BLUEPRINT: Fee-fi Fo-sun

A short taxi ride into the Bund of Shanghai, one arrives at the Juss Building. Though a far cry from the tallest building in Shanghai, the slick 40-story office tower does house Mainland China’s largest privately-owned conglomerate. Amidst hallways scrubbed spotless and ethnic Chinese carvings, you get a view of the Huangpu River, the ferries traversing it, and Shanghai’s major landmarks.
And then find yourself right next door to a large-scale construction project.
Some might consider the clash jarring, but the president of Fosun’s property arm, Xiaoliang Xu, is excited about the drills and cranes at the Bund Finance Center just outside his office window. After all, it is the construction of Fosun Property Holdings’ new skyscraper which is to become the twin to New York’s One Chase Manhattan that Fosun acquired last October for $725 million. The key to the building hangs on his office wall.
In the company’s first ever interview with PERE, Xu walked us through the detail of how this project next door is one of the primary reasons Fosun purchased the 2.2 million square foot New York structure from JP Morgan. The firm hopes to give US companies a gateway into Asia and vice versa, Chinese companies a gateway to the US. “This asset would have a two-way synergy with America’s Chase Manhattan Plaza, letting the two buildings link to each other,” he explains.
That future exchange presents a microcosm of what Fosun hopes to accomplish worldwide as it builds out a global property platform. In the mind of this conglomerate and its executives, real estate is set to become a “central pillar” of Fosun’s business, with the focus on connecting China with the rest of the world. And from what Xu details of Fosun’s plans, the deals it has struck so far are just the beginning.
From rags to riches 
The growth of Fosun Group is one of China’s better-known success stories. As the Communist nation has climbed the global economic heights, Fosun has been right there, making a name for itself both domestically and internationally.
Guangchang Guo, the chairman of Fosun, is after all one of the richest men in China, with connections across China’s business landscape. Dubbed China’s Warren Buffet, he has led his firm to be the forerunner in many sectors, and has teamed up with some giant companies in the global spotlight. For example, last year it invested alongside e-commerce giant Alibaba Group Holding in an RMB5 billion (€593 million; $806 million) logistics development venture.
Try to define exactly what Fosun is, though, and one runs into some challenges. Sometimes described as “China’s Hutchinson Whampoa,” Fosun is at its heart an investment company, but has branched into many other industries. It does its own development and operational management in-house, but also raises private equity funds to invest third-party capital. It operates in industries such as coal mining and pharmaceuticals, but also has three insurance ventures, and invests the capital just like an institutional investor. A “conglomerate” is probably the only way to describe this developer-cum-fund manager-cum-investor all rolled into one, and Fosun’s many avenues into real estate are something its partners must keep in mind, a Japanese fund manager acknowledges.
In numbers, how far this home grown Chinese company has come in 22 short years is impressive. Guo and three other Fudan University graduates started Fosun in 1992 with a pooled investment of just RMB38,000, which back then was worth $6,800. Today, it manages over RMB300 billion ($48 billion) across all its business lines, more than a third of which is now in real estate – over $16 billion. “Fosun is a clever bunch of entrepreneurs, and they really work to be innovative to diversify their property holdings,” one Hong Kong-based advisor comments as he observed the achievements.
Stepping stones to a global platform 
In 2007, the investment company decided to make its presence felt outside of China. It started with listing on the Hong Kong Stock Exchange, and a new platform was born. Some of its most notable overseas investments since then include the $3.7 billion Focus Media privatization, the €556 million take-over of French resort company Club Méditerranée, and the €85 million investment in Greek luxury retailer Folli Follie.
More recently, Fosun’s real estate arm has been particularly aggressive in the international arena. The One Chase Manhattan purchase has already been mentioned, but Fosun also bought into a $1.26 billion Greek airport redevelopment project in April, and most recently acquired boutique Japanese private equity real estate firm IDERA Capital Management, to name a few outlays.
Whatever way the pie is cut, Fosun is set on building out a global platform, and real estate is expected to be a core part of its outward push, Xu insists. At press time, Fosun had RMB15 billion ($2.4 billion) of international property assets on its books, or approximately 10 percent of its total real estate portfolio. And that doesn’t include the approximately RMB28 billion of property assets held by the Portuguese Insurance Group, in which Fosun bought an 80 percent stake in May. Fosun also has four overseas offices set up in New York, Tokyo, London, and Hong Kong. 
Within six years or less, however, Fosun is planning to grow its overseas offices to 18 altogether, including in smaller countries like Portugal. Countries that will be a particular focus for the firm include those within the Organization for Economic Co-operation and Development (OECD) as well as financial center cities. Xu outlines a vision to grow the firm’s overall assets from RMB300 million to RMB1 trillion by 2020, and make real estate approximately half its total assets. That would imply Fosun plans to take its property assets under management to $80 billion in six years. 
Describing Fosun, it would seem “ambitious” is an understatement.
No ceiling 
Indeed, ambition and innovation are traits that Fosun strives to fuse into its corporate culture. Xu says the real estate arm in particular is built on an atmosphere of encouraging the younger staff to take chances. The ideal Fosun employee, Xu insists, is in his 30s or younger with distinct field specialization and a good education.
“They have to act on their own initiative and have an entrepreneurial spirit,” Xu says. To many outsiders, in fact, Fosun is most known for that spirit. The Hong Kong advisor points to the firm’s recent commitment to a pharmaceutical logistics network: “They’re not afraid to step into unique sectors,” he says.
“The ones I know are exceptionally bright guys,” a Japanese service provider agrees, and even admits to trying to poach at least one of Fosun’s real estate team.
When hiring someone, Xu stipulates that Fosun Property Holdings primarily looks for adaptability. “We want them to dare to think – people that are not just conforming to the norms of society, but looking to improve those norms,” he says. Working in this firm is not an easy job, he insists, and so Fosun wants a team of partners, not just colleagues, and looks to reward dedication.
Chairman Guo, who sits on the Fosun Property Holdings’ head committee, often says: “Let those who hear the canon fire decide.” He and the committee may be the ones to vet each policy and investment decision, but his hope is to involve the people working on the “frontiers” of Fosun’s property business in the decision-making process.
“This is a platform, which means there is no ceiling,” Xu continues. “You can tell the company that there is a certain opportunity there, what you can do, what China is lacking in this area and what connections [Fosun] can bring.”
Xu himself is probably the prime example. He joined Fosun’s property division when it was established in 1998, when he was just 26 years old. His first project was building a property advisory arm, Shanghai Resource Property Consulting, from the ground up. It has now grown to RMB10 billion in sales with a top 10 ranking nationwide for six years. He became president of Fosun Property Holdings in 2012.
So far, Xu says it has not proved difficult for Fosun to attract both domestic and international talent. In early July, for example, Fosun brought on Erik Horvat, former director of World Trade Center redevelopment at the Port Authority of New York and New Jersey, to build up its investment platform in New York. In its overseas offices, Xu says the property division puts particular emphasis on hiring local talent.
“In the future, these countries are expecting to have a lot of business with China,” Xu explains. “So if [local people] cooperate with us now, the coming road will be much wider for them.” Once again, Xu sees it as a win-win situation: Fosun can benefit from their local knowledge, and they will understand China much better than their counterparts.
A battle plan of cooperation 
Taking its innovation overseas, however, is not always easy for Fosun, Xu acknowledges. Differences in language and culture mean there are some things the Chinese company cannot do on its own. The firm might want to go to Europe, for example, but Xu confesses to knowing nothing about those markets. Given the competition and challenges Fosun must overcome, it is no wonder Xu calls Fosun’s international strategy something of a “battle plan”.
In this outbound “battle plan,” Xu names three pillars of the strategy: 1) buying completed assets (such as One Chase); 2) buying land for real estate development; and 3) buying up local platform companies. Xu emphasizes the third in particular, naming Japan’s IDERA as an example. Already a local brand operating with its own financing and resources, it can get Fosun past the language and cultural barriers.
Unlike in a battle, however, Xu insists how platform deals must be win-win. “[IDERA has] become one of us to carry some of our load, and they will scour the entire Japanese market for the investments we most need,” he explains. “At the same time, IDERA is happy, because… we have much more capital available for them to look at [deals] with and deploy on our behalf.”
Cooperation is a key concept for Xu. The advantages have to go both ways, or there is no point in investing. “Before we invest, we are always thinking about what opportunities and pragmatic help can we bring to the table for them,” Xu explains. “It all hinges on the degree of cooperation we have: we must be able to bring something to each other.”
IDERA is one case where Fosun got complete control, but Fosun can also become a majority shareholder, which it is hoping to do with Club Med; or take equity participation in minority, as it did with Folli Follie. In a reverse model, Fosun can also establish itself as a joint venture company in China for a foreign firm, as it did last year with Fortress Investment Group for senior housing. “This [fourth model] is relatively more flexible, where we cooperate on strategy,” Xu says. It’s often project-by-project, but this way Fosun is able to learn from what it considers a “superior elderly care archetype in the US” and take it to China.
Flying China’s flag 
As that last model demonstrates, Fosun is fundamentally a “China expert,” and it has no intention of abandoning its country. Although the volatility in China’s property market has encouraged Fosun to speed up its outbound strategy, Xu fully expects the local market to correct itself. Indeed, that expectation is one of the primary drivers of Fosun’s international strategy: the firm wants to bring international expertise back to China.
The basis of China’s so-called property bubble, according to Xu, is what he calls the “Three Highs Model.” Land prices kept going up, the cost of capital or debt also kept going up, and in the end it all depended on residential housing prices continuing to rise. Basically, the residential sector grew too fast for economic industry to keep up with. “And we all know this model cannot possibly continue indefinitely,” he said.
To resolve that, Guo himself came up with the concept of “beehive cities,” or smaller communities bringing everything close together: housing, offices, churches, schools and every other kind of real estate. “That brings all aspects of life together, boosting the city’s ecology and efficiency,” Xu elaborates. “That way the value of the city itself rises, and it’s no longer a bubble.”
Every one of the beehive cities, however, must have some kind of industrial center, such as health, finance, or tourism. And that is where foreign expertise becomes crucial, Xu says. “We always seek out good overseas resources that can be married to the places and investments we have in China,” giving each one of the “beehive cities” a core industry to grow into, such as health or finance.
Take Fortress, for instance. As China’s elderly population balloons, the need for national elderly care is unquestionable, Xu says. “Fosun sought out a model that we could bring to China, something we could set firm on the ground, operate and scale up,” he remembers. Fortress’ model in the US stood out, and Fosun knew they could get Fortress the land and build the relationships needed for the model to work in China, which would be much more difficult for the New York-based investment manager to do on its own.
“Our principle contribution [to our overseas investments] is our ability to graft these investments into Chinese platforms,” Xu says, or help them tap into the Chinese market. Fosun has so far sought to do this with every one of its foreign investments.
Indeed, Fosun’s mode of investment is distinctly nationalistic in tone. All investments it makes must have some potential connection to China, especially in the areas where China needs development the most. “Fundamentally, there are two big wheels – one invests overseas, the other is investing domestically,” Xu explains. “But then between them there is a connecting cable: bringing back the riches of our overseas investments as a way to join up the two strategies.” The ultimate hope, he adds, is that China as a country can learn and develop using the foreign expertise Fosun brings back.
A path of (some) resistance 
A noble sentiment, but Fosun’s nationalism may not serve it well in other countries – it may actually work against the firm. In Japan, for example, Fosun’s acquisition of IDERA is already encountering some local resistance, according to the Japanese service provider mentioned above. Thanks to negative political sentiment in Japan, certain banks could start offering much less competitive lending terms to IDERA, “for really no other reason than that they are now Chinese-sponsored,” he worries. Even foreign clients of IDERA may look for other partners because of Fosun’s perceived connections to the Chinese state – whether or not those perceptions are true.
Given the number of foreign investors that have been blocked from closing deals in the US just because nationalistic sentiment was against them, it’s hard to imagine Fosun won’t face the same there.
“The fact that they want to take foreign expertise back to China can get people on edge – it gets me on edge,” the Japanese service provider confesses.
Xu also admits to practical challenges to growing the real estate platform overseas, such as follow-up supervision and management and continued dialogue with local governments. Each overseas office will have to develop its own asset management capabilities and investment acumen to get Fosun the returns it seeks, and such capabilities cannot be grown overnight, Xu admits. After all, the firm only made its first property investment in New York after watching that city for about four years. Add the unavoidable obstacles of time difference and language, Xu says half-jokingly, and the prospect can feel overwhelming. 
Other investors also wonder whether Fosun may be growing its property business too quickly. In all, Fosun has about four different groups doing real estate investment across its fund management and industrial arms. And sometimes, observers have seen a lack of communication between the groups. There are rumors, for example, that the One Chase deal took some time to close because Fosun couldn’t decide exactly which pocket the money would come from.
“If it expands too fast, it is possible Fosun could lose control [over its various arms],” the Hong Kong advisor said. “They may need to pay their tuition for growing too fast.”
And just this July, Fosun was also facing a hostile bid for Club Med from an Italian consortium, threatening the resort company’s privatization plans. As of press time, this has not been resolved.
However, the head of China at a global property research institute adds that so far Fosun has remained a very “disciplined” investor. “They do not overpay for assets,” he says. “They are aggressive in the number of assets they buy, but not on price.” Fosun’s current deals have also been largely successful. Fosun declined to comment on the performance of its current investments, but it is understood that if Fosun wanted to sell One Chase Manhattan in New York now, it already has buyers lining up, and the firm’s IRR could be as high as 133 percent.
And other challenges are not insurmountable. The Japanese source speculates that as long as Fosun allows IDERA to operate as IDERA and doesn’t interfere too much, it can overcome Japanese suspicion – though that may take a public relations campaign. “They just need to behave like they are one of many foreign buyers – not a politically-oriented one, just businessmen – and then they shouldn’t get much resistance,” the fund manager adds.
Xu says that Fosun has learned to operate by the old adage: when in Rome, do as the Romans do. “As a long-term investor, we insist on creating value-added to the company and we try to become an innovator not a destructor of the markets we have entered,” he insists. At least so far, that attitude has let Fosun be “welcomed with warm smiles everywhere,” whether in Japan, Europe or the US.
In addition, Fosun is not building out its international platform just for its own benefit, Xu insists. He views connecting Fosun’s knowledge of China to the rest of the world not only as a sound business venture, but almost a civic duty. “As far as we are concerned, leading [these companies] into China will help our country integrate the expertise it really needs,” Xu says. “At the same time, once China has become established in these sectors, it will be all the more willing to go all over the world taking what it has learned to support other places. This way, if the China economy picks up, that will spur on the whole world’s economy.”
“We propose to build an investment platform that takes root in China’s strength and reaches out to the world,” Xu concludes. 
All roads lead to property: “the beehive” 
Fosun has coined a new phrase – “beehive cities” – to illustrate its vision for both integration and efficiency in China’s future urbanization.


Fosun’s theory of “beehive communities” underscores just how integrated Fosun’s model of real estate investment is with the firm’s other business lines. If completely divorced from business or industry, the beehive itself would have no life – its very existence depends on integrating industries like culture, tourism and finance into the fabric of the city. And that integration is what will give the real estate its value.
“Fosun as a group has many other industries, so in China local governments constantly approach us about all sorts of industries,” Xu explains. “So maybe one city approaches us about pharmaceuticals. In real estate I can build them a hospital, but I can also make them into a healthcare city,” since Fosun has the pharmaceutical and the insurance companies to do so.
Xu even refers to the Club Med deal in real estate terms, with Fosun Property Holdings securing the land and negotiating with governments to build resorts in China and globally. It is not only a profitable real estate play, but also promotes the cultural and tourism industries in China – and could even serve as the heart of several beehive cities.
Xu describes real estate at Fosun as a “system set apart” that underlies every other industry Fosun is involved in. “The kind of real estate Fosun concentrates on is large-scale real estate, because when you have enough of it… it can support healthcare, culture, and any other business that has a use for the property.”
To cater to its many industries, Fosun Property Holdings has actually divided its real estate operations and development teams into different specializations. So one team will be focused on health, learning the ins and outs of what a hospital building needs to be top-notch. Another team might focus on banking, working with Fosun’s banking arms to be sure that Fosun’s finance offices cater to tenants’ unique needs. That is what will make the firm’s “beehive cities” most efficient, Xu believes.
“It’s like everyone’s playing ball, but here is volleyball, here is basketball, here is rugby,” he explains. “The way you play each is not the same, but it’s all playing ball, and each team plays their ball.”