What Exactly Are We Looking At?

Recently , and I were in Beijing together and had the opportunity to tour Jiuhua Group’s new development.  I think it would be fair to say that we all left scratching our heads, asking, “what exactly are we looking at?”  For those with China experience, at some level what we saw when we first pulled in would not be entirely surprising:  a handful of really, really big buildings on a plot of land that was obviously early into its development.  The buildings that were complete were oddly vacant, giving one a strange sense of disembodiment:  the buildings completion seemed starkly in contrast to the lack of human activity.

To give you a sense of how big this property was, even though only a handful of buildings had been built out, there was a tram that had been built connecting the buildings already completed.  Interestingly, the tram was already looking a bit rough, with rust on the body of the vehicles and the tracks.  The main building, where we spent the majority of our time, was also where the model senior housing units had been built as showcases.

We were at this development because we had been told it was one of the newest senior housing developments being built in Beijing.  What we saw was at one moment exciting, and at another perplexing.  It is worth pointing out that the models we saw were first-class.  These were lovely units that were nicely appointed (deep cherry stained wood, stainless steel appliances, flat screen TVs, marble baths, etc.).  For those interested, I have pushed some pictures I took into a slide deck without additional commentary for viewing below (if your page doesn’t load the slides, they should be viewable ).  Because the actual senior housing units were only available as models, it is not possible to speak to the level of service they will ultimately provide; however, from their brochures they emphasize access to medical care, specifically Chinese doctors from AAA hospitals.

Where things got interesting was when we tried to understand their pricing strategy.  This senior housing development offers three types of units (a flat @ 75m², a one bedroom @ 118m² and a two bedroom @ 150m²).  All three are available in one of two pricing schemes.  The first is a 30-year “rental” at a fixed rate.  The second is more flexible, but with a larger deposit against which a fixed amount is deducted per year for early departure.  I am intentionally not sharing details of the pricing scheme because the actual numbers obscure the main point:  the financial model put forward simply makes no sense given what is known about the cost of living in Beijing, or what similar first-class housing would cost in other local senior housing developments.  As both Joe and I said to one another towards the end of the meeting:  if this pricing scheme is real then I know where I plan on retiring.

So what exactly are we looking at here?  What I am about to propose is my own analysis only – any obvious lapses in critical thinking are entirely my own!  It is worthwhile to zoom out and think about what Jiuhua’s overall plans for this development appear to be.  Go ahead and look at the first two slides below to get a sense of how large this overall development is planned to be.  What you’ll see by looking at their long-term plans is that they intend for this to be a “Resort and Convention Center.”  The development will have 2,300 hotel rooms with 10 restaurants, the largest of which they advertise, “can hold a party for as many as 3,000 persons.”  When looking at this development, it appears we can look at either the footprint of dedicated senior housing or the amount of likely revenue Jiuhua is probably going to recognize from senior care and propose that a development of this scale simply could not be financially justified.  Unless, of course, senior housing is simply the mechanism by which the “locked up value” of this particular parcel of land could be “unlocked.”

This is a phenomenon that senior care operators are going to want to carefully watch for a couple of reasons, not least of which is that a Chinese real estate developer who views senior housing as necessary only to achieve another larger development goal wholly un-related to senior housing is not likely to be a good partner.  This is also why understanding the boundary conditions of their land rights are so essential.  In addition, the head-scratching about the sustainability of this particular senior housing model itself begs questions about this development in particular, if not the developer in general.  On these two points will turn much of what will determine successful operator-developer partnerships in China over the coming years.  Consequently, the idea of how to conduct meaningful due diligence in China is essential and will be the topic of Monday’s more in-depth column.