REAL ESTATE APRIL 29, 2009

By JAMES T. AREDDY

SHANGHAI -- The Shanghai government is trying to orchestrate the buyout of a twin-tower hotel project that looms unfinished over one of the city's priciest neighborhoods as its chief backer, an American known for his philanthropy in China, wavers about the cost of completing it, according to people familiar with the situation.

The matching buildings are designed to house two ultraluxury hotels, a Chinese interpretation of Dubai's sail-shaped Jumeirah Burj Al Arab and a top-end Conrad, a Hilton Hotels Corp. brand.

Late last year, just as workers were erecting latticework exteriors and linking the 30-floor towers with a sky-bridge, the project's primary investor, businessman Leo KoGuan, ordered a project review and left China.

Now, amid a scramble to find money to complete the project, dark shadows flitter through the honeycomb shell in a vivid illustration of how the global financial crisis has dulled the sheen on a showcase Chinese city.

For a decade, Shanghai has been a magnet for foreign investors, offering them the first opportunities in China to buy high-quality apartments, modern skyscrapers, shopping malls, warehouses and luxury hotels.

But Shanghai's global ties also mean foreigners are a chief risk today, with their weakened balance sheets and funding difficulties removing a key pillar of demand.

To be sure, with China's economy continuing to expand, its real-estate industry isn't suffering nearly as much as those in Western countries. But the hotel industry is wTo be sure, with China's economy continuing to expand, its real-estate industry isn't suffering nearly as much as those in Western countries. But the hotel industry is weak, and prices of all properties rose so fast that many now anticipate a fall.

The Shanghai market also lacks foreclosure procedures, second-hand sales and other mechanisms that are the hallmarks of more developed markets.

Mr. Leo's stalled project has prompted questions in Shanghai about whether he is reconsidering his exposure to the project or has run short of money. Mr. Leo couldn't be located for comment.

Questions directed to Mr. Leo were addressed in a statement from the Beijing offices of public-relations firm Fleishman-Hillard and by a spokeswoman at Fleishman-Hillard, who says she has never met or spoken with Mr. Leo.

Delays stem from cost overruns, a project budget review and other contractual issues, not Mr. Leo's financial position or commitment to the hotels, one statement said.

A person familiar with Mr. Leo's thinking says that "money is not the issue" but that he doesn't feel a rush to complete the hotels.

For Shanghai, the project in the city's ritzy Xintiandi zone may be too big to fail. As prominent and centrally located in Shanghai as the Time Warner Center is in Manhattan, it blights the skyline ahead of China's biggest coming event, a World Expo, next May.

One plan Shanghai authorities have considered to kick-start construction is to buy a stake in the project through a government-owned company, say people knowledgeable about the discussions. A spokesman for one such company, Shanghai Industrial Investment (Holdings) Co., says it has considered investing but no decisions have been made.

A government spokesman says any transaction would be a commercial decision.

eak, and prices of all properties rose so fast that many now anticipate a fall.

The Shanghai market also lacks foreclosure procedures, second-hand sales and other mechanisms that are the hallmarks of more developed markets.

Mr. Leo's stalled project has prompted questions in Shanghai about whether he is reconsidering his exposure to the project or has run short of money. Mr. Leo couldn't be located for comment.

Questions directed to Mr. Leo were addressed in a statement from the Beijing offices of public-relations firm Fleishman-Hillard and by a spokeswoman at Fleishman-Hillard, who says she has never met or spoken with Mr. Leo.

Delays stem from cost overruns, a project budget review and other contractual issues, not Mr. Leo's financial position or commitment to the hotels, one statement said.

A person familiar with Mr. Leo's thinking says that "money is not the issue" but that he doesn't feel a rush to complete the hotels.

For Shanghai, the project in the city's ritzy Xintiandi zone may be too big to fail. As prominent and centrally located in Shanghai as the Time Warner Center is in Manhattan, it blights the skyline ahead of China's biggest coming event, a World Expo, next May.

One plan Shanghai authorities have considered to kick-start construction is to buy a stake in the project through a government-owned company, say people knowledgeable about the discussions. A spokesman for one such company, Shanghai Industrial Investment (Holdings) Co., says it has considered investing but no decisions have been made.

A government spokesman says any transaction would be a commercial decision.

Luxury hotels in Shanghai look risky: The city's first-quarter growth slumped to 3.1%, about half the national pace. International hoteliers have plans to add 46% more rooms in Shanghai before the end of next year, even as revenue per five-star room has halved since 2005 and occupancy has fallen to 42%, according to Jones Lang LaSalle Hotels.