Saturday, June 25, 2005

What Land Can Do

(Post 3 of 5)

Commodifying Zhongguancun Real Estate

Zhongguancun has its origins in the flows of commerce. Commercial development drove the development of the real estate industry but the real estate industry has obstructed Zhongguancun’s development. This seems like a paradox.

According to the 2004 “Investigative Report on Software Parks in Eight Cities,” there are three types of domestic software parks: company type (Zhongguancun, Dalian, Shanghai, Zhuhai); government agency type: those established by government departments (Jinan, Qilu, Shenzhen); and government and company joint type (Hangzhou).

Therein lies an obvious question: what is the benefit of company operations in Zhongguancun? It is known that income from real estate occupies a very important position.

Because of the large-scale involvement of real estate, Zhongguancun has quickly become “pricey.”

During a interview, this reporter learned that an ordinary counter in Hilon Electronics Market rents for 9,000 yuan, while an initial “support payment” of 88,000 yuan must be paid before entering the market. In addition, only qualified enterprises are able to enter: it is necessary to register as a company with at least 500,000 yuan in capital?getihu [self-employed laborers] are completely barred from entry.

Further, in Zhongguancun’s other parks, including Fengtai and Yizhuang, there have been effects from surging real estate development and escalating real estate prices. Real estate prices are climbing there as well.

An employee at a mid-level software company opened in an office building, Li Jianjun, told this reporter: “Even this grade of office building costs 6 yuan per every square meter. There is nowhere in Beijing where the price is this high.” High rents are especially difficult for SMEs to bear. Some enterprises have started to use residence buildings as offices or purchased homes to use as office and residence. Some have even moved to the Chaoyang District in eastern Beijing where office buildings rents are relatively cheaper. Mr. Li also intends to leave Zhongguancun and is in the process of browsing housing in Chaoyang.

The “new star” in Zhongguancun over the past years is Zhongxing Micro-Electronics Company which collaborates with world “giants” and maintains its own video chip technology and products. The chairman of the company, Dr. Deng Zonghan who has studied in the U.S., recalled his experience of starting-up by saying that there are too few office spaces to choose from in Zhongguancun these days. This has created a situation where the price of land, housing, and office buildings averages higher than other domestic and international rates. These factors have added to the cost of doing business for SMEs.

It is reported that there is no price disparity between land in Zhongguancun and that in the CBD [Central business district]. Moreover, SMEs in Zhongguancun have the lion’s share of these places?companies with 10-50 people occupy 80%; private enterprises occupy 80%. Clearly, capital is tight for these innovative enterprises and they need to conserve costs. High rents put huge amounts of pressure on their starting up.

In Zhongguancun in this era, almost all real estate projects, whether they are offices or apartments, orient their first round of consumption toward Zhongguancun IT enterprises. Zhongguancun enterprises are a special community both shouldering “the task of developing China IT to new heights” and also carrying “the assignment of digesting the development of regional real estate economics.” Is this double role too heavy?

Real estate development often needs loans from commercial banks to support it; hence there is pressure to repay the loan and real estate developers cannot help but pass on this pressure to the next business. The efficient use of real estate space, related to the flow of capital, has gradually become the focus of developers. As a result, how to maximize the benefits of capital is the top priority of developments. How to reasonably develop the industrial structure and commercial pattern of this region is often only a secondary consideration.

In light of this, some have noted in jest that “if the electronics market becomes untenable, the owners might change all the businesses into clothing or commodities.”

“‘Wearing software enterprise clothing to do real estate business’ companies can be found everywhere,” said IT critic Fang Xingdong in his Losing Zhongguancun, published in 2004. His book speaks frankly about how real estate has become a promotional poison to the long-term development of Zhongguancun’s IT enterprises.

Zhang Zhongning in the “Investigation Report on the Economic Increase of the Zhongguancun Science & Technology Zone” says that: “Real estate in Zhongguancun has become a factor, but this may only indicate the cost of ‘cashing out’ 20 years of savings including the ecology, brand, and intangible assets of the high-tech industry.” “Zhongguancun has gradually adopted a development plan whereby land and environmental resources are used by the market to attract capital while technology investments have turned into economic contributions. The hopes from ‘Official Reply’ [State Council answer authorizing investment in Zhongguancun infrastructure and planning] were that a large number of innovative technology results would move to market bringing economic development, but this has not happened.”

Besides land, another deadly problem that coerces the development of Zhongguancun is finance.

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