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DIALOGUE: Fortune Rising
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Interview with Chris Brooke, President & CEO, China Business Unit, CBRE Group Inc

altCBRE Group Inc, formerly known as CB Richard Ellis Group Inc, has continued to push ahead to be at the forefront of the commercial real estate services market. By revenue, CBRE Group Inc occupies the number one spot within the industry and in 2011 broke in the Fortune 500 being name #440 on the list. China continues to be of great importance to CBRE and at the helm of their China operations is Chris Brooke, President & CEO of the China business unit. Business Tianjin recently had the chance to ask Chris some questions regarding the Chinese market and things that might be coming in the future.

Can you tell our readers a little about yourself and your role with CB Richard Ellis?

I have lived and worked in China since 2002, prior to which I spent twelve years working in Hong Kong. I joined CBRE in 2003 via the acquisition of the company for which I worked previously. Since joining CBRE, I have held various management roles within the company and am now the President & CEO of the China business unit. This role involves the formulation of our business strategy in China, the oversight of our business operations in the country as well as responsibility for financial performance throughout our twelve offices within China.

The Chinese government recently announced they would not ease restrictions on residential property ownership for the year 2012. What impact do you see this announcement having on the property market in China and your business?
I believe that the continued presence of restrictions upon residential property ownership will result in transaction levels remaining at relatively low levels, which in turn will force developers to reduce prices in order to dispose of existing inventory and generate cash flow. The extent and quantum of price reductions will vary by city as a result of local supply and demand dynamics as well as by project, depending upon the financial strength of the individual developer responsible for the construction of a specific scheme.

This trend will continue to place mid and smaller sized developers under financial pressure, particularly given the limited availability of credit. This in turn could lead to further consolidation in the development industry with larger developers acquiring smaller companies which are experiencing financial difficulties. It could also result in some companies looking to sell individual projects, dispose of non-core assets or look for equity investment within new development schemes. It could also potentially lead to a slowdown in the pace of new residential development with developers being more reluctant to invest additional capital in the light of uncertain market conditions.

How much of a linkage is there, specifically to prices, between the commercial and residential real estate markets in China?
The relationship between the residential and commercial sectors of the real estate market is becoming less and less direct as the real estate market in China continues to evolve. The residential sector continues to be heavily policy driven whilst the commercial sector is largely left to operate upon the basis of market forces. This leads to different trends being seen within the two sectors, particularly as the participants within the two sectors also tend to be different, with individual purchasers dominating the residential market and a much larger corporate presence driving activity within the commercial sector. The most direct linkage relates to the strata sales sector of the commercial market, but even within this component of the market there is little direct correlation between price trends within the residential and commercial sectors.

With residential property prices stabilizing in many cities, and even falling in a few, do you think this will carry over to rents or vacancies for commercial properties?
The commercial sector is driven by a different set of dynamics to the residential sector and trends within the commercial sector are therefore much more related to local market activity than the residential sector.

In 2011, we have seen very strong take up in the office sector in Beijing, Shanghai, Guangzhou and Shenzhen which has led to an increase in rental rates within these cities. We have also seen increasing levels of demand in major provincial capitals as multi-national companies have continued to expand their operations across China. We have also seen strong demand within the retail sector across all markets, again leading to increased rentals for high quality shopping centres.

Going forward, in a number of provincial capitals there will continue to be rapid growth in the level of supply of office and retail accommodation as we move into 2012 and 2013. It is this new supply which will put pressure on rents and lead to higher vacancies in certain cities, as against any impact from the trends being experienced within the residential sector of the market.

There is currently a lot of talk of an asset bubble and hard landing that risk occurring due to the property market. Do you agree or disagree that there is an inflated asset bubble right now? Why?
altI do not consider that the real estate sector in China is experiencing a bubble at the current time, notwithstanding the fact that we are clearly seeing volatility in the residential sector and a mismatch of supply and demand in the commercial sector in a number of provincial capitals. Although there has been significant expansion of the real estate sector in recent years, in the majority of cases this has been underpinned by strong demand fundamentals. There is also a limited amount of borrowing associated with mortgages in China, which is a fundamental difference from the situation seen in a number of international markets.

Therefore, whilst we expect to see a correction in residential prices as we move into 2012, we do not believe that this will be a major correction across all markets, and that the quantum of any price adjustments will be heavily influenced by the levels of inventory within individual cities. There is also no doubt that a number of smaller developers will experience further financial pressure in the first half of 2012 but we would anticipate that this will be resolved via the identification of alternative sources of debt and equity and industry consolidation, and we do not foresee a wholesale collapse of the development industry.

In addition, as mentioned above, the commercial sector is driven by different factors to the residential market and is actually likely to see continued growth in rents and prices in 2012 across a number of the major cities as against any form of decline.

Does China still offer a good opportunity to real estate investors, and if so, how can you help those clients realize maximum returns on their investment?
I believe that significant investment opportunities remain within the real estate sector in China – however, for new entrants to the market there are a number of challenges associated with the regulatory framework, pricing and on the ground resources. I am of the view that there is still upside to be seen in both the commercial and residential sectors, assuming that a long term investment horizon is being adopted. In the short to medium term, I believe that opportunities continue to exist in relation to Grade A office buildings in key commercial centres, mixed use developments and retail centres in major provincial capitals, mid-market residential development in second and third tier cities and high quality logistics properties.

What kinds of services can CBRE offer to potential clients to help them navigate the property market in China?

CBRE offers a range of real estate services throughout China, including consulting, valuation, leasing, sales and management. These services cover the office, retail, residential, industrial & logistics and hospitality sectors of the market and are relevant to developers, owners, investors and occupiers. CBRE is therefore well placed to assist both developers and occupiers of real estate in relation to all aspects of real estate development, ownership and occupation.

What areas of China do you currently see as having the best growth for services offered by CBRE?
We are currently very focused upon developing our capabilities within major provincial capitals in conjunction with the continued rapid economic development within these cities. During 2011, we have seen rapid growth in our business activities in cities such as Wuhan, Chengdu, Tianjin, Shenyang and Chongqing and we anticipate this growth will continue in 2012. The key areas of growth in these cities include consulting, office and retail leasing and property management.

Having said this, we are also looking to continue to grow our market share in the key commercial hubs of Beijing, Shanghai, Guangzhou and Shenzhen going forward given that these cities will remain the key hubs of activity in the short term.

How does CBRE bring value to a potential client that might be interested in your services?
altOur focus at CBRE is to add value to the core business of any client via the utilization of our real estate knowledge and expertise. This may include assisting a developer with the design and leasing of a project, helping an investor with due diligence or the acquisition/disposition of an asset, or working with an occupier to secure the optimum solution in terms of either owned or leased premises. We always look to understand the key objectives of our customers in order that we can ensure that our real estate advice supports the core business activities of our clients and assists them to achieve the best outcome associated with any given project/initiative.

Can you share an interesting story from your time with CBRE?
Having worked in China for almost ten years I can safely say that there is rarely a dull moment, particularly in an industry such as real estate. I would not like to pick out one specific example – however, I think that the most interesting aspect of my role at CBRE is to ensure that we have the correct balance between operating as an international company and understanding local market characteristics and industry practice – the striving for a balance in this area always produces very interesting dialogue and dynamics within the company and will represent a key aspect of my role in the medium to long term.

Any parting thoughts?

Many of the questions to which I have provided responses refer to the “China” real estate market. I believe that it is becoming more and more difficult to refer to trends within the country as a whole given the fact that market activity within the larger cities is becoming increasingly driven by local supply and demand dynamics. Therefore, whilst general trends can be used as a guide to overall market activity, it is becoming increasingly important for developers, investors and occupiers to conduct in-depth studies of individual markets prior to making real estate related decisions.
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