Vanke Exec Says Home Prices Have Peaked as Revenues Drop 32%

A top official from China’s largest real estate developer by sales is saying privately that China’s housing market is saturated and there’s no chance of further price increases barring further economic stimulus by the government.

Private comments by Mao Daqing, Vice Chairman of China Vanke were recorded and posted on a Chinese finance website on April 30th, just after the Shenzhen-based developer reported its first quarterly drop in profits since 2002, and they reveal a pessimistic market outlook driven by some hard facts.

In his remarks to a small group meeting in Beijing, Mao identified three challenges facing China’s property sector in 2014, including excessive supply in tier two and three cities, overpriced land in first tier cities, and tightening credit conditions.

A transcript of Mao’s remarks is available in Chinese here, and translated into English here.

Anti-Corruption Drive Beating Down the Luxury Market

The Vanke executive also indicated that the Xi government’s anti-corruption campaign has posed particular challenges for sales of high-end housing.

In his remarks he noted that investigations are ongoing into owners of property priced over RMB 40,000 (US$ 6,390) per square metre, which has dampened demand for new homes, and frightened many current owners into dumping units onto the market for quick sale.

Not Vanke’s First Negative Market Comments

Mao’s remarks to the group in Beijing were not the first time that he has expressed pessimism regarding China’s property market this year.

Speaking to the local press in March to announce a cooperative logistics real estate venture with Blackstone, the veteran property executive said the company had an unfavorable view of the residential market in China this year, and would be turning to the warehouse sector, where yields and demand have remained strong.

During June last year, Vanke’s billionaire chairman, Wang Shi raised fears of a bubble in the country’s residential markets in an interview with the press, after having earlier remarked during a session of CBS’ 60 Minutes program in the US that China’s housing bubble could bring “disaster” to the country’s real estate market.

First Quarter Results Show Profit Decline

While not yet into disaster territory, China Vanke’s first quarter financial results, which were announced last week could indicate challenges for the developer, as well as for the industry that it leads.

The company’s profits dropped 5.2 percent compared to the same period a year ago, while its revenues were down 32 percent compared to the same period in 2013.

The reason for the drop in profits can be seen in the slow flow of new projects onto the market, with Vanke indicating that only 6.6 percent of the new projects it had planned to launch in the first three months of the year had actually made it onto the market.

It’s common practice for developers to delay or otherwise avoid bringing projects onto the market when existing supply is already seen to be excessive or demand slows down.

Developer Attempting to Diversify

Faced with bleak prospects in China’s residential sector, besides its logistics venture with Blackstone, Vanke has taken a number of other measures to diversify its business operations, including starting overseas projects, investing in the banking sector, and getting into the healthcare industry.

In February, the company broke ground on its second US development project, partnering with two US developers on a Manhattan residential project after last year taking on a San Francisco condo tower with Tishman Speyer.

During November last year, Vanke ventured into the banking industry by making a $442 million cornerstone investment in Huishang Bank as part of the finance company’s IPO.

And speaking at a conference last month, Wang Shi revealed that the company is setting up hospitals in Shanghai, Guangzhou and Shenzhen in an effort to build higher value-added real estate projects.