bubble question is always an adamant “no” and a recent opinion article in the Economist agreed, pointing at several factors that I have also previously relied on for support.  One key when evaluating the existence of a bubble is to put the key residential growth indicators into the context of the overall economy and the unprecedented growth across the country in key indicators such as GDP, disposable incomes, and per capita expenditures.  It becomes apparent that although there is some purely speculative investment, much of the demand for housing is fuelled by increasing wealth and widespread desire to simply improve living conditions – this type of demand will continue to grow.  The economist article sums up this relationship between incomes and real estate consumption very convincingly:  Read more »

Geoff Dyer, in a recent Financial Times article, highlighted a statement from Qiu Baoxing, China’s somewhat outspoken vice-minister for construction, in which Qiu expressed disgust with the thoughtless destruction of historically significant buildings that is occurring in many of China’s cities. Qiu Baoxing has established himself in previous years as being a very prominent Chinese official who is not afraid to make candid statements about the challenges that China faces with regards to sustainable development and energy efficiency. This recent reflection on the state of development in China is consistent with this willingness to be straightforward and also raises the very important issue of how to reconcile China’s push for modernity with the necessity to preserve the country’s increasingly few historically significant buildings.

The need for preservation of historical buildings is especially important in today’s China where the country’s youth are increasingly disconnected with their own history. Although some of these buildings have roots in Western and Japanese imperialism and expansionism, they are everyday reminders of many of the political forces that shaped the China of today. The primary obstacle to protection though, is that it is not economically feasible in the vast majority of Chinese cities for a developer to preserve a historical structure. Local developers understand local demand and in their drive for commercial success what results is almost always something that is new, high-rise, and from a Western perspective, often gaudy.

Shanghai is the exception as developers and investors have found ways to make historical preservation a commercial success. The Bund is home to several redeveloped 1920s buildings that cater towards the city’s wealthy expatriates and elite Chinese, and Xintiandi exemplifies what can happen when a powerful developer (Hong Kong’s Shui On Land) partners with a skilled architect (Benjamin Wood) to take a historical area and make it new. Xintiandi certainly does have its critics, but if it had not been redeveloped it almost certainly would have been demolished, and many feel that the project brought attention to the city’s dwindling number of Shikumen houses and eventually led to government protection for many of the original structures that still remain.

Beijing’s consumers and developers are also starting to catch onto the fact that redeveloped preserved structures have atmosphere and appeal that simply cannot be created in a new building (the Nanxincang redevelopment and Beijing Legation Quarter project are examples). Unfortunately though, some feel that many of the capital’s historic areas are beyond repair and more importantly, it is far more expensive to preserve a historic building than to tear it down and rebuild it or replace it. As such, one can’t expect investors and developers to take the lead on preservation, at least until consumer demand evolves to the point where historic buildings are seen as elegant and tasteful as opposed to simply old. In the meantime, responsibility falls to the governement.