Beijing billionaire sees no housing bubble

BEIJING —

From her leafy, 11th-floor rooftop terrace at the headquarters of Soho China, billionaire Zhang Xin scans the relentlessly expanding Beijing skyline she helped create.

Zhang's avant-garde buildings — some sleek as chopsticks, others stepped like rice terraces — became part of the hottest real-estate market in 2010.

Zhang says she's well aware of the chorus of investors and economists who predict China's property boom is about to go bust, taking the global economy down with it.

The doomsday scenarios don't intimidate Zhang, a onetime penniless sweatshop worker. She hopes to prove skeptics wrong again this year by betting hundreds of millions of dollars on new buildings in Beijing and Shanghai.

"I don't see any bubbles," says Zhang. "The next few months will be a fantastic time to buy."

Zhang, 44, personifies the explosive rise of China, from the poverty of Mao Zedong's communist rule to the riches of state-controlled capitalism in the world's second-biggest economy.

At age 30, armed with a master's degree from the University of Cambridge in England and connections from working at Goldman Sachs, Zhang founded Soho China with her husband, Pan Shiyi. The company became central Beijing's biggest developer about a decade later in 2005.

Zhang's ownership stake is worth about $2.2 billion, ranking her alongside Oprah Winfrey as one of the world's wealthiest self-made women, says Rupert Hoogewerf, whose Shanghai-based Hurun Report tracks China's rich.

Economists began predicting a real-estate bubble in China last year after its government pumped $585 billion of stimulus funds into the economy. State-controlled banks went on a record $1.4 trillion lending spree.

"This is a serious bubble," says Andy Xie, formerly Morgan Stanley's Asia-Pacific chief economist, who works independently in Shanghai."The alarm bells are ringing."

If China's real estate takes a dive, so will its economy, analysts say. Property investment and related industries make up about 20 percent of the country's gross domestic product, Citigroup research shows.

The economy, which expanded 10.3 percent in the second quarter, may slow to 5 percent in the third period if housing plummets, says Jim Walker, chief economist at Hong Kong-based Asianomics.

China's economic rulers moved earlier this year to engineer a soft landing. In April, China began imposing stringent restrictions on lending to curb speculation, particularly on luxury dwellings.

While Zhang says government managers will prevent a crash, she would prefer they let the market dictate demand. Unlike most of her rich Chinese peers, who keep a low profile to stay on good terms with officials, Zhang has been very public in her criticism.

"The market should be making the decision to buy or not to buy, not be told by the government," says Zhang, who lives in a 32nd-floor penthouse in her Jianwai Soho development in Beijing.

"The government is very sensitive to public opinion, and that's why people like us have the responsibility to talk honestly about what is happening. That would hopefully help to get the truth to the decision makers."

Plugged in

The English-speaking Zhang, who regularly appears in Beijing's society magazines, brings a Western style to the way she does business. During the 2008 Summer Games in Beijing, Zhang and Pan entertained fellow billionaire Rupert Murdoch and his wife, China native Wendi Deng, at a celebrity party at a resort they built next to the Great Wall of China.

An inveterate blogger and user of a Twitter-like service, Zhang, who calls herself a soccer mom, praised Spain's "perfect" defense in a post after its World Cup victory in July.

Zhang's company headquarters in the Chaowai Soho building looks like a Silicon Valley tech firm. Casually dressed engineers, architects and salespeople bounce around ideas in a communal coffee bar decorated with a sculptured herd of life-size fiberglass pigs.

"Many Chinese companies are run like military camps with military discipline," Zhang says. "We do not run a company that way. It does not help the creative process."

Building binge

In hiring noted architects from around the world, Zhang has pushed the boundaries of design in Beijing. Kengo Kuma of Japan, who designed the Osaka headquarters of LVMH Moet Hennessy Louis Vuitton, created Sanlitun Soho, a development of nine office and apartment buildings shaped like ocean waves. It opened in June.

Zhang and Pan develop buildings for Chinese much like themselves: entrepreneurs.

Many of their rivals put up conventional offices, to be leased mainly to multinational tenants, or grandiose villas and luxury apartments with swimming pools for China's superrich. The duo conveyed their more practical side with the name Soho, which stands for small office, home office.

The company says it has developed 24.8 million square feet of real estate, including about a fifth of Beijing's central business district. Soho China's early projects were multiuse, designed for living, working or both. Buyers of Zhang's high-end units, which can cost more than $8,860 a square meter, include coal-mine owners and exporters.

In the second quarter, 92 percent of Soho China's buildings were occupied, Zhang says. Profit surged last year more than eightfold to $485 million.

"They focus on sectors which hold long-term promise," says Mark Mobius, Singapore-based executive chairman of Templeton Asset Management, which is Soho China's largest institutional investor, with a 4 percent stake. "They have high sensitivity and a great sense of style."

Zhang is expanding her empire again, dismissing the China bears. In June, she bought a 77,300-square-foot plot of vacant land on the Bund, Shanghai's stately colonial-era waterfront strip, where buildings resemble those of 19th-century Europe.

Two weeks later in Beijing, she started marketing a futuristic 1.6 million-square-foot commercial, retail and entertainment complex that's shaped like interlinked cocoons. It will be designed by London-based Pritzker Prize-winning architect Zaha Hadid.

Cultural revolution

Zhang, who was born in 1965 as China was about to plunge into the chaos of the Cultural Revolution, is an unlikely billionaire.

Her parents, who were both translators at Beijing's Bureau of Foreign Languages, separated during Mao's crackdown. As part of the Communist Party's forced exodus of intellectuals to work in the countryside, Zhang and her mother ended up in a rural part of Henan province.

In 1979, they found their way to Hong Kong and lived in a single room. They shared a bathroom with other families.

For five years, from age 14, Zhang toiled in small factories making sleeves, collars, zippers and electrical parts. She says conditions there were similar to those in mainland China today.

"My life then was exactly the same as those factory workers," Zhang says. "It was mindless work. You basically moved from one factory to another for whoever paid you slightly more."

By 19, she had saved the equivalent of a few thousand British pounds, enough to buy an airplane ticket to London and support herself while she studied English at secretarial school.

"Quickly, after I landed in England, I found out ways to get scholarships," she says. "England turned out to be a very encouraging place for me."

She won a spot at the University of Sussex, where she earned her undergraduate degree in economics in 1991. Then she enrolled at Cambridge and graduated in 1992 with a master's in development economics.

London investment bank Baring hired Zhang right out of Cambridge to work in Hong Kong analyzing privatization in China. Soon after starting the job, she switched to Goldman Sachs, serving as an analyst. It was a short stay.

In 1994, she joined Travelers Group. Homesick, she returned to China a year later.

Zhang told The New Yorker magazine in 2005 that she had detested investment banking.

"On Wall Street, all values seemed upside down," she said. "People spoke crassly, treated each other badly, looked down on the poor and adored the rich."

She said investment banking reminded her of her days working in the Hong Kong garment factories. "The difference is, in Hong Kong the competition turned people into shortsighted mice, whereas on Wall Street it turns them into wolves and tigers," she said.

Returns to China

Zhang stepped back into China in 1995 as the economy was moving away from orthodox Marxism. As early as 1978, China's leader, Deng Xiaoping, had begun to open markets, declaring: "To get rich is glorious."

Beijing, famous for its exquisite 600-year-old Forbidden City flanked by stolid Soviet-style architecture, was beginning to sprout modern buildings. Workers were flocking to the capital as China's economy surged at the rate of 10 percent a year.

A friend of Zhang's recommended she contact Beijing Vantone Real Estate, where Pan served as a partner.

Like Zhang, Pan was self-made. His grandfather, a supporter of Mao's rival, Nationalist leader Chiang Kai-shek, had fought on the losing side in the civil war that ended in 1949, Zhang says.

The family had been persecuted for it and forced to eke out a living as peasants in impoverished northwestern Gansu province.

"If I grew up with nothing, they grew up with even less," Zhang says.

After getting a college diploma and working in the petroleum ministry, Pan in 1989 headed south to the tropical island of Hainan, then a freewheeling frontier about to be reshaped as the Hawaii of China.

There, Pan learned the real-estate business before returning with his partners to seek opportunities in Beijing, Zhang says.

Within four days of meeting Zhang, Pan proposed. Soon after their marriage, he left Vantone and the newlyweds teamed up to form a company called Hongshi (red stone), later renamed Soho China.

Zhang would use her experience in investment banking to attract foreign investors and architects; Pan had local knowledge and connections to negotiate with the government to acquire the land.

"It was the initial attraction in us being partners in business as well as partners in life," Zhang says.

Zhang and Pan were setting up their company in 1995 as the local government in Beijing was developing a 1.5-square-mile business district.

The couple correctly gambled that the government would soon allow citizens to get home loans, and that a class of entrepreneurs would emerge to buy their live-work units.

For their first project, Pan and Zhang planned to turn a malodorous old Chinese liquor factory into Soho New Town: 10 brightly colored buildings from 12 to 40 stories high and accommodating 8,000 residents and hundreds of small businesses.

"Neither of us was financially established," Zhang says. "But the good thing about having no experience is that you have no fear."

As construction was about to begin in 1997, the Asian financial crisis struck.

Investors outside China who had promised to back the project suddenly couldn't or wouldn't come up with the funds. Pan turned to local investors to save Soho New Town, and the development sold out even before completion in 2001.

Rather than trying to sell or lease entire buildings, Zhang and Pan peddled units to individual purchasers, a practice they still use today to reduce the risk of whole buildings sitting vacant.

As China's global aspirations grew, so did Zhang's. By the early 2000s, China's economy was rapidly overtaking those of the U.K. and Germany.

Beijing had been chosen to host the 2008 Olympics, accelerating the government's plans to develop the equivalent of three Manhattans in the central business district.

On the site of an old machine-tool factory, Zhang and Pan began in 2002 to put up Jianwai Soho, a complex of 24 white, cubic buildings of varying heights designed by a Japanese architect, Riken Yamamoto.

The project was so large it took five years to complete and exposed a weakness in Soho China's business model, says Jack Rodman, president of Shanghai-based Global Distressed Solutions.

After selling the apartments, offices and shops in their developments, Pan and Zhang turned over control to independent management companies.

At Jianwai Soho, disputes over management fees and quality of service broke out between owners and property managers — tensions that continue to flare today. Some of the buildings are now in need of repair.

Reputation tarnished

Zhang says the management breakdowns hurt the reputation of Soho China, which is taking back control of all but one of its developments.

"Earlier, we said, 'This is not our problem; why should we manage them?' " she says. "Then we realized they have our names on the buildings."

Zhang in 2007 persuaded Pan to take the company public in Hong Kong and cash in. The timing of the initial public offering on Oct. 8, 2007, was exquisite. Less than a month later, global markets began to tumble in the early days of the credit crisis.

Soho China raised $1.9 billion — the biggest IPO by a property company in Hong Kong that year.

Shares traded at HK$4.92 on Aug. 3, 40 percent below the offering price. After plummeting along with the rest of the stock markets during the financial meltdown, the stock outperformed the Hong Kong and Asia Pacific property indexes almost twofold since it hit bottom in October 2008 through Aug. 3.

The IPO, underwritten by Goldman Sachs, HSBC Holdings and UBS, marked a change in Zhang's relationship with Wall Street. Only two years earlier, she had publicly lambasted investment bankers as wolves. Today, Zhang is more circumspect when asked about her Wall Street experiences.

"I had better be careful these days," she says. "I am their client. I work with them very closely."

Today, the Soho name appears on 14 developments in Beijing, a city of 22 million people. In August 2009, Zhang and Pan made their first move into Shanghai with their purchase from Morgan Stanley of the Exchange, a 50-story office building on Nanjing Road, Shanghai's main shopping street.

Zhang, who early this year feared a bubble, now says her own research reveals the property market is regaining its sanity. She says prices have been cooling since April, after the government's lending restrictions, but aren't headed for a collapse.

"We know from our own experience the prices are staying flat," she says.