China’s real estate industry is continuing to grow but that doesn’t mean all of the players are winning, according to data released this month.
Reports by two separate agencies show that an eight month slide in real estate prices is forcing companies to make money by selling more housing, and that the biggest players are increasingly enjoying the highest margins.
This growing competition appears to be favoring the biggest of China’s real estate developers – who often have cheaper access to credit, and are able to achieve economies of scale. And if this trend towards tighter margins continues, the industry will see more small companies forced out of the market.
|Name||2014 Sales (RMB Bil)||2013 Sales (RMB Bil)||Y-O-Y Growth (RMB)||2014 Sales (Sqm Mil)||Y-O-Y Growth (Area)|
|Dalian Wanda Commercial Properties||147.0||130.1||12.98%||9.8||-|
|Poly Real Estate Group||137.0||125.1||9.51%||10.88||0.30%|
|Evergrande Real Estate Group||131.7||108.3||21.66%||18.2||15.20%|
|Country Garden Holdings||128.8||109.7||17.38%||19.42||20.00%|
|China Overseas Land & Investment||122.1||117.0||4.36%||10.17||9.20%|
|China Resources Land||72.2||68.1||6.02%||6.8||14.50%|
|Shimao Property Holdings||71.2||67.1||6.16%||5.87||9.50%|
|Greentown China Holdings||66.0||55.4||19.18%||3.3||3.10%|
Companies Grow by Achieving Volume as Margins Compress
With China’s top ten developers averaging growth in sales by RMB value of nearly 20 percent in 2014, it’s easy to dismiss the country’s real estate downturn as a not particularly bleak situation.
However, when analysed by value of sales compared by area of property sold, its apparent that many of the country’s top developers are having to work much harder to generate profits than they were in 2013.
Out of the top five developers, Greenland, Vanke, Poly and Evergrande all show sales value growing more quickly than the amount of floor space they are selling (and there was no data for #3 developer Dalian Wanda), so the top five have little to complain about.
For the companies placing sixth through tenth, however, the story was margin compression. Country Garden, China Overseas Land, China Resources Land, and Shimao Property Holdings all reported faster growth in floor space sold than in contracted sales revenues. (Greentown reported the rosiest outlook in terms of sales value to square metres of all of the top ten companies, but if you ask some people, Greentown might not be the most reliable source of information).
Industry Giants Grabbing Market Share
Although total sales of property by area were down more than 11 percent in the first 11 months of last year (according to China’s National Bureau of Statistics), a record 80 companies surpassed the RMB 10 billion per year threshold for sales, according to figures from the China Index Academy.
However, while some of these top 80 developers achieved their sales records through higher prices, for the most part it was a game of grabbing market share from smaller players.
Data from E-House’s CRIC also indicated consolidation in the industry, with the country’s top ten developers increasing their total market share by contracted sales value to 17.19 per cent in 2014, from 13.72 per cent in 2013.
The top 50 developers also expanded their piece of the pie to 31.65 percent of sales value last year, compared to just 26.23 percent in 2013.
Faster Growth for Bigger Players
The performance of China’s real estate developers for 2014 also shows that the top tier of developers are achieving the highest growth rates. The Index Academy’s figures show that the top seven developers achieved an average growth rate by sales value of nearly 20 percent last year.
The rest of the top 20 companies could only grow by 14.6 percent in terms of the RMB value of their contracted sales. For the next tier of companies, with sales of between RMB 10 billion to RMB 30 billion in 2014, the growth rate in sales value was lower still, at just 10.4 percent.
Higher Land Prices Keeping Small Companies Out of the Market
With the exception of political disasters like Kaisa or catastrophic collapses such as Zhejiang Xingrun, China’s real estate market consolidation won’t be making it into the headlines, because most of the companies that lose out will be ones that don’t appear in the newspaper.
Many companies will simply have their assets bought out by larger players, and still more will fade away as the rising cost of land and a crackdown on backroom deals keeps them from acquiring sites for new projects.
Despite the downturn, local governments are still able to extract high prices from developers desperate for the new sites they need to keep their cash machines turning, and even the biggest real estate companies are being forced to team up with other developers to acquire sites in the biggest cities.
In Beijing this month, land sales are continuing to set price records, but many of the sites are being bought by developer consortiums.
When a large site in the capital’s Fengtai district was sold for a record RMB 8.625 billion ($1.39 billion) last week the buyer was a group of companies led by state-linked top 10 developer China Resources Land.
Only a few days earlier, a consortium led by Hong Kong’s Wharf and China Merchants Property, which also included additional investors from Shenzhen and Beijing, bought two sites in the same district.
With financing increasingly difficult to attain, and given the high levels of competition, many smaller developers will not have to worry so much about how much much they can sell their properties for, as they will about whether they can secure the pipeline of land necessary to build homes to sell.
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