Vanke Profits Drop 57% Amid Slow Housing Demand, High Land Prices

China Vanke saw its profits drop 57.49 percent in the first quarter as sales of new housing slowed and home prices dropped, but local governments continued to demand high prices for new land.

In its latest quarterly earnings report China’s second-largest property developer by sales reported a decrease in revenues of 6.68 percent on a year on year basis to RMB 8.4 billion ($1.35 billion). However, profits fell much faster as land costs remain high in China despite the downturn.

While Vanke still reported profit growth of 4.2 percent in 2014, China’s year-long property slump has hit the nation’s real estate developers hard. The downturn has also created problems for local governments, most of whom rely on sales of land to developers for the majority of their revenues.

Vanke Blames Profit Squeeze on Aggressive Local Governments

Despite the single digit drop in revenues, Vanke’s profits for the first three months of 2015 were just RMB 650.2 ($105 million), compared to the RMB 1.53 billion it earned during the same period of 2014.

In the earnings report the Shenzhen-based company, without mentioning city governments directly, pointed out that the supply of land auctioned off in China’s 14 biggest housing markets was down by 42.1 percent during the first quarter of 2015, compared to last year. Vanke’s management also noted that, “Despite (the) slowdown in land supply and transactions, the auction bottom (floor) price for the transfer of land still remained at a high level.”

According to Vanke’s figures, 23 percent of land auctions scheduled in China’s major housing markets during the first quarter were aborted and of those land sales that did occur, 47 percent were unable to attract bids above the auction floor price.

The developer’s statistics appear to be in line with results from China’s Ministry of Land and Resources which found that land sales for property development fell by more than 25 percent last year nationwide.

A study by Deutsche Bank released earlier this year predicted that revenues for China’s local governments will drop by two percent this year after growing by just 2 percent in 2014. The report estimates that China’s cities, counties and townships rely on land sales for as much as 60 percent of their income.

Vanke Predicts Better Times as Sales Pick Up

Despite the discouraging first quarter results, Vanke predicts that the company will still be profitable for 2015 and pointed out that, due to seasonal factors, the industry’s sales and profits are traditionally stronger during the second half of the year.

Already in March Vanke was able to point to some improvement in its outlook with sales by area increasing by 2.5 percent year on year to 1.24 million sqm and sales by booked value increasing by 2.1 percent compared to March 2014 to reach RMB 14.7 billion.

Vanke’s sales results roughly mirror the industry as a whole, with sales by area down by 9.8 percent industry-wide during the first quarter, compared to the same period last year. For March alone, however, the same measure slid by just 0.9 percent compared to the same month in 2014.

The Shenzhen-based developer still took pains to point out that it was not eager to buy more land, however, noting that during the period it only “selectively replenished premier project resources according to actual development needs.”

During the first quarter Vanke acquired nine new projects totalling 1.7 million square metres of gross floor area. The average cost of the company’s newly acquired floor area was RMB 4,769 per square metre.