South African game ranch lodge -- February 2008

Sunday, May 29, 2011

South African game farm appraisal


Interior of hunting lodge

I have been asked about the photo at the top of my blog page. This photo was taken from a lodge at a South African game farm I appraised in 2008. It is located in the Waterberg, an upland area about an hour north of Pretoria. With an elevation of about 1000 meters, it is in an area with a mild, malaria-free climate.

I have recently found the same game farm for sale for 3 million UK pounds, or close to $5 million USD, lower than my appraised value and far lower than the South African appraiser’s estimate of value of 70 million rand, or about $10 million USD.

A game farm is basically a ranch that contains indigenous African animals and earns its revenues by hosting wealthy hunters or other tourists, such as photographers. Hunters pay for the animals they shoot. The hunters also have the option of eating what they kill, paying farm staff to prepare the killed animals for consumption. If the hunters do not want the meat, it may be sold to a local restaurant. At the game farm I appraised, the most expensive item on the menu was the white rhinoceros, which cost $25,000 to kill.

The game farming industry claims to be a greener alternative to conventional ranching, as indigenous animals live in better harmony with nature, consuming the full range of vegetation offered, while domesticated animals tend to denude the grasslands and need to be inoculated for disease. For example, there was a recent outbreak of “Foot and mouth disease” in the Kwazulu-Natal province this year.

So what is happening in the South African game farm market? Three years ago, billionaires such as Richard Branson and Howard Buffett (son of Warren) were buying their own game farms, and game farms were appreciating rapidly in value as the result of an increase in tourism by wealthy European hunters. The number of game farms was also proliferating. Nowadays, there are hundreds listed for sale.


Political rumblings

There is a vocal politician in South Africa’s ruling party, the ANC (African National Congress) who is causing some concern among game farm owners. Julius Malema, President of ANC’s Youth League, gave a speech at an ANC election rally two weeks ago which included the following remarks:

They [whites] have turned our land into game farms…We must take the land without paying. They took our land without paying. Once we agree they stole our land, we can agree they are criminals and must be treated as such

President Zuma, also a member of ANC, rebuked Malema and stated that land expropriation was not the policy of the ANC. Nevertheless, the gap in wealth between blacks and whites is still a divisive issue in this black-governed nation which has been ruled by the ANC since 1994. Mr. Malema is said to have a special appeal to young, poor, black voters and is an advocate of having the government nationalize the country’s assets, particularly its mines.

Market analysis

While not finding any current data on price trends in the game farm industry, the following information makes me wonder if there is a price correction about to occur in the South African game farm industry:

1. Seeing a game farm for sale at less than two appraised values.
2. The sheer number of listings of game farms for sale, including over 120 listed for sale with Africa Game Farms and 108 listed for sale at Africa Game Farm Estates.
3. Political rhetoric advocating land expropriation.

Valuation analysis

From an appraiser’s point of view, valuation can be tricky, as sales of game farms typically include a considerable amount of personal property – the animals themselves. Considering that a game farm without animals would no longer capture revenues from wealthy tourists, the real estate component of value is considerably less than going concern value.

Going concern value = real estate value + personal property value + business enterprise value.

The South African valuer took a different approach which essentially added the depreciated replacement cost of all of the improvements to the market value of the game-stocked land, based on sales of comparable game farms, thus including personal property value within the estimate of land value. This is a dangerous way to appraise collateral for lending purposes, which is one reason why this client sends me to appraise in other countries – valuation methods and standards differ.

My client was an adventurous private lender. I advised them that if they wanted to lend based on going concern value, the animals would have to be insured, as animals can be lost to poaching, theft, disease or natural disaster. The seller of the farm told me that he had already looked into insuring the animals, and the insurance costs would be too high for profitable operation of the game farm. In the end there was no loan and no sale.
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Friday, May 27, 2011

Canadian Buying Spree in the U.S. Southwest

Canadian-owned Desert Dunes Golf Course in Desert Hot Springs, CA

My previous post mentioned the activities of Canadian real estate syndicators in the U.S. southwest and Latin America. This is only part of a significant Canadian buying spree that I see happening throughout the U.S. “Desert Southwest”. Most of the Canadian buyers are actually couples or families.

The oil and potash boom in western Canada has provided new wealth to many Canadians, and now that the Canadian dollar is worth more than the U.S. dollar, many Canadians are taking advantage of the oversupply of homes in the U.S. Desert Southwest to buy themselves winter vacation homes, as winters in Alberta and Saskatchewan are legendary for their dreariness.

In my Saskatchewan blog from last October, for instance, I did not mention that on my flight from Las Vegas to Canada I sat next to a Canadian woman who had just purchased a Las Vegas home for herself and her husband.

I’ve also met Canadian buyers in Phoenix and Tucson and most recently I have encountered a wave of Canadians buying in California’s Coachella Valley, better known as “Palm Springs”.

In February I appraised the Desert Dunes Golf Course, a beautiful, Robert Trent Jones-designed golf course bought out of foreclosure by Canadian investors. They have been bringing in many Canadian tourists, and many tourists like the quality and prices of the residential real estate that they see there. For those who are interested, the lender was Kennedy Funding out of New Jersey.

I am currently appraising a recently completed condo complex next to another golf course in Cathedral City, immediately east of Palm Springs. Only 6 out of 40 units have sold so far, but the buyers have been Canadian.
Lantana at Cimarron Condominiums in Cathedral City








Areas of the Desert Southwest having significant oversupply of unsold homes and condos include the Las Vegas, Phoenix, Tucson and Palm Springs/California Inland Empire areas.

As for the Coachella Valley/Palm Springs area, the amount of residential oversupply appears to have stayed constant for a while, with Dataquick reporting a 7% decline in median residential prices in the last year as of April 2011.

The Cathedral City condo market in particular has about a 13-month supply of condos for sale, about the same as 18 months ago. Realtors generally say that a balanced market should have no more than six months of unsold inventory, so further condo price declines are likely. For an investor or flipper, this is not good news, but for Canadians seeking vacation condos, this has brought the median condo sales price in Cathedral City down to $115,500 (or 112,769 Canadian dollars), so this may be a good time to pick up a bargain to enjoy over the long term, taking advantage of the favorable Canadian/US dollar exchange rate. Prices are still declining, though, so no one should feel rushed to buy.
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Saturday, May 21, 2011

Warning about international real estate syndications and other crowdfunding ventures

Unsold Arizona condos are a favorite among Canadian syndicators.





What is a real estate syndication?

A real estate syndicator is one who organizes groups of investors (or “syndicates”) to acquire real estate investments. The syndicators are paid fees from investors for spotting and sharing profitable real estate investment opportunities with potential investors. The process is called "syndication", "TIC" (tenants-in-common), or "crowdfunding".

Real estate syndication achieved a bad reputation in U.S. in the 1970s and 1980s as an investment vehicle that enriched syndicators at the expense of investors. They reappeared in the last few years, now called "TICs" (tenants-in-common), and repeated the same abuses committed before, with the largest syndicators, such as DBSI and SCI, declaring bankruptcy in recent years, causing major losses for their 22,000 investors. Now that "TIC" is becoming a dirty word, the new term for syndication is "real estate crowdfunding".

Lately, I have seen such syndications go international. They may start in Canada, for example, and recruit Canadian or UK investors to invest in US real estate or Latin American real estate without involving a single US investor. They typically overpay for properties because they are compensated in proportion to acquisition prices. I am not implying that Canadians are any more dishonest than Americans, only that the dishonest ones are released from prison a lot sooner up there than down here in the U.S., if they serve time at all.

Take Canadian Ed Okun, for example. He had already had a civil judgment for fraud in Canada before coming to the U.S. to continue his ways.  He is now serving a 100 year sentence in US Federal prison. Here is his story:

Ever since he was a young man in Canada, Ed Okun dreamed of living a lifestyle of the rich and famous. His first wife described him as a con man who stole $150,000 from his father-in-law and raided his own family’s trust fund to buy a 53-foot yacht, Rolls-Royce, Aston Martin and Mercedes before fleeing to the United States to escape a civil judgment. Just prior to his arrest in the U.S. for embezzlement, he drew unfavorable attention to himself with a small dinner party in the Bahamas that cost more than $56,000, a fact eagerly disclosed to law enforcement by his second wife after he dumped her to marry a Brazilian call girl.

Ed Okun is perhaps an extreme example of the type of people the real estate syndication business attracts, but it is not a business that attracts saints. Otherwise, Mother Theresa herself would have been organizing real estate syndications.

Okun’s syndication scam

As a syndicator, Ed Okun claimed expertise in “identifying, acquiring and turning around distressed commercial real estate”. Okun, doing business as Investment Properties of America (IPofA), managed several such syndicates. Being a Certified Fraud Examiner, I was contacted by the lead investor of one such syndicate, composed of 20 senior citizens who lost all of their $13 million investment in Okun’s acquisition of the Park 100 Industrial Building in Indianapolis, the investment he arranged for them.

The Park 100 Industrial Building is an aging behemoth, a 459,000 square foot warehouse built in 1959, about the size of eight football fields. Unbeknownst to the syndicate, Okun already owned this building, for which he paid $3,300,000. As the manager of the syndicate, he then used his claimed investment expertise to have the investors pay him $12,650,000 for the building, earning him a 283% profit.

To justify such a high purchase price, he had to show that he was adding value, which he did by securing a tenant to pay almost $1 million per year in rent in addition to all operating expenses. The investors later found out that the tenant was a shill for Mr. Okun. The lease document between Okun and the tenant promised a $1 million incentive to be paid to the tenant “upon successful syndication of the property”. Thus, the tenant was chosen not to pay money but to consummate the syndication deal. The tenant occupied the property for about a year, but did not pay rent.

Also enabling the scam was Cushman & Wakefield Valuation and Advisory Services, which appraised the warehouse for $12,650,000 based on comparisons to 21st century warehouses. This same appraisal firm currently faces over $10 billion in class action lawsuits in connection with the Credit Suisse syndicated loan fiasco involving the Yellowstone Club and other prominent resorts.

The warehouse was foreclosed on and has traded since then, but since Indiana is a non-disclosure state (good states in which to commit real estate fraud), the subsequent prices are not known. The local tax assessor has assessed its market value to be $4,125,400.

This quite common type of syndication scheme involves the syndicator organizing investors to acquire a major property, such as a mall. The syndicator usually shares few of the risks of the venture by taking huge upfront fees and minimizing his own equity in the investment. He may have already bought the property through another business entity and then sold it to the syndicate or TIC for a profit. Through another company which he owns he may receive substantial fees for management services. The syndicator uses his superior knowledge to take unfair advantage of the investors. The reported “acquisition price” is typically above market value.

In one recent Texas syndication the syndicators purchased a piece of land from themselves, on behalf of the investors, at a $20 million profit after a one year holding period, in a market with a growing inventory of large land parcels for sale at much lower prices. In addition to the $20 million profit, the syndicator earned fees of about $3,300,000 in selling commissions, $500,000 in wholesaling fees, $800,000 in placement fees, $600,000 in reimbursement of offering costs, $350,000 in underwriting fees, and $5,200,000 in reimbursement of offering and organization expense fees. This represents over a $30 million profit on a property that probably lost value since its original purchase as the demand for residential land waned.

Syndicators are thus able to acquire real estate or sell their own real estate with other people’s money and charge those people again and again for the right to take their money. One Internet course on real estate syndication (syndicationsuccess.com) teaches 17 different ways to extract fees from investors. Not to be outdone, New York University (NYU) offers a course this spring entitled Real Estate Investment Syndication: Acquiring and Managing Real Estate Using Other People’s Money, also promising to teach “maximizing opportunities to generate revenue.”

Meanwhile, many syndications are falling apart. 12,000 syndicate investors lost money in the DBSI bankruptcy two years ago, and an estimated 10,000 investors are affected by the current SCI bankruptcy. Both DBSI and SCI were American syndicators, located respectively in Idaho and Los Angeles.

There needs to be a cleanup of this culture of predation on small investors by the real estate syndication industry. Perhaps NYU can offer a course on that, too.
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Monday, May 16, 2011

Hong Kong: Lofty Housing Prices, Low Capitalization Rates




As a global financial center, Hong Kong ranks third and is rapidly catching up with New York and London, bringing in expatriate financial workers to fuel the Asian financial expansion, as Hong Kong is clearly the financial hub of the Asia-Pacific region. Its shortage of land also has created some of the world’s highest real estate prices.

In a recent government auction of land, for instance, three sites sold for a combined price of about $700 million. Sung Hung Kai properties, for instance paid $4.49 billion Hong Kong Dollars, or about $577 million USD, for the sloping 3.63-acre former Lingnan University site, equivalent to $1160 USD psf of land or about $3650 USD per buildable square foot, as the maximum allowed buildable area is only about 180,000 square feet. Completed homes, having views due to the slope of the site, are forecasted to sell for over $5000 USD psf.

China Overseas Lands bought a 30,237sf site in Kowloon for HK$578 million, or about $74 million USD, equivalent to $2458 psf of land. They expect to build only ten houses, which will sell at a price of over $3000 USD psf. The price per buildable square foot is $1850 USD.

While these land prices might not seem high by Manhattan standards, when one considers the low density zoning, the price per buildable square foot is much higher than Manhattan.

Real estate prices have been rapidly climbing in sympathy with near-record sales prices, and a high-floor condo near Lingnan University recently raised its asking price to over $3000 USD psf, with other sellers reported to be increasing their asking prices from 10 to 30%.

The highest recent home sale, at 20 Peak Road, was HK$750 million, or almost $100 million USD, equivalent to the highest residential sale ever achieved in the U.S. The average luxury home price psf was estimated by CBRE at HK$21,351, or about $2700 USD per square foot, 14.5% higher than one year ago, and the overall residential property index jumped 24% from one year ago.

Meanwhile, just as in Beijing and Singapore, the Hong Kong government is taking extra measurements to prevent a housing price bubble fueled by speculators, instituting a 5 to 15% tax duty on residential resales within two years of purchase, and lowering LTV (loan-to-value ratios) to 50% on all non-owner-occupied residential properties, in addition to the aforementioned auction of government land (although the balance between supply and demand could have been improved with some up-zoning).

The vacancy rate for the luxury rental market was last measured by CB Richard Ellis at 1.9% and falling as highly paid financial industry workers are imported into Hong Kong.

The highest reported recent house rental was about $25,000 USD per month for a house at The Peak, and the highest flat rentals have been at about $20,000 USD per month. CBRE estimated the average rent psf for luxury flats at HK$37.70 psf, or about $4.75 USD psf. Serviced apartments, a typical housing option for a visiting expatriate, are leasing in the range of HK$44 to $57 psf per month, 13% higher than one year ago..

As for multifamily investment, unleveraged yield rates are now below 3%, fed thus far by ultra-low mortgage interest rates by local banks, lower than 1% until recently, but some lenders are now starting to raise rates, with Hong Kong Financial Secretary John Tsang warning consumers and investors not to count on cheap credit forever. Meanwhile, mortgage interest rates are also increasing in mainland China.

Is the Hong Kong housing market a bubble waiting to burst? Housing prices were actually slightly higher in 1997, before the Asian financial crisis of 1998, which was started by a real estate bubble in Thailand. This time, the Hong Kong government is doing its best to implement measures to achieve a “soft landing”, legislating conservative LTV ratios and short-term gains taxes unheard of in the United States.
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Saturday, May 14, 2011

Macau: Surpassing Las Vegas as the World’s Top Gaming Destination

Photo: Portuguese colonial architecture in foreground, high-rise living in mid-ground, Wynn and MGM casinos in the background. Below: Sands Casino behind Portuguese colonial architecture.


The growth in the Macau gaming industry has been staggering. In the first quarter of 2011, for instance, gaming revenues in Macau were 43% above the same period the year before, and year 2010 Macau gaming revenues of $23.5 billion are about 4 times the 2010 gaming revenues of the Las Vegas Strip. April revenues were 45% higher year-over-year and roughly 5 times Las Vegas Strip gaming revenues. Macau gaming revenues are predicted to increase another 35% this year, aaccording to Asian securities analysts at CLSA Asia Pacific. The last time the two gambling destinations were on a par in revenues was 2006.

It was not long ago that I was frequently sent to Las Vegas to appraise yet a new or proposed luxury condo tower featuring million-dollar-plus condos. “Who are the prospective buyers?” I asked. The standard response was that Las Vegas would become the preferred casino tourist destination of the world and that multi-millionaires from Asia and the Middle East would be clamoring for second homes in Las Vegas for their gambling holidays. The ultra-luxurious Turnberry Towers near the Strip had sold out their first two phases by 2006 while construction continued on the third and fourth phases, but by late 2006, it was apparent that many Turnberry buyers had actually just been speculators, and at the time of my inspection in November 2006, 25% of the units acquired in the first phases were listed for resale at significant discounts. Most had never even had their interiors finished, as the condos were sold in shell condition.

The American casino industry

The decline in U.S. casino gaming revenues in general (down 10% from 2008 to 2009), as reported in the American Gaming Association’s last State of the States report in July 2010, is partly explained by the economic recession. The top four gaming states by gaming employment in 2008, Nevada, New Jersey, Mississippi and Louisiana, saw respective decreases in gaming revenues of 10.4%, 13.3%, 9.4% and 5% from 2008 to 2009, and Las Vegas saw a 20% decrease in gaming revenues from 2007 to 2009. Despite the lessened demand for gaming in Las Vegas, one huge project hit the market, adding to the oversupply:

City Center, Las Vegas

This is a 16.8 million square foot mixed-use project in the heart of the Las Vegas Strip, developed at a cost of $11 billion and partly owned by Dubai World. Opening in December 2009, only 550 out of 2400 condos have been sold, the Aria Resort & Casino has lost $161 million in the first three quarters of 2010 and the Mandarin Oriental Hotel has lost $23.6 million in the first three quarters. In my visit to City Center in October 2010 I saw a spacious indoor retail mall with high-end retailers and few customers.

Macau

For Asian, Middle Eastern and European gamblers, Macau is more accessible than Las Vegas, and numerous flights are available to Hong Kong, with Macau being a one-hour ferry ride away. There are 100 million people within three hours driving time to Macau and 1 billion people within 3 hours flying time.

Unlike Las Vegas, with its inhospitable climate (100 degrees at night in the summer and cold and windy in the winter), Macau has a humid, subtropical climate that is relatively constant and pleasant for walking. Las Vegas can fool you into thinking that the next casino is only a one minute walk away, and then the walk turns into 15 minutes of seemingly walking straight into a blowdryer.

While the Las Vegas Strip funnels human masses along sidewalks partially blocked by hooker hawkers, tourists in Macau can walk in many different directions without waiting 5 minutes for a traffic light, and can explore the historic areas or retail areas without having to take a taxi that would only get stuck in a traffic jam if it was in Las Vegas. Macau also has an interesting mix of cultures; it is Las Vegas meets Lisbon meets Chinatown, as Macau was originally a Portuguese colony, and the street names and public signs are in the Portuguese language.
Colonial section of Macau












The 89-year-old Hong Kong billionaire Stanley Ho is the pioneer of the Macau gaming industry as the founder of SJM Holdings, but the major U.S. casino operators, Las Vegas Sands, MGM and Wynn, have also established large presences there, and both Sands and Wynn now receive the majority of their profits from Asia. As Mr. Ho declines into senility after having had brain surgery, there has been a highly public controversy over which of his four wives woul inherit his casino empire. The recent winner has been his fourth wife, Angela Leong, who was once a dancer and aerobics instructor and met Mr. Ho through a shared interest in ballroom dancing, but now controls a $1.2 billion empire of 20 Macau casinos; she now plans a $1.3 billion theme park resort with six hotels, an equestrian center, and an indoor beach, all while serving in Macau's legislature. Mr. Ho’s extended family controls about 30% of Macau gaming, with about 20 casinos.

SJM's flagship property, the Grand Lisboa


A recent Wall Street Journal article (4/18/11) on Macau gaming seemed to place the highest hopes on Hong Kong-listed SJM Holdings, a local favorite that has strong political connections and a price-to-earnings ratio of only 11 in this rapidly growing Macau gaming market.

Meanwhile, a joint venture between MGM Resorts International and Pansy Ho, daughter of Stanely Ho, is being prepared for an IPO on the Hong Kong Exchange as MGM China Holdings, as MGM tries to catch up with Wynn and Sands in capturing the rapid growth of Asian gaming. MGM Holdings plans to issue 760 million shares in the range of HK$12.36 to HK$15.34 per share (or about $1.60 to $2 USD per share.

I visited Macau during the weekend of the grand opening of the 2200-room Galaxy Macao resort, the most spectacular yet in Macau, which cost almost $2 billion to build on a manmade peninsula of reclaimed land called the Cotai Strip. Nearby is the Venetian, now the world’s largest hotel building, owned by Sands. The Cotai Strip is poised to become the high-end area of Macau, including some of the highest price condos in Macau.

Sands plans to open an even-larger casino in Macau next year.

The Chinese government has eased visa requirements for travel to Macau, opening the floodgates for China’s many nouveau riche gamblers. 75% of Macau’s gaming revenues come from high rollers from China. Ms. Leong, heir apparent to SJM, has specialized in lending gambling money to these high rollers, and Wynn also estimates 80% of its revenues and 60% of its earnings are due to high rollers. Moreover, planned bridges to Macau from Hong Kong and the mainland are estimated to expand the number of visitors to Macau by 50% in the next 5 years. High speed trains will transport gamblers from Guangzhou to Macau in less than hour, reducing travel time by about 70%.

Macau's government recently imposed a limit on gaming tables to 5500, though, a limit which has already been met with the opening of the Galaxy. Unlike Las Vegas, the Macau gaming industry gets more than 90% of its revenues from table games rather than slot machines. This is due in part to the large number of high rollers and in part to the different ratio of slots to tables, about 2.4 to 1 in Macau as opposed to 17.2 to 1 in Las Vegas.


Macau has emerged in the last five years as the world’s top gambling destination now, perhaps taking Las Vegas down a notch as it struggles with its own temporary oversupply of casinos and condos. The fortunes of Las Vegas may be more limited to domestic tourism in the future.

Luxury condos being marketed in Macau's Cotai South neighborhood

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Friday, May 13, 2011

NEW SOUTH CHINA MALL: WORLD’S LARGEST FAILED MALL 新华南

All photos were taken at about 1 pm on a Wednesday afternoon on a sunny day in May.


Having been an appraiser of distressed malls since 1984, I considered New South China Mall to be the Mount Everest of distressed malls. I finally got to visit this mall on May 11, 2011.

Completed in 2005, it is the world’s largest mall with leasable area of 7.1 million square feet, gross building area of 9.6 million square feet, space for 2350 stores, and a 99.5% vacancy rate.

What makes New South China Mall unique is that it has been mostly vacant in its 6 years since completion, and an inspection of the premises indicates that most of the few tenants this mall started with are now out of business. Press releases from the mall indicated that the mall had pre-leasing commitments from 1016 stores and opened with 386 stores.

New South China Mall was developed by an instant noodle billionaire, Hu Guirong, and financed with a billion-yuan loan ($154 million) from the Agricultural Bank of China, which was previously one of the Chinese government's "policy banks", banks that previously made loans based on government policy rather than on economic soundness. This was Mr. Hu's first retail development project, and perhaps he thought that once he had mastered instant noodles that he could master anything.

The mall's feasibility was supported by a study from the SMR Group in Guangzhou, which forecast 203,973 customer visits per day based on the reasoning that building the largest mall in Guandong Province would attract shoppers from as far away as Guangzhou and Shenzhen. This is analogous to building the world's largest mall in Newark, New Jersey, and expecting shoppers to come from New York and Philadelphia.

While I'm not sure if Chinese market research firms have the requisite skills to perform such a study, most feasibility studies, whether in China or the U.S., are typically ordered by developers to justify an over-reaching project and are thus not designed to be objective, any way. (Most lenders are too cheap to order feasibility studies and assume, to their detriment, that the appraiser they hire will automatically determine feasibility for them.)

The Founder Group, a high-tech company created by Beijing University, recently acquired a 50% interest in this property.


People in photo are a janitor and a security guard


Here are some of the factors that have led to the mall's failure:

Demographics

The mall is situated in the city of Dongguan, 50 km south of Guangzhou and 90 km north of Shenzhen. There is no doubt that the Guangdong Province of China has experienced a population explosion, with the cities of Guangzhou, Dongguan and Shenzhen having a combined population of over 25 million residents.

Dongguan is a sprawling industrial city of 7 million residents and about 900 square miles of incorporated area, more than twice that of Los Angeles. Dongguan does not match the affluence of the cities of Shenzhen and Guangzhou, though. If Shenzhen and Guangzhou were New York and Philadelphia, for example, Dongguan would be Newark, comparing cities based on personal wealth. Annual GDP per capita is $13,750 in Guangzhou, $14,245 in Shenzhen, but only $8187 for Dongguan. Similar to Newark, too, is its reputation for a high crime rate compared to its neighbors.

Of Dongguan’s 7 million residents, 5.2 million are classified by the Government as “permanent migrants”, most of who are young women who have come from rural areas to work in factories – not the sort to hop into a BMW to search for a Louis Vuitton purse at the mall. Most do not have cars. It is estimated that 75% of these migrant workers earns less than $200 per month, and some of that is sent home to even poorer relatives.

Furthermore, the mall is located in the less affluent Wanjiang district of the city, where the factories seem to be low-tech, manufacturing things like cabinets and display shelves and using mostly unskilled labor. (This area was described as farmland at the beginning of the mall's construction in 2002 but is now a fully urbanized area.) Unlike typical U.S. urban form with dying central cities and middle class flight to the suburbs, China's urban central business districts are thriving centers of commerce, and suburbs are for factories and low income housing.

Also complicating mall feasibility is the generally low level of household income in China, estimated to range from one-tenth to one-sixth of U.S. household income (and not officially measured), and the Chinese are known as being savers, too. Too much attention has been spent on the relatively small class of nouveau riche known for its conspicuous consumption. (See my blog post on Macau.) Western-style malls are a recent arrival in China, and seem to work better in the wealthiest cities, such as Shanghai, than second-tier cities like Dongguan.

Despite Dongguan’s recent growth, there are now widespread reports that factory workers are leaving for better paying jobs in Shanghai and other high-value manufacturing cities.

"Strength-accumulating quietness"

Accessibility

Super-regional malls are dependent upon freeway accessibility. For instance, the 520-store Mall of America in Bloomington, Minnesota, is located near the junction of Interstate 494 and Minnesota State Highway 77. The 800-store West Edmonton Mall in Edmonton, Alberta, is located near the junction of the 2 and 216 freeways in Edmonton.

On the other hand, the highways leading to the New South China mall are tollways owned by Dongguan Development Company Ltd (not the government), with tolls ranging from 17 to 25 yuan (about $2.60 to $3.85 -- customary tolls for New York City drivers, but not for underpaid Chinese workers).

There seems to be a lack of convenient public transportation to the mall, too, considering that the mall is not in a central location and Dongguan itself is a sprawling city that has grown without the benefit of rational urban planning. Dongguan has grown without urban planning from 28 factory towns that ultimately grew into each other. With an area of 2500 square kilometers, most Dongguan residents would need to take multiple bus rides to get to the mall.

There is also an inter-city bus station with an entrance approximately one km west of the mall's entrance, but no easy pedestrian access to the mall. Even then, inter-city bus fares are typically more than $15, once again too expensive for the average area resident.

To get to the mall, I took a train from Shenzhen to central Dongguan and then took a 55-km cab ride the rest of the way, having to also pay for the cab driver's 98 yuan in tolls (about $15) for the 110 km round trip. The drivers at the taxi stand all knew about the mall, yet my driver could not find the mall when on the same street and had to call the mall several times before the phone was answered. When a local taxi driver cannot find a mall that has been the world’s largest for the last 6 years, that mall is indeed in trouble.

Visibility

The mall site is mostly obscured from the main road by its high building profile (4 stories) and minimal signage. The cab driver and I almost passed the mall before realizing we had reached our destination, as the entrance, as seen in the satellite photo, is only about 100 yards wide. The only leased spaces were the ones visible from the main road through this 100-yard aperture.


No anchor tenants

There is no department store currently anchoring this mall, but the official mall web site states that the mall was originally supposed to be anchored by 1) a Causeway Bay department store of more than 400,000 square feet and 2) a KFC (?!). Other intended anchor tenants were OMOMO out of Hong Kong, OBI out of Germany, and Sundan Electronics. I do not know if these other stores ever opened.

In keeping with the mega-mall concepts of the Mall of America and the West Edmonton Mall, New South China Mall is situated around a miniature amusement park with children’s rides and canals with gondolas, like the Venetian in Las Vegas. At the time of my visit at 1 pm on a Wednesday afternoon, there were no shoppers, but several dozen school children in the amusement park. Out of about a dozen tenants, the three tenants doing business at that time were McDonald's, KFC, and Kungfu (a Chinese fast food restaurant with Bruce Lee as its emblem), all visible from the street and also patronized by amusement park patrons.

The theme park concept was said to be inspired by the success of the Window of the World theme park in Shenzhen, but Window of the World is almost 20 years old and was the original theme park in Guangdong province, which now has 40 theme parks, 12 of which were bankrupt as of 2007.

Hark! A customer approaches McDonald's, the mall's leading tenant.

Other Functional Problems

I found it odd that there were no mall maps to be found in the world's largest mall. Any other Western mall one-twentieth its size would have maps.

I was also surprised to find myself trapped inside the mall, too, when trying to exit to the interior courtyard/theme park, which means that the shops are conversely just as inaccessible from the theme park. There are too few entrances to the enclosed shopping area. There were no shoppers or open stores in the enclosed areas I visited, and the entrance to the McDonalds was closed from the interior of the mall.

The design team for New South China Mall visited more than 100 malls worldwide to collect the best design ideas, but they apparently focused only on aesthetics and not on functionality or accessibility. It is an attractive setting, with re-creations of seven different parts of the world, such as Rome, Paris, and Amsterdam, but little thought was made to how customers would find the mall or move around in it once they got there. There is a replica of L'Arc de Triomphe, though.

Retail competition

Having previously lived in America’s most Chinese city for several years (Monterey Park, California – 56% Chinese) and traveled to many Chinese destinations, I have never known a Chinese community to be under-retailed (having a lack of stores); theirs is an entrepreneurial culture. The SMR Group's feasibility study assumed the trade area to be the entire Pearl River Delta (including the larger and wealthier cities of Guangzhou, Shenzhen and Hong Kong), assuming that building the world's largest mall would effective draw away customers from the 15 other super-regional malls (more than 1 million square feet) that were built in Guangzhou and Shenzhen between 2001 and 2003, most of which also suffer from high vacancies. Could New South China Mall be way more retail space than Dongguan needs?

The failure of New South China Mall is also symbolic of a fundamental disconnect between mall development and actual income levels throughout China as empty luxury shopping malls start cluttering the nation. Household incomes are still well below those of more developed Asian states such as Singapore, Hong Kong, Taiwan, Japan and South Korea. The recent decade of mega-mall development in China reflects a naive hubris that presumes that the biggest mall will therefore attract the most shoppers.

PS: For hilarious hyperbole and misuse of the English language, be sure to visit the mall's English language web site www.southchinamall.com.cn/english. The mall is described as "a pacemaker" (perhaps meaning "pace-setter", a pacemaker being the little machine that keeps Dick Cheney's heart from stopping), and "a grand symphonic epic with high tone of traditional wealth revolution, investment revolution, consumption revolution and leading commercial trend of the time and vogue life style",..."highly hailed by experts, scholars, authoritative media and the society, as an international commercial empire". It even discloses that some Chinese economists were initially skeptical of the feasibility of the mall, but now "South China Mall has demonstrated its elegancy and glory, and is bound to be a miracle of commercial history." That was written a while ago. Now the mall is experiencing "strength-accumulating quietness" as the mall president, Kun Liu, has announced another 200,000 square meters (2,150,000 square feet) to be developed in an effort to somehow finally give the mall the critical mass it needs to compete against smaller malls (his opinion, not mine).





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