The construction industry in China is one of the most active in the world, and has experienced exceptional growth for over 10 years now. This activity has, of course, been closely followed by Western companies.

With China more than ever in the spotlight – due to the Olympic Games of course – GSE China Ltd Business Development Director Arnaud Sebban casts new light on certain conventional truisms and describes the fast-changing corporate real estate market, where the issues include administrative steps, sustainable development and new territories.

Can you give us a brief overview of the construction market in China?

A.S. : The construction sector, which accounts for nearly 8% of the Chinese GDP, is vigorously supported by the central government which has strongly invested in modernising the country’s industrial fabric and in infrastructure projects. This growth in turn has been stimulated by large-scale events such as the Olympic Games in Beijing, the 2010 World’s Fair in Shanghai, the Asian Games in Canton in 2010, and others. 

The sector nevertheless remains highly regulated and structured. Each company is subjected to a complex qualification system which restricts its scope of activity and the type of project on which it can work. This qualification system takes into account, among other things,  the references built in China, turnover and minimum capital, number of employees employed by the company in China, and their areas of specialisation…

These measures have considerably slowed down foreign companies from accessing the market. For example, some of the small to medium sized companies with niche technology and expertise in energy-saving sectors do not have the financial or human resources required to meet these criteria.

Despite the dynamic market in China, and the staggering prospects for growth, the number of foreign companies in the construction sector has continually decreased since China’s entry to the WTO. This surprising statistic is also due to extremely strong local competition.

As seen from Europe, we tend to think that there is fairly heavy bureaucracy involved in the administrative steps required to participate in a construction project in China. What has your experience been?

A.S. : Unlike what most people may think, the procedure for obtaining a building permit in China is much quicker than in some countries in Europe. You need approximately 3 to 4 months to get a building permit for an industrial project. The steps involved may appear to be  complex (indeed some thirty different offices have to give their authorisation or opinion) and to require the submission of an impressive number of documents, but overall - the processing times are relatively fast, and the result is generally what was expected, if you comply with all the rules.

One of the main reasons behind this fairly rapid turnaround is the absence of any third-party recourse, for most of the projects are taking place in industrial parks, and these parks can issue the building permit themselves.

Can you describe the main steps involved in launching a project in China?

A.S. : China distinguishes between ownership (all the land belongs to the State) and land use rights which can be granted for a period of time spanning from 30 to 70 years, depending on the type of activity assigned to the land.

For industrial projects, once you have identified the land, which is generally located near the business areas, it is strongly recommended that you proceed with the qualification of the site through a Due Diligence study which includes a soil analysis to determine the presence or absence of existing pollution, and the type of soil improvements required, among other factors. In China, particularly in the coastal areas, soil quality is poor and may require implementation of solutions such as piles and soil reinforcement, which can account for significant cost overruns in a real estate investment.

Once you have found the land of your dreams, you have to acquire the right to usage based on an auction-like procedure or by establishing a mutual agreement, if the land has been previously owned.

Prior to taking registration steps for the launch of the construction project, the owner must first carry out an environmental impact report and a feasibility study, which he must then have approved. He must also provide a land use rights certificate and his business license.

Once all these documents have been prepared, only then can the Design be officially submitted to the various administrations for validation and approval. The Design must obligatorily be prepared by a Chinese design institute – the only organisation that is authorised to “stamp” the drawings.

What changes do you see occurring for business real estate in the near future?

• The idea of sustainable development is gaining ground in China. The government has made energy savings one of the priorities in their 11th 5-year plan. On average, Chinese buildings consume 2 to 3 times more energy than in Europe and North America. According to a study, buildings accounted for 37% of the energy consumption in China. As a result, authorities have set up standards and tax incentives which seek to achieve 65% savings in energy consumed as compared to current consumption levels. 
   
• Food security is another major issue. More than half the meat and dairy products which circulate in China do not respect the cold chain, and it is said that one-third of the agricultural production goes wasted each year. Very few businesses have looked at this market so far. Yet, public authorities – driven by growing consumer awareness – have set up a number of rules to improve product traceability and safety. This is going to result in new investments which have, so far, been cruelly lacking in this sector. 
   
• We are increasingly seeing projects for 2 to 3-story warehouses in the primary cities such as Shanghai, Beijing and Guangzhou. This type of warehouse, which can be better justified for purposes of return on investment rather than for operational advantages, will tend to become more widespread if nothing is done to counterbalance the increase in the price of land in these cities. As a result, developers are creating new projects for logistic parks in secondary cities such as Tianjin, Suzhou, Kunshan, Shenzhen, Chengdu and others, which have greater land reserves and therefore more affordable prices. 
   
• We are also seeing a gradual transfer of investment from the coastal region, which is now well-developed, towards the inland areas of the country. This is the result of proactive government policy which seeks to rebalance the various forces in China. The effects are gradually beginning to be felt, due to the efforts made to open up certain provinces and thanks to several tax incentives. Industrialists are therefore starting to invest in the Western regions benefiting from the famous pool of cheap labour.
   
• A series of measures aims to halt investments in the main cities where harsh competition already exists, and to redirect investment towards the secondary cities where there are many projects to develop shopping centres and stores. The lack of quality shopping centres and the prospect of fast growing and value added assets in these strategic locations are attracting a lot of interest.

		Opposite, the Grade B, a license issued by the Shanghai Construction Bureau, attesting to a firm’s ability to build large-scale projects on Chinese soil. GSE China Ltd is one of the rare Wholly-owned foreign firms to have obtained such accreditation in China.