黑洞社区

Peering upwards into the Shanghai fog, on a chilly late winter鈥檚 morning in the city鈥檚 Pudong district, the latest floors on what will be China鈥檚 tallest structure are just visible through the haze.

Fifty floors high now, by the time the Gensler-designed Shanghai Tower reaches its full complement of 121 levels, it will stand at 632m, making it the dominant tower on a skyline already packed with extravagant symbols of the city鈥檚 dramatic development over the last 15 years: the crystalline Jin Mao tower, the brash and overpowering Oriental Pearl Tower, and the 492m high Shanghai World Financial Centre.

There is no doubt that Shanghai, and China more generally, has run entirely counter to the international downward spiral of development work over the past four years. China鈥檚 annual construction market has shot up in value from 拢200bn in 2007 to around 拢500产苍 in 2011, and in 2010 overtook the US to become the world鈥檚 largest construction market with 15% of global work. According to a report by Global Construction Perspectives that figure is expected to rise to 21% by 2020.

Much of this anticipated growth is expected to come from China鈥檚 second and third tier cities, with the central government seeking to encourage development in central and western China to ease the pressure on space and resources in the more developed eastern coastal regions such as Beijing, Shanghai and Guangzhou.

But over recent months, increasing signs of caution have crept into the outlook for China鈥檚 development sector, with some commentators fearing that the country is heading for a so-called 鈥渉ard landing鈥� from its economic boom. Meanwhile, the Chinese government has taken steps to cool the overheated housing market by placing new restrictions on home ownership in major cities, which has already hit investment in the residential sector.

So how much confidence should really be placed in the future of China鈥檚 construction market? And how much opportunity is there for western firms tempted to muscle in on a market which, despite all the barriers to entry of a heavily state-controlled sector, has also, as it has grown, often coveted international glamour and western technical expertise?

China鈥檚 need for construction

China鈥檚 construction sector has enjoyed dramatic expansion since the eighties, when the government identified it as central to the country鈥檚 economic growth. On top of the government鈥檚 desire to create a stronger industrial and commercial infrastructure, demand has been fuelled by China鈥檚 need to support a burgeoning population. The mainland population at the end of 2011 stood at 1.3bn, almost 20% of the population of the world. This was a rise of 6.44 million on 2010, despite a flat birth rate.

This has resulted in a continued demand for residential, social infrastructure and transportation projects, the need for which has been increased further by a trend towards urbanisation. By the end of 2011, for the first time more than half of China鈥檚 population - 51.27% - was living in urban areas rather than rural, according to China鈥檚 National Bureau of Statistics.

These inherent drivers of construction growth are backed by key policies in China鈥檚 12th Five Year Plan, which outlines the government鈥檚 political and spending priorities for the period 2011-15. The plan is centred on a desire to increase urbanisation still further - the government wants to create 260 new cities in the coming 20 years - and to open up China鈥檚 second and third tier cities for trade and investment.

In tandem with this, the government wants to redistribute China鈥檚 industrial base so that manufacturing plants are no longer so greatly concentrated in western and central areas, creating more balanced communities and reducing the problem of industrial pollution.

The need to reduce pollution in itself also provides a potentially strong boost for construction growth. In December 2009 the Chinese State Council committed to reducing its carbon intensity - carbon dioxide emissions per unit of GDP - by 40% to 45% by 2020. The five-year plan identifies a more sustainable built environment - including a retrofit programme - as a key contributor to achieving this target. In addition, the plan commits to a series of major renewable energy projects, including the construction of six onshore and two coastal and offshore large wind power projects, and the construction of a series of solar energy power stations with a total generation capacity of over 5 million kW.

Such an obvious need for investment, and the strength of the government鈥檚 commitment, has fuelled confidence among many about the future possibilities for construction in the country. Stephen Lai, managing director of Rider Levett Bucknall Hong Kong, which is acting as cost consultant on the Shanghai Tower, says: 鈥淲e think that there will be a lot of work for the next 10 to 20 years. The second tier cities are seeing a lot of development, and the first tier cities may be slowing but they aren鈥檛 stopping.鈥�

Economic concern and construction

Despite this, however, there have been rumblings of concern that China鈥檚 boom may go bust, posing a strong risk to its development pipeline. China鈥檚 statistics bureau recorded a slowing of growth to 9.2% in 2011 from 10.4% in 2010, and late last year the International Monetary Fund warned that the escalation of the economic crisis in Europe could slash China鈥檚 economic growth, advising Beijing to prepare stimulus measures in case this happened.

Chinese vice-president Xi Jinping, on a visit to the US-China Economic Trade Cooperation Forum in Los Angeles last month, moved to address the fears, saying: 鈥淐hina鈥檚 economy will maintain a steady and robust growth. There will not be a so-called hard landing.鈥�

Yet fears about a crash in development work have been stoked by the impact of government policy towards residential development. In an effort to cool house prices in some cities, including Shanghai, the government last year increased the minimum down payments on homes. It also limited the number of houses families can purchase in certain cities, as the Chinese preference for investing in property over its fledgling stock market has led to some families buying multiple homes that then stand empty for years. Following this, China鈥檚 National Bureau of Statistics recorded that 52 out of 70 major cities that it monitors saw property prices drop between November and December 2011, and 48 out of 70 experienced a drop between December 2011 and January 2012.

Daneo Shen, associate director at consultant Sweett, says: 鈥淚n some cities, because of the government policy, the [residential property] prices are nearly 20% down. So developers and investors are slowing down construction, and it has affected work in the residential sector a lot until now.鈥� But he still believes that the industry will go up in the second half of this year because 鈥渢he demands in the residential market are still at a high level and the residential sector is near to the bottom point now鈥�.

However, although the policy will hit residential work in developed cities in the short to medium term, there is a broad consensus that the Chinese government will not allow the correction to go too far. Barry Piper, Asia director at Faithful + Gould, says: 鈥淭here is a bubble, and there are inflation issues. But I don鈥檛 believe it will pop. The government appears to have robust plans to keep the economy stable.鈥� In fact, Piper adds, the fact that the Chinese government can intervene in this way is a strong guarantee against a sudden crash. 鈥淚t鈥檚 a planned, controlled economy.鈥�

And experts argue that although the residential sector may be cooling, opportunities elsewhere are on the rise. Beijing and Shanghai are still seeing growth in commercial work, albeit at a far reduced pace, and second tier cities such as Chongqing are seeing a higher demand for quality commercial space as businesses seek to establish themselves away from the
high-cost bases of the most developed areas.

Much of the demand for office space is from foreign clients; however, the growth of Chinese domestic businesses means that these are increasingly driving development. Michael Kwok, director at Arup, which has seven offices in mainland China, says: 鈥淎bout 70-80% of our clients on buildings are foreign investors, particularly from other Asian areas such as Hong Kong and Singapore. But I think that balance will become more local. Both areas of demand are growing, but the local growth rate is higher.鈥�

Another area enjoying a high level of spending is infrastructure development. This is happening on a national scale, as the government seeks to create better links between its rapidly increasing number of cities. Around 60 airports are to be built during the current five-year plan period, and despite slowing its high-speed rail programme following a fatal crash in Zhejiang province last year, the rail ministry is still spending 400bn RMB (拢40bn) this year. Xiaobing Zhu, regional director for transportation in China at Aecom, says that the rail market will continue to offer opportunity: 鈥淪chemes will be built, but more slowly,鈥� he says. 鈥淨uality is the top priority.鈥�

There are also major opportunities in local 鈥渢ransport orientated development鈥�, where new metro lines or local airports are used as a cornerstone for major mixed use schemes.

Opportunities for western firms

Despite the apparent allure of its pipeline of work, the construction sector in China remains relatively protected by the state, meaning that there are heavy restrictions on the extent of work that can be carried out by foreign firms.

Virtually all contracting work is carried out by Chinese companies, many of which are still fully or partly owned by the government. The major opportunities for western companies lie in consultancy or design, but even here there are legal limitations on the work that can be carried out. The final stages of a project鈥檚 design, for example, can only be drawn up by firms with a local licence - which are extremely difficult to obtain for firms that have entered the market from overseas. As a result, architects operating in the country generally carry out early design work and pass the project to a local design institute before it reaches construction drawing stage.

Despite this barrier to entry, however, there remains a hefty appetite for western design, particularly on signature projects. Foster & Partners, SOM and KPF have all designed signature projects in China, although architects working in the region say that increasingly practices are having to prove what else they can bring to a scheme, rather than their brand alone. Francois Thibaudeau, associate at TFP Farrells, says: 鈥淚nitially, the Chinese thought the moon looked better in the west. They still want that design vision, but they鈥檝e also realised that western expertise can provide better buildings.鈥�

China is looking to western firms for technical expertise in areas which its domestic industry, having developed so quickly, still has not had a chance to grasp, fully or at all. This sometimes relates to particular forms of construction - for example, expertise in steel frame, a skill sought by second tier cities seeking to build high-rise buildings for the first time.

There is also an emerging demand for project management, a relatively new phenomenon in China, as projects become more complicated. Mark Budden, whose Shanghai and Beijing-based project management firm MBPM was bought by EC Harris in 2011, and who is now a partner at the consultant, says: 鈥淎t the moment, 鈥榲alue鈥� is 鈥榗heap鈥� - it鈥檚 all about lowest price - but that is changing. Project management evolved in the west as architecture became more creative and projects more complex, and we will see that happening here.鈥�

sustainability is another area in which China is keen to learn from the experience of the west. Helena Fu, director of Aecom China Sustainability Center, a think tank the company set up a year ago to meet the growing demand for sustainability advisory and consultancy services in the country, says: 鈥淐hina has been very interested in worldwide best practice. That鈥檚 proven valuable for companies like ours, as we can combine the technical and global expertise from the breadth of projects we have throughout the world, with our local know-how and understanding of the Chinese market.鈥�   

Of the western firms already operating in China, those that report strong demand for their services are often multidisciplinary consultants. They can combine areas of design and management expertise whereas Chinese competitors can often only provide a single service. Arcadis鈥� purchase of EC Harris was driven in part by its desire to increase its strength and service offering in China, and Faithful + Gould, part of the Atkins group, is predicting that more than 20% of its revenue will come from Asia by 2016.

These firms, it seems, are undettered by market jitters: even with a correction, the scale of the opportunity in China means it is viewed as a sound target. As Baet Yeok Hoon, a senior associate director with Atkins in Shanghai, says: 鈥淭here is real pent up demand, even if there are questions over how supply works with that demand. But this isn鈥檛 somewhere like Dubai: there鈥檚 a real population here, and the market has a long way to go.鈥�