China Needs 10 New Yorks Over the Next 20 Years. How Do We Get in the Real Estate Game?

Dan Harris at China Law Blog has been quite bullish on the China healthcare business prospects, particularly pharmaceuticals (see parts one and two). I am not one to disagree, and Chinese pharmaceutical R&D, manufacture, and sales does sound like quite the opportunity. But what if you are not in the enviable position of owning valuable pharma IP? I'd take a wager on construction.

The other day it was revealed that Blackstone was reentering China's real estate market. I was a bit shocked by this news, as I'm sure many others were, because all the signs seem to be pointing towards a real estate bubble in China: 25-30% of commercial and housing space may be sitting vacant, prices seem to be leveling off, and the government has apparently insisted on tightened real estate lending. Intrigued, I delved further and realized that Blackstone was actually investing in a realty developer. Now that makes sense!

A recent piece at Foreign Policy heralds the coming of the Megacities through a collection of charts and graphs of urban changes in China and India over the coming 20 years. Of particular note is that China will require 40 billion square meters of new commercial and residential space over the next 20 years. That is equivalent to 10 New Yorks, or the size of Switzerland. A rising tide might not necessarily lift all boats, but it will surely lift those with the capital necessary to keep building. And a company like Blackstone should be able to provide the financing to a housing developer to ensure that it can reap a healthy profit off of the natural growth of China's urban landscape.

So how does one go about getting into the construction game? Well, construction of anything worthy of a significant foreign investment, such as 1) class A hotels, residential buildings or office buildings, 2) international exhibition centers, 3) large scale theme parks, 4) public gas, heat, water facilities, 5) golf courses, 6) cinemas, 7) refineries, and 8) smaller coal fired plants, falls in the Catalogue of Restricted Foreign Investments. This does not mean that it cannot be done, it just means that the formation of a company that wants to engage in one or more of these types of construction will be subject to a more onerous (read: more lengthy and expensive) review and approval process than other types of foreign investment. This, of course, is in addition to the standard examination and approval procedures (see a "simplified" flow chart). But if you have the time, money and patience, plus some synergies in your portfolio, construction sounds like one hell of an opportunity.