Forty miles southwest of Seoul, along the Incheon City coastline, sits 1,500 acres of mud. This unassuming location is the site of the world’s largest private development project, a $20 billion, 10-year master-planned international business center that will ultimately contain more than 50 million square feet of commercial office space, 10 million square feet of retail, 40 million square feet of residential, a 1.2-million-square-foot convention center, and hotels, schools and hospitals.
Billed as “The Gateway to Northeast Asia,” New Songdo City is the brainchild of U.S.-based developer Gale International and Korean construction company POSCO E&C. The joint venture will develop and own the massive business center, which the South Korean government intends to become the country’s answer to Singapore and Hong Kong. Only a few miles from the new $5 billion Incheon International Airport, English will be the primary language, and the international companies and employees will receive exemptions from corporate and income tax.
This is public-private partnership on a colossal scale, and perhaps evidence that the easiest way for U.S. developers to bring their development model to Asia is not just to build new projects — but entirely new cities.
“There are obviously a lot of Korean influences here, but by the same token it has a foreign bent to it,” said John Hynes, president and chief executive officer of Gale International. “This is for American businesses and businessmen who will know how to operate in that community. But interestingly enough, that community is very desirable to a lot of Koreans. The Western look and feel is a sign of progress and sophistication.”
As a result, Gale International, the majority owner of New Songdo City, is working closely with its financial partner Morgan Stanley Real Estate Funds to bring U.S.-based developers to South Korea. The first company on its agenda is Taubman Centers Inc., a Bloomfield Hills, Mich.-based real estate investment trust with stakes in just 22 regional malls in the U.S. and no international presence.
Until now. Better known for its luxury brands than an aggressive expansion platform, Taubman Centers has not yet announced any formal agreement with Gale and Morgan Stanley about developing New Songdo City since entering into negotiations with them last year. But it did attend the groundbreaking of New Songdo City in November 2004, and in April this year it unveiled Taubman Asia. The new division will be headquartered in Hong Kong and led by Morgan Parker, a former vice president of Morgan Stanley who ran its Tokyo retail investment business.
Taubman, though one of the smaller REITs on the scene in the U.S., is one of the few companies diving into Asia outside of the established retail hotbeds in Tokyo, Singapore and Hong Kong. Despite the constant clamoring about China, South Korea, and Southeast Asia as the growth prospects of the future, exploring Asia has proved more challenging than expected.
“Asia is the most difficult place for U.S.-based retailers to expand to,” said Michael Collins, partner at Bain & Co., a global management consulting firm. “You are not sharing customers and costs. You are moving into a market where, generally, your existing distribution infrastructure and store base is not going to be helpful. Your buying needs change. Your merchandising will likely change significantly. You will need to get to know an entirely different customer.”
For a developer, said Collins, finding the right local partner, especially in the public arena as Taubman and Gale did, is key to success.
“There is a large government interest in developing mixed-use properties and creating new opportunities for economic growth,” he said. “The gaming industry is a huge area of opportunity for retailers and retail developers, for example. But working with the right Asian business partners in the private sector is critical, too.”
Simon Property Group took the route of joint venturing with a local company to bring its retail model to Asia. Last month, its wholly owned subsidiary, Chelsea Property Group, partnered with Seoul-based Shinsegae Co. and Shinsegae International Co. to develop outlet centers in South Korea. Shinsegae is currently one of the largest department store operators in South Korea, and also owns stores in China. Shinsegae Chelsea will be a 50-50 partnership headquartered in Seoul. Simon, for its part, expects to open an office in China in the “near future,” said a company spokesperson.
“A developer has to go into Asia with expertise and have a proper local partner,” said Laura Pomerantz, principal at PBS Realty Advisors. “If they don’t, it will be a disaster. But if the development is done with local knowledge and experience, it’s going to be a huge opportunity. You have a massive shopping population that hasn’t been fully tapped and hasn’t been exposed to the level of retailing that exists in the United States.”
“The retail developers in Asia and especially China are local mall owners or developers from Malaysia and Hong Kong,” said Ann Chen, partner at Bain & Co.’s Hong Kong office. “But they are nothing akin to the U.S. REITs and their development model. Another issue is that the local developers are all competing to build the most prestigious and luxurious malls across the different cities, so there is no Madison Avenue. There is no critical mass of retail development.”
In South Korea, at least, the formation of New Songdo City and its 10 million square feet of retail — which, if Taubman develops it, will increase its real estate portfolio by 50 percent — will create a cluster of department stores, malls and street-side retail to compete with Seoul and Tokyo. And its U.S. developers, with their bent on building Westernized retail for its mix of Western and Korean customers, are keenly aware that this may be a huge opportunity for U.S. retailers to make a grand entrance to emerging markets in Asia.
“There is a play here for an international department store,” said Hynes. “Nordstrom’s, Neiman’s, anyone that Taubman is interested in. There’s also room for a domestic store. The question is who is interested, and who is willing to work in this format with us.”