Theme Parks and Beyond: China encourages marriage of entertainment and real estate

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On Sept. 29, Kevin James, director and chief liaison of the Los Angeles Mayor's Office of Film & TV Production, noted at the second U.S.-China Film & TV Industry Expo at the Los Angeles Convention Center that “the relationship between China and Hollywood continues to grow and become intertwined as more partnerships and investments surge.” Evidence cited by James included:

* A joint venture with Warner Bros and China Media Capital to produce local-language films in China

* Universal Studios’ deal with a Chinese state-owned consortium to build a theme park in Beijing

* Disney and Fox partnering with Chinese company Tencent to make the entire Star Wars saga available to Chinese viewers online

* China's Alibaba Pictures investing in Paramount's Mission: Impossible—Rogue Nation and Chinese conglomerate Dalian Wanda Corp. co-financing The Weinstein Company's Southpaw for $30 million.

* China's Hunan TV making a deal to invest $375 million in Lionsgate's slate over three years

* Warner Bros of Beijing’s investment in a slate of at least 18 films with STX Entertainment

* IMAX’s investment in opening hundreds of IMAX screens and theatres all over China

“This year, ticket sales [in China] could reach $6.5 billion...almost catching the U.S. box office, which is estimated to bring in revenues of $6.9 billion," James added.

In a keynote titled “China, China, China,” Mike Ellis, president and managing director, Asia-Pacific, at the Motion Picture Association, provided even more detailed data at the Asia Society's sixth U.S.-China Film Summit in Los Angeles on Nov. 5. Ellis reported:

* 36% box-office growth from 2013 to 2014

* 48% box-office growth in the first half of 2015 compared to the first half of 2014

* US$4.8 billion box office by early September 2015

* China’s forecasted emergence as the world’s biggest box-office market by 2017

Overall, the Chinese film and TV industry has risen 53% since 2011, generating a total economic contribution of US$64.4 billion (396 billion yuan). The industry supported 4,117,000 jobs–jobs that are high-productivity, relatively well-paid jobs that are around 90% higher than the average across the whole economy. The industry generated US$16.9 billion (104 billion yuan) in tax revenues. The report was prepared by Oxford Economics and may be viewed at www.mpa-i.org.

An especially intriguing panel discussion at the U.S.-China Film & TV Industry Expo addressed "China-U.S. Investment in Entertainment Real Estate.” It was moderated by Phil Hettema, founder and president of The Hettema Group, a leading designer of theme parks and other attractions. With five Chinese real estate trade leaders and two of his American colleagues on the stage, Hettema predicted that theme parks alone in China will grow by five percent next year. "It is a tremendously fast growth rate for someone who lives and works in the theme park industry,” he noted.

Prior to the founding of his firm in 2001, for 14 years Hettema was the senior creative director for Universal Studios, in charge of building their attractions around the world. In his informative and sophisticated PowerPoint presentation, Hettema emphasized that intellectual property-based entertainment can not only drive high value and revenues for the surrounding development, but more importantly can become the anchor of the destinations that can drive value. For example, once the Disney Shanghai project was announced, the surrounding real estate almost doubled in value. Hettema believes that the Disney Shanghai and Universal Beijing theme parks will raise the bar tremendously and have great impact on an industry that will continue to grow and expand the market, not just for the big players but also for new developers. The Chinese speakers collectively offered a full picture of the Chinese entertainment real estate market that is rarely reported.

Film Studios

The first panelist was Zhang Mingzhi, president of the China Alliance of Radio, Film and Television Production Committee. The Alliance includes almost everyone in the Chinese film and TV production business: 6,000 producers and 800 production companies, including CCTV network, satellite TV and film studios, private and state-owned. In recent years, their member companies produced an average of 16,000 hours of TV series annually, with 95% of television broadcast and 85% of film market shares. They also have nearly 70 member studios.

Zhang proudly gave the example of Hengdian World Studios, located about 200 miles south of Shanghai with a size over 30 square kilometers (7,413 acres). “They wanted to be the largest studio in Asia just a few years ago, and now they are the largest one in the world.” With all their sets covering 5,000 years of Chinese dynasties and eras, "you name it, they have all." In terms of hospitality, they can accommodate a total of 60,000 people at one time. Last year, they accommodated 64 production crews at one point. Last year's ticket sales reached 1.7 billion yuan ($274 million) from 13 million visitors. Hengdian offers free studio filming, while open to the public to attract tourism—which works, and works well.

The Alliance also evaluates film studios and issues licenses as National Certified Filming Locations. The key factors to be considered include convenience in transportation, scenery with striking characteristics, and full hospitality services. A film or TV production crew expects to have at least 50% of filming done there once they move in. The Alliance is also responsible for recommending the certified studios to their members, who last year alone produced 600 films and 450 TV series.

Is there still room for new film studios? "Huge," Zhang responded. He estimated, "China has only developed less than 10% of the filming studios.”

‘Filming Towns’

"To avoid 'aesthetic fatigue.’ we are constantly scouting new locations to shoot films and TV, Zhang observed. He’s enthusiastic about another entertainment real estate model on the rise called "filming towns.” Typically, the local government likes to utilize their geo-cultural resources, and the Alliance provides the plans and designs. The filming location is usually built outside of the town, “which could create a win-win situation for all, from local governments to investors for the film and TV industry.”

Cultural and Creative Industrial Parks

Following Zhang's optimistic high note, Li Zhanjun, principal, research, of the China Real Estate Association, illustrated another model called "Cultural and Creative Industrial Parks.” Different from manufacturing industrial parks, these parks engage businesses from film and television entertainment, to art and design studios, to advertising, publishing and law offices. According to China Real Estate Association statistics, there are as many as 2,500 of this type of cultural real estate project. However, only 10% of them are profitable. Some 70% still lose money, and about 20% are able to make ends meet. "Large investment, built rapidly and high-risk" are the three characteristics of this type of development, requiring experience China does not have, according to Li.

Li recalled his encounter with the Disney negotiation team. “They already had the experience of building Disney theme parks in America, Japan and France, but China had absolutely no experience. In fact, the negotiations were essentially a process of the Chinese learning from American colleagues about investment, development and construction. During theprocess, new normative standards for Chinese culture real estate development were established… Seven categories with more than 2,000 standards were absorbed and adopted from our American colleagues in the negotiating process of building Shanghai Disney. So these standards play a very good role for government regulations, for new design specifications for China's planning, architectural and design departments, and construction.”

Chinese Government Incentive Policies

Speaking with authority, Li summarized the government policies, which vary at the local level, toward the marriage of entertainment and real estate development in four categories:

1) Land supply: The government supports culture and entertainment-originated enterprises by approval of the use of state-owned land with a leasing agreement. In China, all land is owned by the state; the term for the right to use the land is 70 years. Unlike commercial real estate bidding processes, the government includes the land supply in a five-year planning and development arrangement in advance, so that the cultural industry investment can forge its plan with the physical land already allocated. Many also transform old, failed factories or warehouses to new cultural and creative industrial parks, or film-TV production facilities.

2) Funding supply: A cultural industrial park's investment can be costly. Whether Chinese banks and financial institutions can provide guarantees to secure the loans is an important aspect determining whether the projects see smooth progress. In order to obtain loans from the financial institutions, some use equity mortgages, or a company can be set up for the equity mortgage. Or they use their own finance or warehouse inventory as collateral, credit orcommercial insurance.

3) Taxes: Many of these places rely on ticket sales from tourists as their income. The government eliminates the tax. For heavily invested projects, such as large-scale film and television ventures, in some places income is tax-free for three years. For businesses that are still losing money even after adopting these measures, some local governments even offer exemptions, reductions or deferments on sales tax and other taxes, with the goal of helping these businesses get on their feet as quickly as possible.

4) Government investment: In recent years, the central and local governments have increased their investments in cultural real estate, as well as in film and television businesses. Adopting the PPP (Public-Private Partnership) model from the United States, the government outlines a project and businessmen invest. If it succeeds, the government issues an acceptance check in accordance with the requirements of the contract. The government thus secures the investor's initial capitalization. Further, the government is also able to providecapital guarantees to the companies engaged in the cultural industry—not through a government agency, but through state-owned enterprises. The transaction is business-to-business, between companies.

(A side note on government investment from the Western perspective: In his Film-TV Expo presentation, Kevin James of the L.A. Mayor’s Office stated that California has significantly increased its investments in the entertainment industry through new legislation raising the film and television tax credit to $330 million per year for a period of five years—roughly $1.6 billion before renewal. "Mayor Garcetti's Office of Film and Television Production oversees the relationship between numerous city departments to make sure film, television, commercial and music-video productions feel very much at home right here in the city of Los Angeles,” he said. The relevant websites are www.film.ca.gov and FilmLA.com.)
 

The Marriage of Entertainment and Real Estate

Hu Zhigang, VP of the China Real Estate Association, urged the marriage between film and TV and real estate in his keynote, Hu's PowerPoint presentation detailed the developments in both industries.

On the film and cinema side, film admissions were 355 million from 13,120,000 screenings in 2011, rising to 617 million from 25,970,000 screenings in 2013. However, every 100,000 Chinese shares 0.97 screen; even in urban areas the ratio is 1.84 screen per 100,000 people, a sharp contrast to 13 screens per 100,000 people in the U.S. Hu predicted, "Chinese film can have more than fourfold growth; therefore, there is still a lot of room for cinema construction, compared to a mature industry.”

The marriage between film and TV and real estate in China has begun. A good example is Wanda Group, with their historic acquisition of AMC in 2012; combining Wanda Cinema Line at home, they instantly became the number-one cinema operator in the world. There’s no need to repeat Wanda's glorious numbers here. Hu attributed Wanda's success to their directly learning from American exhibition and distribution operations.

Another big player is Evergrande Real Estate Group, which has invested 850 million yuan ($137 million) in film and TV production, exhibition, distribution, talent, animation and records.

Hu believes that film and TV are an "axis", or the American term "anchor," which can pull culture, commerce, tourism and entertainment together and also transform and drive Chinese real estate forward.

On theme parks/studios, Hu has a top ten list, starting with Hengdian, Shanghai and Zhongshan, as well as the ambitious Beijing Huairou Theme Park/Studios. There are a thousand more, small and big. Without statistics, he said, "Not everyone is doing well,” due to lack of know-how in operations, innovations and long-term plans, with problems ranging from the abuse of government incentives to deserted parks and sham projects. "People who know film and TV do not know real estate; people who know real estate do not know film and TV," he opined. The trade leader had sharp criticism for the trend started with the real estate, coal-mining and finance sectors. He believes China has not yet developed a true sense of entertainment real estate.

What is thesolution? To avoid wasting resources, to avoid financial bubbles. "Respectfully learn from Hollywood,” Hu’s last PowerPoint slide advised, bold and clear.

Based in Los Angeles, Keping Qiu is a columnist with China Film News, a weekly trade read by decision-makers in China. Her articles may be found at her website, www.chinema.com. She thanks the U.S.-China Film & TV Industry Expo for providing online videos of their speakers.