To all real estate professionals and investment managers:

I was very disturbed to see an article in the China Daily that grossly misrepresents the facts about a commercial real estate development model that the Chinese call HOPSCA. The article -- which can be found at http://www.chinadaily.com.cn/bizchina/2 ... 874853.htm -- presents the HOPSCA model as a "new" commercial real estate concept, and the article wholeheartedly supports the model. What the article doesn't tell the reader is the following:

1. The main project referenced in the article is not a HOPSCA project, but instead a factory outlet project developed by the European outlets magnate, RDM (a subsidiary of the Fingen Group). No comparisons should be drawn between the HOPSCA model and the outlet model. The article makes no attempt to differentiate between the two models.

2. The HOPSCA model (hotels, offices, parks, shopping, clubs, apartments) has been in practice in China since early this century. Such projects as those in Ordos, Luodian, Fengxian, Shenyang, Wuxi and other cities around China have been roundly judged as failures inasmuch as they fail to promote commercial activity, precisely the stated goal of HOPSCA in the article.

3. HOPSCA projects in China rarely benefit any party other than the company that wins the rights to purchase undeveloped land and to parcel up that land before selling to developers. These companies are typically quasi-governmental organizations or companies whose leaders have murky ties to local government bodies. Developers who purchase land from these organizations find it difficult to make a profit from any commercial properties within the developments, as the poor geographic locations of these HOPSCA mean that purchasers of residential property hold the properties as investments and do not occupy the properties. As a result of low customer presence, commercial real estate struggles mightily.

4. The nature of HOPSCA -- huge-scale suburban/rural developments -- goes a long way toward further inflating land prices in China, as promises of huge returns (which rarely materialize in the case of commercial development) entice developers to overpay for suburban/rural land plots.

4. HOPSCA is now being touted by the government's mouthpiece (the domestic media) because Chinese developers have already abused the practice of developing residential properties (over-development), factory outlets (combination of over-development and poor understanding of the model) and a handful of other real estate concepts. Because China depends upon rampant real estate development to generate GDP growth, and because so many real estate models have already experienced flagging growth as a result of poor implementation and flouted guidelines, the China Daily and the Chinese Academy of Social Sciences (the principal backer of the HOPSCA model) are now trying to create a "development craze" about HOPSCA.

Commercial development has always been a demand-driven industry. Even Irvine, California (what could be classified as one of the largest HOPSCA projects in the world), was built in response to huge demand on the part of urban Californians for a more suburban environment (and I should note that the Irvine master plan was substantially more well-thought-out than "hotel + office + parks + shopping + clubs + apartments = commercial success"). What the China Daily's article amounts to is a call to participate in a top-down (and by "top", I mean the CASS, the "academy" of the Chinese government) commercial development campaign. There is no evidence to support the claim that market demand for suburban/rural commercial developments is high. On the contrary, the ever-escalating prices of commercial real estate in China's urban centers is evidence that China's commercial demand is still firmly within China's outer ring roads.

Foreign investment managers should warn their clients that the HOPSCA model is an unsustainable and proven unsuccessful commercial development model. The article is grossly negligent in its analysis of the facts and serious questions need to be asked about the motivation of the China Daily in publishing such an article.

I would like to see where they are pulling a 15-20% IRR from, aside from the government boys who are flipping the raw parcels once zoned.

HOPLA, and gone is your money TIC

Does this mean that the China's People's daily is not the upstanding impartial purveyor of the truth it is touted to be? I'm shocked!!!!