When store manager Si heard that the rent of his store in Xintiandi was to rise again, he confessed things seemed a bit desperate for his business.

Xintiandi had offered favourable leasing conditions at the beginning of the project more than two years ago. In order to establish the brand name, there was a fixed amount of rent from tenants or the taking of a certain proportion from tenants' business profits based on turnover. Now rents have been increased tenfold compared with what was being charged at the beginning.

Still, Si said he would pay the new "high rent".

One worker in a bar in Xintiandi, who declined to give his name said: "You can leave Xintiandi if you don't want to stay as hundreds of business operations are waiting in line to come into this golden location.

However, Si commented: "The situation is like the dilemma of 'The Besieged Fortress': those outside want to come in while we on the inside are desperate to find our way out. Tenants are in a totally passive position in negotiations about leasing terms with the Shui On Group, the developer."

Market price

Zhou Yongping, assistant to Vincent Lo, the chairman of Shui On Holdings Ltd said: "The contracts of the first batch of tenants will expire soon. We just reset the rent according to the market price. Different times, different rents."

About half of tenants in Xintiandi today were among the first batch of two or three years ago.

According to Zhou, at the beginning, Xintiandi gave tenants preferential rent treatment to attract big international brands. "At that time, no one knew Xintiandi and the market price was, of course, very low," he said.

Zhou said the rent was less than US$1 per square metre. In the new contracts, it rises to US$1 to US$2, depending on the stores. "Even this price is not very high and along nearby Huaihai Zhonglu, most stores in office buildings are charged this price," he said.

Zhou gave the example of the rent of a store in a building opposite the Pacific Shopping Centre. The rent was as high as US$7.50 a square metre after several months of rent-free tenancy. But Haagen-Dazs, the tenant had accepted.

"I can say many tenants express their willingness to continue the contract and accept the new price," Zhou said. "Everything goes smoothly in the well-run stores."

Only a few tenants said they couldn't accept the new rents which were many times higher that their original rents and were thinking about moving out.

"It is also time for Xintiandi to choose tenants with the aim of maintaining vitality," Zhou said. "When an old contract expires, it is an opportunity for both Xintiandi and tenants,"

Worthwhile choice

Amy Zhang, in charge of Layefe Home, is staying. "We still choose Xintiandi, though the rent is several times higher than before and it is really expensive to us," she said "I hope we will earn more money from next March, the starting time of the new contract."

Zhang said the store's decision to stay was the decision of her boss, Chen Yifei.

"Layefe Home wants the best market and the best location to set up the store. There is only one Xintiandi in the country, so it's worth the price. We should accept it and find ways to solve the economic trouble," she said.

"But few shops make profit in Xintiandi, because of high business cost," Si said. People see crowds of tourists in Xintiandi every day but how many of them actually consume here?"

Last summer, the Shui On Group held a German beer festival by the artificial lake behind Xintiandi about which Shi made the comment that it was like "robbing beggars of their food".

A large number of tenants in Xintiandi run bars and clubs whose major profit come from the sale of beverages. Shi said Xintiandi organized the beer festival without considering the conflict with tenants it would cause.

"If there is a new suitable project, we will consider moving out," he said.

Every day, more than 10,000 visitors come to Xintiandi, according to the Shui On Group's figures. At weekends, the number can surpass 20,000 visitors. "Such a big population offers the same good opportunity to every store," Zhou said.

In an official note, the group says Xintiandi has a big batch of profit-making tenants such as X, Paulaner, Zen and Xin Ji Shi. The key to success comes from the product, the service and the business-running ability of each tenant.

The note says that to attract international brands and good tenants, Xintiandi has made itself a popular brand with a good business environment. To those whose rents have expired, it is normal business practice to negotiate a new contract at a new price according to market conditions. The new rents are an illustration of the value of Xintiandi and also the result of two-sided negotiations.

"To me, it is understandable for Xintiandi to raise the rent because its cost is so high and this brand now worth the high price," said Zhu Lianqing, director of the Commerce Research Centre of the Shanghai Academy of Social Sciences.

Zhou said: "The reason for the rent increase is not to make up for the huge investment. The increase is a small piece of cake to the Shui On Group. Just depending on Xintiandi, 20 years is not enough to reach the break-even point."

The total investment in the 52-hectare development is 1.4 billion yuan. In 1998, without powerful support from a bank, Vincent Lo, the chairman of Shui On Group, put in more than 800 million yuan (US$96.7 million) of his own company's capital into Xintiandi.

The next year, when the banks began to appreciate Lo's vision, they advanced US$45 million in loans. Based on keeping the old structures while improving their quality, the reconstructive cost of Xintiandi is estimated as 20,000 yuan (US$2,420) per square metre.

In Shui On's schedule, profits mainly come from developing the quality residential houses and first-class office buildings. Based on the brand name Xintiandi and the good environment, sale prices have continued to rise steeply.

"Once a fund from Europe asked Mr Lo about the price of Xintiandi, Mr Lo answered that Xintiandi is priceless, no one can afford it," Zhou said. "We have never considered selling Xintiandi, but renting it."

(Shanghai Star December 11, 2003)