With its naked ambition to be the top player, Sunco has become an intractable thorn in the real estate industry's side. While its admirers and enemies laud and scoff, Rupert Hoogewerf finds out if Sunco is on the brink of fulfilling its ambition to be the top developer in China – or on the brink of disaster.
Like China after its performance in the summer Olympics, Sunco is glowing. As the country celebrates the returning athletes, Sunco's Linghai development in Beijing stands as another medal for China 's real estate industry. Holding the gold is Sun Hongbin, the 41-year-old founder and majority shareholder of Sunco.
Sun smiles at the comparison between himself and Liu Xiang, the Olympic gold medallist hurdler and China 's first-ever first gold in track and field. Both may have been well-known locally, Liu Xiang in Shanghai and Sun in Tianjin , but today both have burst onto the big stage. Then, as if to show off his performance, Sun sweeps his hand towards the European-style buildings and lake at the Linghai development.
“Last December, Sunco bought this piece of land for US$110 million, which the media considered to be too expensive.” Sun's admission acknowledges that this purchase was seen as controversial. Yet for Sun, the purchase was buttressed by prudent planning. “What they did not factor in was our speed of development. At the time, I announced we would start selling within six months and – sure enough – six months to the day later, we started selling.”
With as many doubters as admirers, one thing is certain: Sunco is shaking up China 's real estate industry. This year, Sunco expects to beat Vanke into second place as the biggest player by sales in China , with sales of more than US1.2 billion.
Size is everything
“Sun is a party pooper,” comments Wang Zhigang, a well-known real estate consultant. “He has stepped in and knocked about the cosy way of life for other developers.” To add insult to injury, Sunco's aggressive advertising campaign highlights its ambition to be the best. As Wang's comments show, this is causing the establishment to sit up and take note. But is it just self-hype and good fortune? What if Sun turns out to be right after all? What if size is the remedy to the riddle?
The demand for new housing in China is steadily increasing with the average salaries on the rise, the continued population growth and the urbanisation policy. China is now the world's biggest market for new houses. Beijing has announced it wants more than 70% of its population to be urbanised by 2020, whereas it currently stands at 40%. “In Shanghai the ratio between new and old (often referred to in China as ‘second-hand houses') is 1:1, compared with Beijing at 1:0.3, Tianjin at 1:0.7 and the US, which is more like 1:9,” says Sun, further highlighting the potential of the market – and significant proof that right now may be the time to lean towards size instead of the slow and steady.
Another key turning point for Sunco was 2002 when it started its nation-wide expansion. Since then, sales have almost tripled each year, blipping onto the radar screens of other developers, from US$110 million in 2001, to US$180 million to US$480 million to this year's budgeted US$1.2 billion .
Size brings several advantages, admits Sun: “We will benefit from financing advantages, human capital advantages (the better people will want to work at the best place) and execution advantages.” Looking five years ahead, Sun expects to have 5% of the market, estimated at sales of US$6 billion.
Financing the expansion
Though the success of the Linghai development has cast a hush over the apprehensive crowd, it was not achieved without considerable plotting, planning and, first and foremost, financial intelligence. “Real estate is about cash flow,” says Sun explaining that at the Linghai project, the land cost US$110 million with the total investment due in the project to amount to US$250 million. “We only had to pay 30% up front, and because of our speed we were able to start using sales to finance the rest of our expansion.” Sun juxtaposes this to the US , where customer payments have to go onto escrow. “In the US , there are a lot more sophisticated financial products to help with the financing of property developments, which China does not currently have on offer.”
However, Sunco does have help. “We work with partners on individual projects, who help finance the initial stages of the project. On completion of each project we pay the partner back,” explains Sun. “We do not take loans for the group as a whole.” Sunco's partners include Tianjin Trust, Tianjin City government, Binhai City government, Jinbin Development, Tianbao Holdings, Tianjin Daily, Sun's former employer Lenovo, and, since April, Morgan Stanley Real Estate Funds.
Recently, Sunco has been looking for a listing. After going through all the appropriate approval processes though, the process is not complete. “We are still holding out for the right time,” says Sun, adding that many of the international institutional investors undervalue the potential of China 's property market. Yet Sun denies that China 's credit crunch that started in May has been bad for business. “We already have our land bank, so our advantages will become more obvious. The only change is that the credit crunch will slow down our expansion because of the difficulty to gain bank financing in the near future. ”
More expensive to tear down old houses
Though Sunco's thirst has not been quenched, it is cautious of draining all the fluid from the fountain. “We must be a nation-wide player,” says Sun, “especially after the Ministry of Land and Resources' July 1, 2002 directive that government land was to be sold at public auctions only. The whole country has become one market now.”
Before 2002, land was transferred privately in most Chinese cities, giving some developers the opportunity to obtain land use rights at incredibly low prices or pay for the transaction cost in instalments. In Beijing , for example, land is often traded three times before construction of the development begins.
Pan Shiyi, chairman of SOHO China, one of Beijing 's leading developers, has been adding his voice to the debate: “As the July 2002 directive was never properly enforced, this August 31 is the key date with the central government now closing many of the loopholes. The future is dim for many small land speculators who used their connections with the banks or local government to maintain their businesses.”
Sun justifies his purchase of more than US$1.2 billion of land in the first six months of this year by reasoning that costs of developing cannot go down. “The government is offering better protection to former occupiers of the land, as reflected in last year's change in the constitution, which offered legal protection of private property. Now it is much more expensive to tear down old houses, for example, and relocate the former occupants.”
(Not so) secret weapon
Sun's secret weapon for gaining local knowledge has been his successful property agency business, which he started in Tianjin in 1994. “We normally send our property agency into a new city first, allowing it to get a firm understanding of market demand, before starting with developments.”
Yet even with ten years of experience, Sunco has its challenges. “We face many of the same problems faced by the multinationals as we set up a nation-wide network,” Sun admits. “We need to really understand the local market and must have one company culture.”
No more official titles
On his work experience before he set up the property agency ten years ago, Sun is unusually quiet. His masters completed, Sun went to work at Lenovo before heading to the US on a two-month management course at Harvard. In 1994, he set up his real estate agency business, two years later expanding to real estate.
But Sun's name card is the real testament of his experience, which as little as six months ago used to carry the title of director. Now he has resigned all official roles. “In the US , management is too strong vis-à-vis the shareholders. Seventy percent of companies do not split the role between chairman and CEO. By contrast, the typical Asian boss is too powerful. By resigning all official executive roles, I am the same as the little shareholder.” Sun holds 85% of the company and is planning to decrease this to 70%, giving out shares to his 16 or 17 key management. “Thirty percent is alot in a fast-growing company like ours,” Sun points out, and adds that his senior management enjoy higher salaries than Motorola, with its China HQ also in Tianjin.
Today, Sun stands on the threshold of building China 's largest real estate developer. There are plenty that believe Sunco has overstretched itself with its large purchases of land and ambitious growth rates. “There only needs to be one break in the cash flow chain and the whole company could come tumbling down,” says Hu Baosen, chairman of Henan Jianye Group.
But there are two undeniable facts about Sunco today. First, it has shaken up the industry with its naked ambition to be the top player. Second, it is on the brink: Its enemies would say the brink of disaster, its admirers the brink of fulfilling its ambition to be the top developer in China.
