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Shanghai surprise

The Grand Gateway clears China's development hurdles

by Susan Thorne

The Grand Gateway, a 3.3 million-square-foot mixed-use project in Shanghai, China, features 1.1 million square feet of upscale retail spread over seven levels.

With its handsome entry pavilion, streetfront fountains and gleaming stone surfaces, The Grand Gateway would be at home in the downtown streetscape of a U.S. metropolis such as New York City or San Francisco.

But in fact, this 3.3 million-square-foot mixed-use complex with a shopping center is located in Shanghai, and its case history illustrates some of the differences in mall development between China and North America.

Opened in December 1999 in the central shopping and business district of Xu Jia Hui, The Grand Gateway has 1.1 million square feet of retail on seven levels, making it Shanghai’s largest shopping center, according to Wilfred Ho, executive director for Hong Kong-based developer Hang Lung Group, which owns the center.

With a population of 14.2 million, Shanghai is known as a cosmopolitan, Westward-looking city with discriminating shoppers, Ho said, making The Grand Gateway’s upscale merchandise mix and attractive design a good fit with the market. Anchored by a 150,000-square-foot Mega department store, the retail tenants are principally units of Asia-Pacific retail companies based in China, Hong Kong and Taiwan.

The mall is also positioned as a family-oriented leisure destination, with extensive entertainment components including two discotheques, video game and laser tag facilities, a mirror maze and a number of food-service operations, among them, Kentucky Fried Chicken and Pizza Hut outlets. Since opening with its retail premises 90% occupied, The Grand Gateway has attracted 3 million visitors per month, said Roy Ho, the center’s director and deputy general manager, and it has become established as a city landmark and gathering place for public events like the Shanghai Fashion Fest. Sales figures to date were not available.

While The Grand Gateway is well-known today, the process of bringing a U.S.-style mall of this type to completion in China is far from straightforward. The country’s volatile economic and political situation creates a climate of uncertainty that makes long-term planning and financing difficult.

“It’s like any developing country,” said Eddie Wang, president of The Jerde Partnership, a Venice, Calif.-based architectural firm with extensive experience in Asia. “The economy and lifestyle are changing rapidly, and the kind of legal framework for business which we have [in North America] doesn’t exist: Taxation and franchising laws, licensing and retail regulations are still evolving and often complicated.” Consequently, it can be difficult to identify the costs of a project, Wang observed.

Rapid growth in some parts of China adds to this uncertainty. When The Grand Gateway project was first conceived in the early 1990s, a building boom was under way in Shanghai and retail overstoring was feared.

“When we first became involved in the project in 1993, no one was sure what the market was going to be when the center was ready,” said Paul R. Makowicki, an associate principal for southeast Asian business development with Callison Architecture, Seattle, designers of the center. “So we built in construction flexibility so the project could be brought onstream in phases.”

The future apartment and office components of The Grand Gateway were also designed so that they could be developed as either residential or commercial space, to suit market demand.

It was difficult initially to assemble the large land parcel needed for the project in a good location with good public transportation access (The Grand Gateway connects directly to the subway system). The hurdle of building regulations was a further obstacle: A Callison release points out that more than 100 separate agencies have jurisdiction over the various aspects of new development.

One special requirement for The Grand Gateway was fire truck access to the center of the complex; to meet that condition, Callison created a special interior pedestrian promenade with restaurants on both sides, which doubles as an access road.

The building approval process was made more difficult because certain Western construction methods and materials proposed for the project were unfamiliar to the Chinese authorities.

Makowicki said that to counter this, Callison brought the Shanghai fire marshal and an associate to the United States to see current construction techniques, “to help them understand things like pressurization of elevators.”

Poor local infrastructure is another potential issue for property development in China. Makowicki said that it was difficult to maintain adequate water pressure for sprinkler systems at The Grand Gateway, for instance.

Today, The Grand Gateway is functioning well, although many Shanghai shoppers are still not used to the concept of a shopping center, Wilfred Ho observed. Shoppers often prefer a department-store format where they can inspect merchandise on their own without being waited on, he said.

The food outlets have proved to be the most popular area of the center.

Leases to retail tenants range from $2 to $3 per square meter per day, and both flat rent and percentage rent options are available. Improving the tenant mix is a concern: Deputy Manager Roy Ho hopes to attract more Western tenants. “North Americans are talking to us, but it will take awhile.”

Wilfred Ho indicated that retail spending in Shanghai is weak at the moment, “hence rental yield vs. investment is low. However, the situation seems to be improving. We are treating Grand Gateway as a long-term investment,” he added. Further improvement may be seen when the final phases of the The Grand Gateway project are ready. To date, the mall and a residential block, which is 85% occupied, have been completed; another residential tower and two office towers and two residential blocks are scheduled to open in 2002 and 2006 respectively.