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REAL ESTATE: Unleashing Yujiapu's Potential
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Unleashing Yujiapu's Potential

By Michael Hart (Managing Director at JLL Tianjin) and Sean Linkletter(Research Analyst at JLL Tianjin)

BT 201512 100 04 Real Estate 001September 30th marked a big day for the Yujiapu Financial District, as the railway station opened, linking the area to both Tianjin and Beijing via a high-speed rail. The Yujiapu development has come under criticism from Western media - many considered the region's construction as a sign that China was at the height of its property bubble. Instead, the completion of Yujiapu's new, eye-catching railway station may instead be a signal that the government is capable and committed to establishing Yujiapu as a regional commercial center.

The Yujiapu Financial District is a government-financed new development area located in Tianjin's Binhai New Area. Resting on a peninsula formed by Haihe River, the area spans a total land area of 3.86 million square-meters. The area is to be developed in four phases, covering more than 100 plots of land, equating to roughly 9.5 million square-meters of new development space. The project aims to diversify the regional economic base, which has traditionally depended on manufacturing and logistics.

By developing Yujiapu - a brand new, master-planned commercial development - Tianjin is following in the footsteps of other major Chinese cities that have created economic zones to spur development, including Shanghai (Lujiazui) and Guangzhou (Zhujiang New Town). But just a few kilometers away, in the TEDA development area - one of Tianjin's best known development zones - a mixed-use commercial area called TEDA MSD (Modern Services District) is also under development. Somewhat confusingly, TEDA and Yujiapu are separate areas, with distinct leaderships and goals, but both are part of Tianjin's Binhai New Area.

BT 201512 100 05 Real Estate 001To comprehend the genesis of Yujiapu, and similar commercial district developments in China -- it is important to understand that developers motivated by profit are unlikely to undertake a green-field development where there is no market and no infrastructure. The plan for Yujiapu is a grand one. Take an unused, former industrial site and transform it into a major base for the service sector. That process involves creating a master plan, building the base infrastructure, including transportation links, securing several anchor tenants and allowing time for the project to develop. Eventually, once a critical mass of tenants, services and other support functions have come online, commercial developers will be attracted by the available land plots. More importantly, and if successful, the local government will have created a tax base with companies and individuals attracted to the area, providing income when the local manufacturing base eventually declines.

The Tianjin government put in place a plan to make this happen. They hired SOM (Skidmore Owings and Merrill) -- an experienced US-based architectural and planning firm that has developed a number of the world's most iconic buildings, worked on the Beijing Finance Street master plan, and many other city-level master plans across China and Asia. The government created a project company to undertake the initial land and infrastructure development called TIFI (Tianjin Innovative Financial Investment company). They secured several anchor tenants for the office buildings, including Huaxia Life Insurance, Winland Group and the Tianjin Rural Commercial Bank. They also recently secured a major cultural resource when Julliard -- the New York-based performing arts institution -- announced plans to open a branch in Tianjin in 2018.

Whilst many scoff at such plans, they don't realize that Shanghai's Lujiazui skyline was developed in much the same way. Although today it has nearly one hundred skyscrapers, most of the original buildings were government-backed, including the Jin Mao tower, the Shanghai Stock Exchange, the Bank of China Tower, and the buildings for the Bank of Shanghai and Bank of Communications. Lujiazui was kick-started by central planning, not capitalism.

When planning the area, SOM took into consideration challenges that other new zones had faced. For instance, in Shanghai's Lujiazui area, a major road, splitting the area in half, made it difficult to get from one side to another; additionally, subsequent subway development made traffic challenging. To avoid this, the Yujiapu project routed a major highway around the district and installed a pedestrian tunnel linking the train station to all the office buildings in the area. Office workers can transfer directly from the train station to their offices without ever going outside. Pedestrians will be especially thankful of this during the winter, and it will make the below grade retail space more valuable. Additionally, the developer pre-built subway tunnels so that in future years -- when the subway lines are built into the area -- construction will not disrupt activities in the area.

Yujiapu has also set aside significant areas along the river and within the business district for parks and green space. Two large parks are located in the start-up area, the first portion of Phase 1 to be built. There is also a hotel building reportedly going to be managed by an international hotel management company.

One criticism of Yujiapu is that there is no residential space completed to date, but rather the area is opening with nearly a dozen office buildings, a recipe for a sterile environment. Later phases of the project will include residential and this should help to see a steady increase of activity in the area. Another criticism has been that TIFI -- a local-government financing vehicle (LGFV) -- has taken on large debt to finance the project.

Its designation as a financial center reflected the hopes of some officials that financial firms could be attracted to the area. Yujiapu did indeed receive more flexibility than most of China to register private equity firms and asset financing companies in the district. These firms may eventually use Tianjin as a base, but a more likely set of tenants for the office towers are those who reflect the local economy, such as in manufacturing, shipping and logistics.

BT 201512 100 02 Real Estate 2Directly across the river from Yujiapu is another area named Xiangluowan, sometimes referred to as Conch Bay. This area was developed before Yujiapu, but has been panned because a number of projects appear to be half completed or are for sale at bargain prices. A number of domestic developers bought land there and developed projects for strata title sale, but didn't have money to see their projects through. The result is that there was much property speculation and very little actual use, so the area feels deserted. Outside observers sometimes incorrectly conflate these two areas. TIFI has attracted criticism because it hasn't been able to attract and convert major office users yet, but TIFI still controls most of the buildings in Yujiapu and is, therefore, better able to manage the environment during the start-up phase.

Much of the criticism of Yujiapu has been self-inflicted. TIFI's headquarters has a huge model of the master plan, but staff -- who can recite from memory impressive statistics and the names of companies they hope to attract -- couldn't answer basic questions that fell outside the script. And initially there didn't appear to be anyone on the staff with commercial real estate experience who could articulate how the development would actually work.

After a series of embarrassing encounters with international media deriding the area, TIFI largely shut the door to the media. Then came reports that Rose Rock - a group linked to the Rockefeller family, and who were supposed to be building the iconic, mixed-use development near the train station - was at least temporarily shutting down its project. Other groups with links to New York - a city TIFI looked to for inspiration - including Tishman Speyer, have reportedly also quietly shelved their project for now.

However, things finally seem to be moving in the right direction for TIFI and Yujiapu. In 2014, Power Long - a domestic developer -- opened a shopping mall nearby and although it needs to attract more footfall, the new transportation link will help, and struggling retail centers in China are hardly unique. With the train station now opened, visitors can easily access the area. In November, the government even held some promotional activities drawing students and young people to the area.

It was easy to be critical of Yujiapu, when it was half-built, unconnected, remote and empty. With a few anchor tenants now secured, an interesting skyline in place, a world class cultural anchor committed and a train that connects it with Beijing in 45 minutes, now is the time to start critiquing it. If it is successful, we will see more investment from the private sector, and TIFI will be able to do what the government did in Shanghai's Lujiazui - that is, step back into the shadows and let visitors believe it was all the work of private enterprise and capitalism.



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