When I sit down to speak with Eric Wo, Managing Director of Savills North China, he is dapper in a crisp white shirt and dark suit despite the heat of the Beijing summer. Traditional Chinese paintings and scrolls with ink-painted calligraphy adorn the walls behind him.

Eric Wo was born in Hong Kong and studied in the UK. He attended a boarding school in Wiltshire, before taking a degree at Southampton University. Diploma in hand, Wo returned to Hong Kong in 1990 and joined real estate company First Pacific Davies (predecessor of Savills) in 1995. A year later, Wo moved with the company first to Guangzhou, then Shanghai, then Beijing. In 2006, he was asked to set up Savills’ South West China division out of Chengdu, where he remained until he returned to Beijing in 2023 after being made Managing Director of Savills North China.

“That was a cold start when I was put in charge of the Chengdu office,  and our competitors were already in the market for over one year,” explains Wo. “It was a tough post and hard to survive because the market was not very mature in Chengdu at that time. And for Savills, it was also very challenging to find the right person for the role. Luckily, I started up from setting up the office, then I opened the business successfully, and I stayed in the post.”  

Wo’s role as MD of Savills North China is a culmination of three decades working in the same sector across the same region for the same company. He has witnessed the learning years of the 1990s, the boom years of the 2000s, the regulated years of the 2010s and the challenging years of the 2020s.

“From the 1990s to 2010, the market grew very fast. Beijing, Shanghai, Guangzhou, Chengdu… a lot of projects were built in that period in every major city across residential, commercial and retail [sectors],” Wo explains. “The market growth was so fast that people couldn’t cope. During that time, our biggest challenge was to find enough experienced staff to do the work because the speed of the building and new projects was so fast.”

International companies like Savills succeeded because they brought professionalism and best practices to China, Wo explains. However, by around 2010, a lot of local companies had caught up with the international companies and the huge profits previously seen were harder to achieve.

“Local companies learn fast, and our staff or staff from competitors went to local companies or opened their own consultancy firms, so after 2010, some of the professional works were taken by smaller local firms, ” he says.  The market competition had become even more intense, and to make Savills stand out against its local competitors, Wo focused on ensuring the company had not only the best business practices but also the best company culture. Wo believes that a great corporate culture attracts the best talent, which ensures Savills stays ahead in the race for excellence.

After the development boom in Chengdu started in earnest, the challenge for Wo was finding human resources as it was hard to get good people and train them quickly.

Like selling a product, recruiting into a company requires sales and marketing. Sales, Wo explains, is the way you recruit people and how much money you pay them compared to the next company. “Instead of hunting for good people, I thought, why not to get them to look for us,” he says. “Especially at the start of my business in Chengdu – I joined a lot of forums and conferences that enabled me to show to a large audience how we are thinking very positively, that we have a good company culture and deal with people fairly, and we are a professional service company in Chengdu.”

Wo explains that it’s not necessarily about paying your staff the most but ensuring that you are rewarding them properly for achieving results, providing them ways to better themselves through learning, development and having a route to promotion.

But for Wo, the most important thing is ensuring the team is happy. “People want to work happily. But happy doesn’t mean having parties all the time,” he emphasises. “People are happy when they are treated fairly and don’t have to deal with internal politics. If there is good internal management that keep internal politics at bay people work happily.”  

“Company culture and integrity is still an edge for foreign companies. It makes it easy to attract the best talent,” Wo says. “We need to develop new ideas and keep ourselves in advance of the market.”

Prior to around 2010, foreign companies had products or services that China didn’t have and therefore could sell these at a high margin. But with China’s rapid development, companies started to be able to produce similar products at a lower price, meaning the foreign companies couldn’t hang on to their margins as they did before. “Foreign businesses that want to do good business in China have to bring in the best services, the newest technology and really good professional products and services. Those with a 1990s mindset will not survive,” Wo says.

Around 2015, a lot of foreign developers and Hong Kong developers started to exit the China market due to tightening of real estate policies that made the sector less profitable. Instead, they were replaced by state owned enterprises or local governments who had no shareholders to please.

Wo and I discuss the more recent challenges: the Covid-19 pandemic, the economic slowdown, geopolitical tensions, and China’s real estate slump. Wo tells me he believes that the economy is a periodic problem, and it will settle down eventually.

The most important thing to consider when the economy is going through challenging times is to control costs, Wo says. “Previously, the aim was always to grow your business, but nowadays, the goal is to sustain your business and consolidate,” he says. “This is a great time to think of new ways to do business, new products to launch or new markets for geographical growth.”

For example, as the US and European economies slowed, China looked to open up new markets in the Middle East, Southeast Asia and South America.

“Look at extending your business without having to invest too much. Consider how to raise income or profit of the company little by little,” advises Wo. “And develop new products and new technologies – always be thinking one step ahead.”

Savills is involved in all elements of real estate apart from the construction itself. From planning a single building to an entire city block; pre-management consultancy and sales to leasing and project operations and management – the company provides a full service across the retail sector. Moreover, the company now provides a property, asset and business valuation service for those looking to leverage their equity stake, receive investment or list on a global market.

“There have definitely been ups and downs, and the market has changed quite a lot since Covid-19, but all our businesses have remained strong,” Wo says. The key thing, he advises, is that “in order to earn and survive, don’t think you can get quick money or easy money. You have to work harder than ever. This period will pass in a few years’ time and so we should prepare before the good times come.”

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On Thursday, 10 August, Country Garden, one of the few major developers in China to avoid bankruptcy in recent years, issued a profit warning. The next day, its shares fell to record lows, affecting the wider property sector; the Hang Seng Mainland Property Index fell 1.49% the same afternoon. On Monday, 14 August, Country Garden delayed payment on a private onshore bond for the first time.

On Thursday, 17 August, Zhongzhi Enterprise Group – a major Beijing-based asset manager with considerable exposure to the property sector that has a reported RMB 1 trillion (£108.5 billion) in assets – told investors that it needs to restructure its debt. It had already been missing payments on dozens of financial products. Reuters reported that Zhongzhi had hired one of the Big Four accounting firms to audit it.

The same day, China’s property giant Evergrande, which defaulted in 2021, filed for bankruptcy protection in New York. It was also informed by China’s securities regulator that it is being investigated for suspected disclosure violations.

On Friday, 18th August, two Hong Kong-listed property developers, Yuzhou Holdings and Sino-Ocean Group Holdings, announced significant losses for the first six months of the year. Nikkei Asia reported that Yuzhou cited an “unfavourable macro environment and the downturn in the real estate industry”.

Concerns about property contagion – which then extended to the financial economy due to Zhongzhi’s troubles – led several global financial institutions to cut their China growth forecasts for the year. Morgan Stanley, for example, cut its estimate from 5% to 4.7%.

SCMP reported that the Japanese financial services company Nomura gave an unusually pessimistic assessment in a new research report on China, warning that “slumping home sales may lead to a rising number of developer defaults, a sharp contraction of government revenue, falling demand for construction materials, declining wages of employees in the property and government sectors, weaker consumption and faltering financial institutions.”

China has already started to act to shore up the economy, including a 10-basis-point cut in its one-year benchmark lending rate on Monday. The small size of the cut may reflect concerns by the authorities about bank profitability – a key factor in preserving financial stability.

Nevertheless, Nicholas Spiro, a partner at Lauressa Advisory, a London-based real estate and macroeconomic advisory firm, told SCMP that while China’s property sector woes are serious, their potential impact on global markets should not be overstated and that China is highly unlikely to be facing a “Lehman moment”, a sentiment echoed by many other analysts in the industry.

This is partly because state ownership provides banks in China with a degree of protection against problems in other parts of the financial market. Moreover, in contrast to the West, Beijing tends to allow state-owned banks and other financial entities to help absorb troubled companies.

Photo by Karl Groendal on Unsplash

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China’s property market accounts for around 25% of GDP. Analysts widely assumed that this, therefore, makes the sector too big to fail. They might be about to be proven wrong. The property market has contracted by as much as 7% year on year, causing real estate to have become a significant drag on the Chinese economy. Following the struggles of Evergrande, China’s second-largest property developer, late last year, more real estate companies have come to be swallowed by their ballooning debt. The co-chairwoman of Country Garden, another massive developer, has lost as much as £10 billion from her personal fortune in the last 12 months. The result is that developers are no longer building homes, buyers have started to hold off on paying their mortgages or entering the market, and the system has run out of capital. 

Background 

China’s real estate sector might be seen as a bit of a Ponzi scheme. The developers rake in hordes of cash from existing customers for properties that have not yet been built and then use that cash to fund the construction of homes for new customers, which is fine, assuming that confidence is high and all the cogs are turning. Should investors in the developer companies lose faith in their debt management, however, or the economic environment takes a turn for the worse, the model then starts to come under considerable strain. Real estate is also incredibly pro-cyclical: everything good feeds on itself in the boom, and everything bad feeds on itself in the downtime. 

Worse, there is little incentive to regulate the real estate sector in good times. High sales come with high demand and high borrowing, meaning that Chinese consumers, the banks, the developers, and, to a certain extent, the government, are all happy. Indeed, the only incentive to regulate during a boom is to reduce the damage a likely bust will bring. The Chinese government sought to introduce closer regulation last year when it implemented a “three red lines” policy to restore the real estate sector, but it has not been particularly effective — at least not yet.

More than 90% of properties sold in China in 2020 were off-plan, but the completion rate was just 60%. Predominantly middle-class mortgage holders are starting to complain. Furthermore, the real estate market is not struggling due to financial pressure on homeowners — it is the developers who are under the cosh. That is an awkward state of affairs for the Chinese government in a politically sensitive year in which President Xi will likely secure a third, unprecedented term. Middle-class mortgage holders could start to wonder whether the government, the regulators, and the state-owned banks that drive much of the country’s real estate activity, can actually deliver the better life they have promised. 

What are the options for the Chinese government?

Failure to regulate the industry sufficiently while it was booming has left regulators in an impossible position. Stepping in to pay people’s mortgages will only encourage more people to default on their loans. That could be very costly, stretching well into hundreds of billions of dollars. But bailing out the developers will only encourage them to continue the practice, which in Tibet, Qinghai and Guizhou is so severe that developers start six houses for every completed property. 

Covid is exacerbating the situation as lockdowns deter potential buyers from visiting and putting down an offer on properties, whilst mortgage payers still have to pay mortgages even if they have lost their jobs or experienced pay cuts. Unemployment is currently running at 6.1%, just shy of the 6.2% recorded at the start of the pandemic. It is plausible that the situation will improve after the Party Congress. The government could then begin to take bolder steps in rebooting the sector, which is not without risk as lots of people could lose a lot of money, or relax Covid restrictions, increasing consumer confidence. With state-owned money covering over so many cracks, not just in the real estate sector, however, it is hard to see how state intervention can be dialled down without triggering some inflation or social unrest. 

Ghost towns 

Beijing has announced plans to revive millions of stalled property developments by issuing loans worth up to £120 billion at rates of around 1.75% per year to plug the shortfall. It seems unlikely to work. Not only is such a figure a drop in the ocean, but it might also be considered a rather dubious use of public funds, taking into account that many of these unfinished apartments are in areas where people have no intention of living. The majority of potential buyers are seeking to move into the cities or generally eastward, but many of the apartments that developers have invested customer money into are located in western or northeastern China, where the local government has incentivised state-owned developers to revitalise the area, regardless of demand.

Ordos, in Inner Mongolia, is China’s most infamous ‘ghost town,’ but there are many others. Indeed, there is enough vacant housing in China to accommodate the entire population of Spain. That, in turn, puts pressure on prices, meaning that even if the government relaxed Covid restrictions and gave the property market the boost it needs, prices would probably not increase and provide the market with the greater liquidity that it needs. 

Impact on UK plc 

UK companies have already been impacted negatively by the slowdown in China’s real estate market. The oft-cited 25 to 29% of GDP that the sector contributes to the total takes into account construction, servicing, retailing, commodities and miscellaneous material inputs — all of which British companies in China are well placed to provide. Indeed, CBBC has already heard from British firms that have contracts with Chinese developers who are experiencing financial difficulty and, therefore, have had to default on payment. 

The CBBC View 

It is very likely that the regulators will get the current crisis under control; China’s property market is too big to fail. There are reports of the government instructing state-owned banks and the developers to come to some agreement under the direction of the Ministry of Housing and Urban-Rural Development. The problem is that this plan revolves around directing more state-owned money to solve the issue, which is not sustainable in the long term. Foreign creditors are not an option; they have already lost £10s of billions in Chinese real estate bonds, so, as the economist George Magnus argues, it will take a miracle to lure them back to China’s real estate market. Ambitious structural reforms concerning how the developers work with local government, state-owned banks, and their customers will be required, but the problem has become so severe that this is not without risk. A lot of people are going to have to lose a lot of money at some point in the near future. The question is who and what are the broader socio-economic repercussions of that.

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A rise in the Chinese student population benefits UK property market, writes Rosemary Playfair

Investors from China are cashing in on the opportunities provided by a drop in the value of the British pound and increasing yields and rents in the UK buy-to-let market, particularly with student flats. The Chinese student population in the UK has grown by 34 percent in the last five years and China now sends more students to the UK than any other country in or outside the EU.

Grant Property, leading UK based property investment company, reports a surge of interest from China as new and existing investors are purchasing more buy-to-let properties to add to their portfolios. An increase in rents as much as 15 percent over the last 12 months alone, combined with steady long-term capital growth (on average 7 percent per annum) and prices in regional UK cities rising at their fastest rates for 10 years, are factors making UK property an appealing investment prospect.

Student accommodation is the jewel in the crown for the property investment market

“We are seeing a huge demand from investors from China, some of whom are looking to buy multiple properties each,” says Peter Grant, founder of Grant Property. “In the last year we have sold over £33 million worth of properties to investors and we are currently dealing with 20 percent more enquiries than this time last year. Investors have seen returns of up to 28 percent per annum over the last 22 years. From China alone, we have gone from one client to 30 clients in a few years, and we are currently dealing with dozens of enquiries.

University of Essex’s new student accommodation in Southend on Sea, Essex

“Investors are capitalising on the opportunity to snap up traditional flats in UK cities, particularly where there is a large student population. The focus is on traditional refurbished properties in good city centre locations, not purpose-built blocks on the edge of town, which tend to attract mainly first year students.”

“Student accommodation is the jewel in the crown for the property investment market,” says Grant. Student accommodation is not subject to the same economic or political influences as the rest of the property market. Even in a recession, occupancy is very high, so rentals are virtually guaranteed. And high demand delivers high yields. UK universities and colleges are very popular with Chinese students, expats and UK students alike. Parents are recognising the virtues of buying property for their student son or daughter to offset tax, save on rental outgoings and even generate income from letting out a spare room.

Overseas investors in UK property are now outnumbering UK investors and, according to Grant, that is likely to continue.

“Most of our enquiries are coming from overseas now and that is showing no sign of changing. The latest figures for the Chinese student population in the UK was over 120,000, and that doesn’t even include the number of expats living in China, many of whom want their children to study in the UK. A lot of expats want to invest in property back home to build security for their future. I expect the numbers to continue to grow as the UK’s higher education system carries a lot of prestige in China (and indeed the rest of the world), and students achieve impressive qualifications.”

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