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From idea to reality: catalyzing the growth of a new city

By delivering landmark real-estate development on an unprecedented scale, a new city center attracts global corporations

Challenge

A global real-estate developer and a major city in China partnered to create a new city center and economic hub to foster growth and create a focal point for the community. Their vision was to establish an area that would succeed both commercially and as a vibrant living space.

On the other hand, the scale of the project would dwarf comparable urban-hub real-estate developments and present a new, unprecedented challenge for the developer. Initial forecasts estimated the total cost of the project at over $5 billion—with over two million square meters of development area for office, retail, cultural, and residential space in the heart of the new city center. The planned towers would be amongst the tallest in the world.

It was by no means guaranteed that the project would attract the right mix of business and residential users to fill all this space—and near-vacant developments elsewhere in China and across the world were a potent reminder of the risks involved. So the developer and the city leadership asked McKinsey to help define a compelling value proposition for the new city center, one that would draw in global and national corporations, small and medium-size businesses, and aspirational residents. Just as important, they asked us to help optimize the business case for the project and build a project team to drive successful delivery

Discovery

We realized that the new city center's success would rest on using leading practices in every aspect of the project—from marketing, to construction, to designing effective project governance. The cornerstones of the entire development would be clear understanding of which economic sectors and demographics it needed to attract and a coordinated strategy to meet every need of those businesses and residents.

We therefore began by working closely with the client to define the development's key target markets and the value proposition for each of them. This resulted in a bold vision for the city's future: to become an international shipping-and-logistics center, a hub for manufacturers and energy players, and the knowledge and innovation hub for financial-services firms.

Next, we used extensive interviews and market research to help define the success factors that would attract these businesses and the talent to staff them. These included quality, affordable commercial and residential property with iconic architecture to differentiate the city; a sound regulatory environment; clean air and abundant green space; and excellent safety, transport, schooling, healthcare, retail, cultural, and recreational facilities.

With this picture in mind, we worked with the client leadership over an intense 3-month period—including visits to benchmark projects in global megacities—to define the initial concept design. This determined the overall development mix between office, residential, and retail developments and identified the features that would differentiate each element, such as conference centers, fitness clubs, and swimming pools integrated into the office towers. This process also prioritized the special features that would make the development a vibrant regional hub, including a destination shopping center, a premier event space, and cutting-edge museums and public-arts projects.

Over the next year, we supported the design, costing, funding, procurement, stakeholder engagement, and project management required to bring the development to a successful launch. This included:

  • managing engineering and construction tendering, contracting, and procurement, to ensure on-time and on-budget project delivery
  • driving the financial modeling for the entire development, including consolidating key revenue, cost, and exit assumptions
  • developing the fundraising approach, including designing the funding structure and creating an investor road show
  • developing the stakeholder-engagement strategy and supporting key meetings with government leaders, regulators, investors, and potential anchor tenants to build the profile of the project, garner feedback on the project plans, and win their backing
  • structuring and helping to staff a high-caliber project-management office and supporting it on a weekly basis

Impact

Working alongside the client, we helped establish and refine the scope of the project to ensure it could be successfully financed and delivered. The development won widespread support from government and other stakeholders, including critical regulatory concessions from the city government.

As a further key area of impact, we helped secure the commitment of investors and strategic development partners for the entire project and defined detailed memoranda of understanding to set out their deliverables. We also helped build a powerful set of capabilities in the project-management office, which has kept a $5 billion project on time and on budget.

Through the use of leading practices, such as optimizing the mix of project components, phasing the project based on the forecasted evolution of the city, and designing an effective fund structure, we helped optimize the financial case for the development, resulting in a significant increase in the project’s internal rate of return (IRR). Optimization in the areas of engineering, construction and procurement is projected to raise IRR further.

FEATURED EXPERTS

Michael Della Rocca

Partner, Philadelphia

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