China’s government has made reviving investment in the property sector a top target for 2016, but Xi Jinping and friends may have a tough year ahead of them after nearly a third of the country’s top developers lost money in 2015.
A total of 15 of China’s 50 mainland-listed builders are expected to report a loss for last year, according to a report published last week in the official Beijing Times, and nearly half of those locally listed firms saw profits decline compared to the previous year.
The slowdown in China’s property sector has been pegged as a major contributing factor to sluggish growth in the overall economy, and the government has recently stated that selling off an overhang of unsold homes is a primary priority for the economy in the new year.
Rising Land Prices and Slowing Sales Squeeze Developers
Although home sales recovered strongly in China’s biggest metro areas during the second half of 2015, developers still found their profits squeezed by rising land prices, as competition increased for the few available plots in first-tier cities.
After starting the year in a policy-induced slump, average home prices were up by 1.6 percent nationwide in China last year compared to the end of 2014, according to figures from the National Bureau of Statistics, with prices in Shenzhen rising by more than 40 percent over the same period.
However, the housing recovery was not enough to rekindle profits, even for some of China’s largest developers.
State-owned Poly Real Estate, which ranks in the top five for home sales on the mainland each year managed to make profits of RMB 12.3 billion ($1.9 billion) last year on sales of RMB 123.5 billion, according to a recent report in the China Daily. However, although revenues grew by 12.75 percent for the year, the developer reported that profits were up by only 1.18 percent.
Poly was lucky, however, as it was one of only 12 mainland-listed developers to report any profit at all. 23 out of the 50 developers said that their profits had declined.
The problem for Poly, as it is for many builders in China, is the rising cost of land.
In November of 2015 major developers including Country Garden, China Resources Land and China Merchants Land all backed away from land parcels that they had recently won at auction after concluding that they might not be able to profitably build and sell homes on the sites.
In China, local governments control sales of land and often restrict supply in order to squeeze the maximum revenue out of sales of building sites.
Government Facing Challenges in Reviving Real Estate Industry
The difficulty in achieving profits in the mainland’s housing industry has been one of the factors driving outbound investment by Chinese developers, and this could prove to be a challenge as China tries to sell down its record backlog of unsold homes.
According to data released by the National Bureau of Statistics, the number of unsold new homes nationwide increased 14 percent to 437 million square metres by the end of October, which led the government to make selling down this backlog a major priority at its Central Economic Work Conference in December.
The bureau’s numbers showed that property investment, a crucial driver of the economy, grew just 1.3 percent in the first 11 months of 2015 from a year earlier. This rate was the slowest recorded since early 2009 and is seen by many as a major factor in top-line GDP growth falling to just 6.9 percent for the year.
However, with developers struggling to make a profit on their existing projects, the government’s challenge in reviving investment now looks that much harder.