U.S. firms encounter new obstacles developing in China

From left: Tishman Speyer CEO Jerry Speyer, Hines Interests Chairman Gerald Hines and Simon Property Group CEO David SimonAs commercial construction remains stagnant in America, several high-profile American developers have turned to China for new projects, including several with notable ties to New York.

But for all the obstacles these developers are accustomed to encountering in the city, according to the New York Times there are even more hurdles to clear in China.

In addition to the obvious language and cultural barriers — for example, the Chinese do not consider a contract a binding agreement, and disputes with tenants are better settled over dinner than in a court room — unpredictable policy, layers of bureaucracy and the necessity of building local relationships make the prospect of development difficult. Current policy is encouraging development of mixed-use communities in suburbs which lack the historical data necessary to project costs and profits. Additionally, many local development companies are at no loss for equity, so American firms need to come in with more than just a handful of cash.

As a result, many of the American develoeprs have exited the market even before their first project came to fruition. Hines Interests, which has been active in New York of late, built the first phase of a 45-acre mixed-use development and then immediately sold its stake. Large U.S. mall owner Simon Property Group developed four malls in second-tier Chinese cities but sold its interest before three of them even opened and claimed losses of $20 million. Blackstone Group bought a vacant shopping mall in Shanghai, found tenants, and sold it to a local Hong Kong investment company. Only time will tell whether a similar fate awaits Tishman Speyer‘s forthcoming mixed-use development in Shanghai. [NYT]