You'd think that with a population of 1.3 billion China would be a pretty crowded place.
That may be the case in its major cities and on the eastern coast where most of its inhabitants are concentrated, but as the world's third largest country with a land area of some 9.6 million square meters, much of the population remains scattered across the country in small agricultural villages making it difficult for them to benefit from improvements that are bettering the quality of life for many of their fellow countrymen.
So, in a move that might seem rather strange to Israelis who are encouraged continuously to spread out of the crowded center of the country into the periphery, the Chinese government has adopted an urbanization plan with hopes of drawing the rural population to its cities.
"You have to be blind to not see the potential here is huge," says Yosef Grunfeld, chairman of Kardan Israel Ltd., about the world's fourth largest economy.
Some 170 cities in the country currently have populations of at least one million, while forecasts have 50% of the population living in urban centers by 2010 with that number rising to 70% by 2018 from 530 million city dwellers at the end of 2003.
Grunfeld, last week, headed a contingent of management of Kardan N.V., an international investment company based in the Netherlands, which brought a group of Israeli journalists to China to view its real estate projects there.
Kardan, a $1.4 billion company that trades on Euronext Amsterdam and is a member of the Maof on the Tel Aviv Stock Exchange, is active primarily in real estate, financial services and infrastructure, but also operates in the automotive and consumer goods and communications and technology sectors through Kardan Israel. The real estate operations are conducted through GTC Real Estate N.V., which conducts its China activities through a 50%-owned venture with Lucky Hope Group Co. Ltd., its local partner based in Beijing.
The company is continuing its practice of partnering with local companies in China following the successful model of GTC SA, Kardan's operator in Poland, which started in 1994 with the $6 million purchase of a factory in Warsaw and is now a $4b. operation.
Given the company's focus on emerging markets, the decision to enter China, which is one of the world's fastest growing economies, was a natural one, coming in 2005 with the focus being on so-called second-tier cities over first-tier locations because of the stronger growth in those locations.
"In 2000, when the market started to open with so much growth we saw an opportunity," Grunfeld tells The Jerusalem Post.
He says the decision was based on the viability and macroeconomics of the market and where it was going over the next five to 10 years. While some many Israeli businesses have realized China's potential resulting in some 200 being represented there, Kardan is the only one now operating in the real estate sector. Given the expanding Israeli presence in the country, Prime Minister Ehud Olmert, during his visit to Beijing in January, announced the opening of a new trade consulate in Guangzhou, one of China's fastest growing cities.
Official statistics and private estimates show average economic growth in China at roughly 9%-10% from 1980 to 2005, with a similar growth rate from 2001 to 2006. According to the Chinese government's Five-Year Plan for 2006 to 2010, annual growth is forecast at 8%, with som private forecasts even higher.
"It's a very strong economy with a lot of resilience. It's very difficult to grow less than 7%," says Arthur Kroeber, director of the Dragonomics economic research firm.
Spurring that growth, according to Kroeber, is worker productivity - gaining 20% a year - and government spending on infrastructure, which is getting an extra lift from upgrades and projects to prepare for the 2008 Summer Olympics for which Beijing will serve as host city.
Meanwhile, he says, even though wages are rising about 10% to 15% annually, it is not translating into increased consumer purchasing power.
"Because the economy's productive capacity is rising faster than the ability to consume, a 'consumption driven economy' is still years away," Kroeber says, noting that of the 1.3 billion population just 120 million have discretionary income. That number, however, is expected to jump to 300 million by 2015.
Where the the population is spending its money now, Kroeber notes, is real estate.
"They may scrimp and save on other things, but will pay for housing," he says. "I don't think you want to be in anything else because they don't spend on anything else."
That comes as no surprise to GTC, which says it has received a tremendous response to its offerings in Shenyang and Xi'an.
In Shenyang, China's fifth largest city with a population of about 7 million located in the country's Northeast, GTC has two projects underway and a memorandum of understanding for a third.
Qili Xiangdi, construction on which began in September 2005, has already sold 1,412 units of a total 1,863 to be built on the 130,000 square meter plot. At a current average sales price of $365 per square meter, the company has already received revenue of approximately $40m. out of an expected total of $64m. Completion of the final phase four of the residential and commercial project began in April and is expected to be completed by November 2008.
Nearby, on a 440,000 square meter plot, GTC also is building Palm Gardens, another commercial and residential endeavor, with an expected completion date in the second quarter of 2011. Thus far, 222 units of a total 3,500 in the five-phase project have been sold for revenue of $20m. The current average sales price is $550 per square meter and total expected revenue is $200m. Sales in phase two of the project are expected to begin in October.
Under a memorandum of understanding signed in February with the Shenyang Puhe New City Administration, GTC acquired rights to use a total land area of 460,000 square meters with 920,000 square meters of building rights for Shenyang Daoyi.
In Xi'an, the capital of Shaanxi province, GTC is looking to capitalize on China's enthusiasm for the Olympic games and has purchased one of just 24 licenses from the Olympic Committee to use the Olympic name in its marketing. It is now selling its Olympic Gardens project, which will include residential and commercial units, as well as a five-star hotel. Nearly all of the 470 apartments available in phase one have been sold, including 288 on the first day of sales alone. About 580 of 1,010 units available in phase two have been spoken for, generating total revenue to date of about $35m. The current average sale price is $370 per square meter, and total expected revenue is anticipated to be $387m. Completion of the six-phase project is expected by the end of 2012.
Continuing its rapid expansion, within the next three years, GTC hopes to be one of the top five developers in the area, operating in 10 cities, including a move into the country's South and West. Another two projects are expected to be added within a year. Grunfeld says they are looking at "quite a number" right now with some currently in negotiation. During the visit, Alon Shlank, managing director of Kardan N.V., made a side-trip south regarding plans for a development in a new city.
While still just a small part overall, Kardan expects China to be a "significant" part of its value in the near future.
Given sales of $1b. in the country thus far, it's not impossible China could account for 15% to 20% of Kardan's value in the next three to five years.
Where to next? Grunfeld says the company will be busy in China for the next five years but that he's optimistic about markets throughout Southeast Asia.
"The engine that's driving the locomotive is not just driving China, but also will drive the surrounding areas - Thailand, Malaysia, the Philippines," says Grunfeld. "This is the place to be."
China's water situation presents another opportunity
Any visitor to China has heard the warning, "Don't drink the water."
It's one worth heeding, as the availability of safe drinking water and the resource in general is scarce - with the country having a water resource volume per capita that is only 25 percent of the global average. In the North, per capita water volume is just 10% of the world average.
More than 400 of China's cities are facing water shortages, while more than 100 face serious shortages, especially large cities such as Beijing and Tianjin.
Meanwhile, a Chinese government survey in 2002 found that almost 75% of the country's lakes are severely polluted and about 35% of river sections surveyed could only fulfill requirements for industrial and agricultural uses.
As for underground water, just 63% is drinkable without treatment; 17% can be used for drinking after treatment; 12% is unsuitable for drinking but can be used for industry and agriculture; and 8% can be used for industry only after treatment.
A rising population and rapid economic development will only increase the strain on these resources, and the government has established serious objectives to improve the situation.
That provides an excellent opportunity for Israel, which has established a name for itself as a leader in water treatment technologies. Indeed, during Prime Minister Ehud Olmert's January visit to the country, a cooperation agreement was signed with the Beijing Water Authority to advance projects in the water technology sector.
Realizing the potential, Kardan also has set itself up to be a player in this lucrative market, establishing Kardan Water International Group, a 66.7%-owned joint venture between its Tahal Group subsidiary and local partners, to invest in and manage, operate and maintain water-related infrastructure projects in China with a direct investment of nearly â‚¬64 million in selected projects.
In phase one, the venture will work in the areas of waste water treatment and water supply in the Huai River and Yangtze River areas while in phase two it will add desalination projects and expand its geographic coverage.
Although Kardan expects to succeed in this sector, just as it has in its Chinese real estate ventures, the going may be tough as it competes with various local players, as well as international giants such as Veolia, GE and Siemens and Israel's IDE Technologies Ltd.
The author was a guest of Kardan N.V. in China.
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