Vanke Slows Investment as Profits Rise But Margins Tighten

Third quarter financial results released by China Vanke show what might be the best case scenario for the country’s real estate developers, and it’s not all that rosy.

In a statement to the Hong Kong stock exchange, the Shenzhen-based builder revealed that while it made more net profit during the last three months than it had during the same period in 2013 – by 2.8 percent – its margins continued to tighten.

The slide in sales mirrors a nationwide downturn that has saw home prices in September fall compared to the same period last year as real estate prices slid for the fifth consecutive month in China.

For Vanke, this experience of having to work harder to make money is part of a trend that has been going on all year, as revenues for the first nine months of 2014 are actually down by 0.5 percent compared to the same period last year. And the developer is responding by spreading out its investments and taking on more partners – a trend which might soon spread to other developers who are facing even bigger challenges.

Vanke Still Able to Sell – But at Lower Prices

In its report to the stock exchange, the developer revealed that its sales for the period from July to September were up both in terms of area and value – 4.426 million square metres worth RMB 48.15 billion “representing an increase of 15.8% and 7.4% as compared with those in the same period of last year” according to Vanke.

For the year to date, Vanke has now sold 12.638 million square metres for RMB 149.06 billion, representing an increase of 15.0 percent and 16.0 percent respectively compared to January through September 2014.

Despite moving much more space, net profits grew more slowly, reaching RMB 1.65 billion for the quarter, compared with RMB 1.60 billion last year – an increase of just 3.1 percent.

China Vanke’s results in terms of profit margins were even more discouraging as the developer’s gross margin fell by 1.1 percentage points to 23.8 percent compared to the same period in 2013.

In its statement, the company pointed to an oversupply of properties on the market as the primary cause of its diminishing profits, and said that it expects the inventory of new properties to continue to increase in the near term.

More Than Half of Developers See Profits Drop

If Vanke is facing tougher times, then the situation for many smaller developers is shaping up to be even more severe. As the group pointed out in its financial statement, selling houses is just much tougher in 2014 than it was in 2013.

According to Vanke’s figures, residential sales by area in China fell 14.2 percent during the first nine months of the year. In the 14 cities that the developer tracks – Beijing, Shanghai, Shenzhen, Guangzhou, Tianjin, Shenyang, Hangzhou, Nanjing, Chengdu, Wuhan, Dongguan, Foshan, Wuxi and Suzhou – the amount of housing sold was down by 21.5 compared to the same period last year.

While only a few smaller real estate companies have publicly collapsed this year, and cases such as Greentown’s acquisition by Sunac are rare, more than half of the developers that have reported their earnings for the third quarter have reported deteriorating profit and loss positions, according to a Wall Street Journal Report citing data from Wind Information.

Vanke Goes Asset Light and Lowers Investment in Downturn

In response to the decreasing returns that Vanke is seeing on its investments, the developer is becoming more cautious about project acquisitions and it re-iterated its preference for an “asset light” model in the current environment.

During the first three quarters of the year, Vanke completed only 44.7 percent of the floor area that it had planned to release in 2014, and noted that land sales of residential land in the 14 cities that it tracks had fallen by 54.1 percent in the first nine months of the year, as developers lose interest in risky land buys.

For its own part, Vanke stated that, “As the adjustments in the land market may continue to intensify, the Group adopted a prudent investment strategy…” The developer also pointed out that during the period it had “continued to adhere to its “cash is king” strategy.”

Asset Light Strategy Providing Partnership Opportunities for Private Equity

Given these most recent results, China’s largest developer has made it clear that it will continue to emphasise its asset light model by pursuing partnerships and collaborative projects. During this year, Vanke has announced a partnership with Blackstone for logistics projects, and the developer also reportedly sold nine projects to Carlyle in August.

With Vanke continuing to face these financial challenges, it’s likely that other Chinese developers may also begin to consider asset light models, which could provide opportunities for international and local investors who still have a taste for China’s property market.