Ventures in Shanghai: Risk and Reward in Cross-Border Development

Featuring Commentary by Fred Cooper

Harvard Real Estate Review
Jan 4 · 17 min read

Masamichi Ueta, Harvard GSD MDes Real Estate and the Built Environment ‘18

In 1993, the local government of Shanghai envisioned the development of three ‘super-tall’ towers in Pudong — an urban district located at the east of the Huangpu River. The government wanted to attract international investment, and the proposed towers would serve as symbols of modernization and development in Shanghai. In alignment with their development strategy, the local government decided to construct the first of these towers while inviting international developers to build the second and third. Many prominent developers, including Mitsui Fudosan and Hines, greeted the government’s call with a muted response, citing the uncertain investment landscape in the country. Only Minoru Mori — then the President of Mori Building — agreed to invest, saying “Let me build the second one.”

This anecdote, viewed within the broader political and economic climate in Shanghai at the time, provides insight into why, starting in the 1990s, international developers began to invest in emerging cities in China. In exchange for assuming high risk, they discovered they could earn high returns while gaining recognition as prominent city builders in China.

The following pages analyze two case studies of large-scale real estate development in Shanghai to understand the ways that international developers can navigate the challenges and exploit the opportunities of investing in China. This approach compares the investment performance of domestic and foreign projects by analyzing returns from real estate operations and identifying critical moments during project timelines. It shows the rationale behind international investment in China, the risks of such investments, and creative ways developers have overcome the risks of investing in China.

Figure 1: Destination of Cross-Border Real Estate Investment Capital | Source: Urban Land Institute and PricewaterhouseCoopers, 2008 (top) NRI Real Estate Report, 2014 (bottom)

International real estate investment in both emerging and mature markets has risen sharply over the past two decades, particularly in Asia.¹ When the growth in the domestic real estate markets of most developed economies slowed down in the 1990s, investors in those markets found that increasing global economic integration made the idea of investing in emerging markets more compelling than ever.² For instance, Japan’s real estate market experienced anemic growth after the collapse in 1991 of the asset price bubble. This hardship drove one of the largest development companies in Japan, Mori Building, to invest in Shanghai. Similarly, the Hong Kong-based developer Shui On Group suffered after the 1997 Asian Financial Crisis, which was worsened by compressed capitalization rates and dwindling domestic investment opportunities.

While traditional international capital flows had been largely directed toward Japan, in the twenty-first century the United States, Western Europe, and Asia markets have attracted significant and growing interest over the past decade (see Figure 1).³ Although much of this capital seeks an “opportunistic” risk/reward profile, visionary developers sought to tap the emerging market in China by devising “value-added” and “risk-mitigating” development strategies.⁴

Historic reasons for investing in real estate assets — higher returns, portfolio diversification, and the ability to hedge inflation — continue to apply both domestically and internationally.⁵ However, two other factors encouraged international allocation of investments in real estate assets: first, access to a broadly expanded universe of real estate and second, the need to offset the international liability exposure of multinational corporate pension funds with other types of international asset holdings.⁶

There is always a risk that cross-border cash flows cannot be realized because of a disequilibrium between domestic and foreign platforms. Given this concern, international developers underwrite to meet higher investment returns in compensation for assuming additional risk. At the same time, they mitigate that risk by seeking joint ventures with local partners to obtain location-specific expertise and relationships, which is of particular benefit to securing construction financing. There are three major types of risk that international developers face in their operations in emerging markets: political risk, economic risk, and currency risk as summarized (see Figure 2). The cases of the Shanghai World Financial Center and the Shanghai Xintiandi shed light on some of the creative methods international investors have adopted to overcome the risks of investing in emerging cities.

Figure 2: Risk and Risk Mitigation in Emerging City Investment | Source: Author
Figure 3: Economic Fluctuation and Mori Building Project Timelines | Source: The Real Estate Companies Association of Japan. Mori Building: The Making of Vertical Garden Cities. Japanese Edition. 2009.

Founded in 1955 by the Mori family, Mori Building is one of the largest and most prestigious Japanese development companies. It has been widely acclaimed for its “Vertical Garden City” mixed-use developments. Under its late president, Minoru Mori, Mori Building built some of Tokyo’s most acclaimed buildings, including the Roppongi Hills complex, which opened in 2003.

In 2008, Mori Building completed the development of the 101-story Shanghai World Financial Center (SWFC). Currently mainland China’s fourth tallest building, the SWFC is a mixed-use skyscraper designed by Kohn Pedersen Fox with a complex program of office, hotel, conference rooms, observation decks, and ground-floor retail.

In 1990, the municipal government of Shanghai made this and similar projects possible when it introduced a master plan to develop the Pudong district as a global center of finance and trade. Meanwhile, the Chinese government also adopted policy reforms that encouraged foreign investment and allowed foreign entities to lease land. These changes cleared the way for Mori Building and others to invest in Shanghai, which helped create a radically different city in Pudong. In 1993, Mori Building began to expand its business into Shanghai with a plan to construct the SWFC, an office building to meet the needs of the emerging financial center. Shrinking profit margins and tepid property price appreciation in Japan, caused by the collapse of the asset price bubble in 1991, had spurred cross-border investment and, in the particular case of Mori Building, triggered the decision to invest in Shanghai.⁷

The construction of the SWFC began in 1997, but only the underground piles were completed before the Asian financial crisis caused the project to be suspended for six years. Ripple effects from the attack on the World Trade Center in New York on September 11, 2001 dealt a further blow to Mori’s ambitions, sowing fear in the minds of investors and prospective corporate tenants that tower buildings could be terrorist targets. Consequently, Morgan Stanley, Mori Building’s financing partner — having invested $650 million in debt and $150 million in a minority equity stake — had to rearrange its financial scheme dramatically.⁸ During this period of uncertainty, other investors fled the project. As a result, Mori’s interest in the venture rose from 30 percent to 80 percent of the project’s total equity commitment. These unforeseen events led to significant cost overruns and delayed profit realization. As the SWFC case demonstrates, international developers must find ways to survive if limited capital partners pull out of the deal. One way developers can overcome this financial risk is to use their domestic portfolio properties as a source of equity by selling them or committing them as collateral.⁹

In response to the severe challenges encountered during the construction delay of the SWFC, Mori Building implemented several risk-mitigation measures. It revised the design to meet the ever-shifting specifications demanded by international financial institutions, which had a positive impact on the project’s quality and projected returns. Construction resumed in 2003 with numerous enhancements to the original plan, including an increased building height from 94 floors (1,515 ft.) to 101 floors (1,615 ft.), the addition of an observation deck, and greater floor-to-ceiling heights. Importantly, they also re-designed the office space to a rigorous class-A global standard, allowing them to remain competitive with enhanced safety and amenity demands for supertall towers. Mori Building applied its development and management expertise throughout this challenging design and development process to improve the project, eventually completing construction in 2008.¹⁰

Fortunately, the performance of the class-A commercial office market in Shanghai has outperformed expectations, leading to lower vacancy rates and higher rental growth than forecasted. Consequently, the SWFC realized significant cash inflows for Mori Building despite its prolonged development phase.

The relationship with local government officials is crucial in all large development projects, and especially for international investors. Yet attitudes of local government toward development projects can shift in unexpected ways due to changes of leadership, including within the city planning agency. Mori Building took advantage of a phased development approach in coordination with a local partner to navigate this political terrain successfully. This project was considered a high-risk investment due to the uncertainties of Shanghai’s real estate market during the development and lease-up periods. However, Mori Building weathered these challenges with the support of the local government, which provided a development tax exemption and allowed for increased floor-area-ratio (FAR) and building height to maintain the economic feasibility of the project. In this case, Mori Building’s alignment with the local government’s long-term city making vision earned them the trust and goodwill needed to bring the SWFC project to completion.¹¹

A comparison of the performance of the SWFC project with another large project the company developed in Japan helps to understand Mori Building’s accomplishment in Shanghai. Completed in 2003, Roppongi Hills Mori Tower is a mixed–use development project in Tokyo, which combines “living, working, playing, resting, studying and creating” in an area of approximately 11.6 hectares, based on the concept of a “Tokyo cultural center.”¹² It contains offices, residences, retail facilities, cultural facilities, a hotel, a cinema complex, a broadcasting center, and an art museum on top of Mori Tower. Roppongi Hills is the biggest private-sector urban redevelopment project initiated by Mori Building in Japan.

With a primary use as class-A commercial office, the building became Tokyo’s largest tower by net rentable area, with 4.1 million square feet spread over 54 floors. It was built to the strictest seismic standards to protect against earthquakes. Building a single tower with immense floor plates was one of Mori Building’s most daring design gambles. Architects and consultants had pointed out that these characteristics restricted the number of potential tenants, as companies often prefer to occupy an entire floor for greater visibility and cohesion, and few required such a large floor plate. Insisting on a single tower, Mori Building sought to address this challenge by targeting industry sectors and individual firms for whom this unique infrastructure would be appealing, particularly information technology companies and foreign financial institutions who were aggressively expanding to Japan.¹³

A comparison of rates of return between the SWFC and Roppongi Hills shows that the SWFC outperformed its counterpart. According to the following valuations, the return on assets (also referred to as capitalization or cap rate) from SWFC was 5.82 percent, far higher than the Roppongi Hills rate of 3.34 percent. The SWFC cap rate exceeded the expected return on asset in Shanghai class-A office market, which, at 3.75 percent, was close to that of Tokyo market. Thus, the SWFC is exceeded valuation and profit by approximately 2 percent.¹⁴

After the completion of the SWFC in 2008, the global financial crisis hit real estate markets in both mature and emerging cities. This forced Mori Building executives to sell a portion of their ownership of the SWFC in strata titles in order to limit financial exposure.¹⁵ In other words, they had to realize their profits earlier than expected to compensate for suppressed cash flows from operations. Nonetheless, Mori Building executives view their investment in the SWFC as a success. Their long-term vision for city making and patient long-term investment strategy in emerging cities, coupled with their experienced management team, enabled Mori Building to overcome high barriers and develop prime real estate assets.

Sui On Group, the developer of the Shanghai Xintiandi project, was founded in Hong Kong in 1971 by Vincent H.S. Lo. The firm first entered the mainland China market in 1985 and spent several years building its business platform. Located in the heart of the city, Shanghai Xintiandi consists of retail, entertainment, and office uses in historic and modern buildings. The North Block is a vibrant place of restored and rebuilt historic courtyard residential buildings serving as shops and restaurants. In contrast, the South Block is largely modern in style and construction. As the first project in China to repurpose old structures, Xintiandi differs from conventional patterns of development that emphasize new construction.¹⁶ Xintiandi proposes a new model of adaptive reuse and historic rehabilitation that has significantly influenced the way government officials and developers throughout China view old neighborhoods and traditional buildings.

In the late 1990s, the Luwan district government in Shanghai asked various developers to submit development proposals for a large swath of land in the center of the city known as Taipingqiao. Shui On Group eventually won the rights to develop this 52-hectare (128.5-acre) area with their mixed-use concept, anchored by a 475,000-square foot landscaped park and artificial lake. The major components of the proposed district include retail complexes preserving old structures in Xintiandi North and South Blocks, as well as the commercial and entertainment complexes of Corporate Avenue, class-A office buildings, an entertainment and commercial complex, and an 18-hectare (44.5-acre) luxury for-sale residential concept called Lakeville. More than ten office buildings were planned along Corporate Avenue, and two class-A offices had been completed by the end of 2005 and were fully occupied. The first phase of Lakeville featured three low-rise apartment buildings, villas, and two office towers. In 2005, a sale price of $5,000 per square foot was achieved becoming the highest residential prices paid in Shanghai at that time.¹⁷

In the first stage of its development, Shui On Group executives had to consider the suspension of the project due to the economic downturn in Asia. During this period, they shifted their focus to developing amenity spaces — public, shared spaces such as a landscaped park and artificial lake — with local government subsidies. Once the economy began to recover, they resumed development by constructing project components that added value — in particular a series of luxury for-sale condominium buildings adjacent to the landscaped park as mentioned above. This strategy enabled them to realize significant profits shortly after the economic crisis. With this newfound equity capital, they invested in the development of prime commercial office projects, which generated stable income.¹⁸

During construction, cost overruns escalated the total development cost. As a pioneering project, Xintiandi’s numerous amenities, public spaces, and high-quality finishes incurred a construction cost per pound ten times the standard in China at that time.¹⁹ Yet Shanghai Xintiandi now stands as an important branding tool for the Shui On Group and for the entire Taipingqiao redevelopment area, which has helped to justify the project’s relatively high development costs.²⁰

At the beginning of the Xintiandi project in 1997, no precedent for this type of low-rise mixed-use commercial center, which incorporates the reuse and rehabilitation of historic structures, existed in China. The uncertainty of this development model caused potential investors to view the project with skepticism. As a result, Shui On Group was the sole investor in the initial stages of the project — it was not until the end of 1999 that outside investors began to express their interest. Eventually, a consortium of four banks committed capital to Shanghai Xintiandi, injecting $45 million as a part of the total development cost of $168 million.²¹

The Shui On Centre Wanchai Office in Hong Kong is a comparable project with which to gauge the performance of Shanghai Xintiandi. Shui On Centre is a 35-story class-A office building with a gross floor area of 555,000 square feet (excluding a three-level underground parking structure) in the central business district of Hong Kong. Located on the Wan Chai waterfront near the Hong Kong Convention and Exhibition Centre, five-star hotels and serviced apartments, Shui On Centre is well placed to serve Hong Kong’s business community. It also houses the Shui On Group’s headquarters in Hong Kong. As of the second quarter of 2017, the commercial office capitalization rate in Hong Kong is one of the lowest among mature markets in the world, according to the report by Colliers International.²² Consequently, the project’s appraised market value is quite high. Shui On Group has used their prime assets in Hong Kong as collateral to conduct high risk/high return investments in emerging markets.²³

As the comparison between Shanghai Xintiandi and Shui On Centre illustrates, Xintiandi yielded significantly higher returns than the Hong Kong development. The return on asset (cap rate) of Xintiandi was 7.13 percent, which outperformed the Shui On Centre rate of 2.77 percent. Compared to Shanghai’s retail market recent cap rate of Shanghai, Xintiandi has realized a significantly high revenue stream for Shui On Group.

The large increase in rents coupled with the low vacancy rate in Shanghai has elevated Xintiandi to be a prime asset and income-producing property. Furthermore, Shui On Group has been able to expand the “Xintiandi” model — mixed-use development incorporating historic context and public space — in other emerging cities in China.

One of the most tangible risks to investors across the globe is currency risk. The potential volatility of exchange rates during the holding period of an investment adds an element of unpredictability in their cross-border investment. In an ideal risk-neutral scenario, especially in emerging markets, the exchange rates between two countries would remain stable throughout the life of a cross-border capital commitment. Such an ideal condition is unlikely over a long-term investment, as in the case of Shanghai Xintiandi. However, Shui On Group decided to retain their position in the market while continuing to reinvest their capital in China. They have now built more than six projects in China featuring a mixed-use development strategy similar to Shanghai Xintiandi.

When the various dimensions of international investment risk are identified, strategies can be employed to anticipate and mitigate them. After a thorough analysis of the risk/return profile in relation to investment goals, a foreign developer can make informed decisions on cross-border investments.

As the SWFC case illustrates, international developers must have a plan if limited capital partners pull out of a deal. To protect against this downside scenario, developers can sell or collateralize domestic properties from their portfolio. While this can be a controversial action, it may be justified to keep a project in motion and realize profits on an anticipated timeline.

Economic uncertainty, sudden policy changes, construction delays, and currency fluctuations can all lead to delayed profit realization. Farsighted developers can take protective measures, such as underwriting to a higher target internal rate of return, adjusting building programs to respond to changing market conditions, or selling in strata titles to strengthen short-term revenue. Creating joint ventures with local professionals is a common strategy to mitigate the planning and policy risks of cross-border development. Due to multi-faceted risk exposure, investors typically move into emerging markets when a combination of low domestic returns and high foreign returns provides incentives to do so.

Changes in local government composition or structure can shift the fortunes of a development project at any point in its timeline. For Mori Building and Shui On Group’s ventures in Shanghai, local partners helped them to win local government support in the form of development subsidies and planning allowances such as increased building height and density. In both cases, an alignment with the local government’s long-term city-making vision built trust and goodwill.

In navigating challenges and finding opportunities, both Mori Building and Shui on Group have established the prestige of their brands through city making in China. Since their initial investments, they have grown their businesses by successfully incorporating their lessons from Shanghai into their overall business strategies at home and abroad. As these cases illustrate, cross-border investors can use creative and bold ideas to discover the opportunities and overcome the challenges of developing large real estate projects in emerging cities around the globe.

Fred Cooper is a Senior Vice President of Toll Brothers, the leading builder of luxury homes in the U.S. and one the nation’s largest land developers. He joined Toll Brothers in 1993 to establish its Finance and Investor Relations Departments. Fred has overseen Toll Brothers’ exploration of international development opportunities in Asian, Latin American, and Middle Eastern markets. Previously, he was Director of Corporate Finance and Planning at DKM Properties Corp., and Senior Vice President of New York City’s economic development bank. He holds an A.B. from Brown University and a Master of Public Policy in finance and international development from Harvard’s Kennedy School of Government.

Looking back now, with more than twenty years of hindsight, the opportunity to develop major centrally located sites in Shanghai in the 1990’s was a “no-brainer”, given the city’s amazing growth since then. However, as Mr. Masamichi Ueta points out, when the pioneering Shanghai World Financial Center (SWFC) in Pudong and Shanghai Xintiandi in the Luwan District were initiated, there were many risks and unknowns which made attracting capital to these untested markets a challenge: In both cases, the developers ultimately were the primary investors in the development of the earliest phases.

There are many examples of similarly ambitious developments, in China and elsewhere, that have faltered. What made these so successful?

Both Mori Building and The Shui On Group were bold and visionary. In addition to financial returns, they saw the economic and social value in placemaking, which guided a long-term strategy. They also had the foresight in the 1990’s to focus on Shanghai, and what turned out to be spectacular locations in that city, rather than other markets in China.

Both companies were sophisticated real estate developers who had significant experience in undertaking projects of this scale. They each possessed the financial might and staying power to manage through the challenges that arose over a multi-year, multi-cycle development period. They were aware of the need to modify their plans in response to evolving preferences among their various office, residential, and retail users. They had the capacity to tap sources of internal capital when investors were skittish. And they had the experience to “know what they didn’t know”, thus filling knowledge gaps by enlisting partnerships with local players and maintaining solid relationships with government.

In both cases, the projects were part of a larger plan initiated and supported by various levels of government. Mr. Ueta points out that in Pudong the government jump-started the area’s development by building the first tower. The government also proved accommodative in providing financial support and approving various design and density changes at SWFC required to keep the project competitive over its decade-long development process. At Xintiandi, the government was similarly supportive in what has proven to be a multi-decade public-private investment in successful placemaking and place-branding.

Mr. Ueta’s article highlights many risks and challenges inherent in developing real estate in unproven markets. He also shows the strong potential upside if done successfully, as both Shanghai World Financial Center and Xintiandi demonstrate. While pioneering real estate development in emerging markets is not for the faint-of-heart, the potential for strong financial returns and transformational social and civic value-creation can make the outcome well worth the effort.


  1. David J. Lynn. Emerging Market Real Estate Investment.(Hoboken, NJ: John Wiley & Sons, 2010,14–20.

2. The Real Estate Companies Association of Japan, Real Estate in Japan 2009., Real Estate Companies Association of Japan, Tokyo.,

3. Nomura Securities Co. Ltd., NRI Real Estate Repor, 2014.

4. Shisei Nagatani, M. B. (2016, November). Investment in Emerging Markets (M. Ueta, Interviewer).

5. Lynn. Emerging Market Real Estate Investment, 21–25.

6. Ibid.

7. Minoru Mori, MORI Building: The Making of Vertical Garden Cities (London: Penguin Books, 2012); Asahi-shinbunsha (Japanese edition, 2009), 230–265.

8. Jumpei Shirasaki of the Special Situation Group, Morgan Stanley Real Estate Fund, author interview, June 2017.

9. Jun Fujiwara of Mori Building, author interview, March 2017.

10. Mori Building Co., Lid. Corporate Reports of Investor Relations 2008.

11. Clay Chandler, “Building Shanghai’s tower of power Asia’s boldest developer reaches for the sky with a 101-story Shanghai tower.”, CNN Money, January 9 2008,

12. Urban Land Institute (ULI) Development Case Studies: Shanghai Xintiandi, Urban Land Institute, 2005, 2–5.

13. Mori, MORI Building: The Making of Vertical Garden Cities, 185–223.

14. Assumptions are based on current appraised values, with initial expected returns from both investments assumed to be much higher than actual (experienced) returns.

15. Mori Building Co., Lid. Corporate Reports of Investor Relations, 2002, 2003, 2008, 2015.

16. ULI Development Case Studies, Shanghai Xintiandi.

17. Michelle Yun, “Shui On Plans Xintiandi Listing by End-2016, Sells More Assets,” Bloomberg, March 18, 2015,

18. [NAME], investment officer, Shui On Group, author interview, January 2017.

19. “Construction cost per pound” is the standard method for measuring development costs in Asia.

20. ULI Development Case Studies, Shanghai Xintiandi, 6.

21. ULI Development Case Studies, Shanghai Xintiandi, 5–6.

22. Global Cap Rate Report, Q2 2017. Colliers International,

23. [NAME], investment officer, Shui On Group, author interview, January 2017.

Harvard Real Estate Review

A student-run publication investigating the intersection of real estate, technology, and design. We foster collaborative conversations between students and industry professionals to explore solutions to contemporary urban issues.

Harvard Real Estate Review

Written by

Editorial team at the Harvard Real Estate Review

Harvard Real Estate Review

A student-run publication investigating the intersection of real estate, technology, and design. We foster collaborative conversations between students and industry professionals to explore solutions to contemporary urban issues.

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