Deloitte Foresees Downward Cycle for Mainland Developers

Despite the increase in their average total revenue, nearly 60 percent of listed mainland real estate companies in Hong Kong, Shenzhen and Shanghai registered a decline in net profit margin during 2012, reflecting the beginning of a profitability down cycle in light of tight policy environment and easing economic growth, according to the latest research report from Deloitte.

The Deloitte report compared the financial data of 174 property companies listed in Shanghai, Shenzhen and Hong Kong in 2012 against that of 168 companies in the previous year. There were also in-depth interviews with the management of certain major market players. The sampled property companies engage mainly in property business in China, deriving 50 percent-plus revenue or return on assets from property development or investment.

Net Margins Down

The report said property companies achieved average total revenue of HK$7,912 million in the reported period in 2012, against HK$6,348 million for the same period previously. Net profit margin dropped 2.65 percent from 2010, albeit a slight increase of 0.5 percent from 2011. A reduction pattern has emerged for return on equity, which weakened to 9.98 percent in 2012, against 10.72 percent in 2011 and 11.5 percent in 2010.

“In the past year, we witnessed constant increase in volume and prices for domestic property market in top-tier cities; and sufficient demand also continued to provide a shelter for the housing market in tier-two cities against policy risks. Cooling measures will remain in place this year as there is no sign for any change in policy tone. Overall, lower profit margin will be a likely scenario for Chinese real estate companies in the future amid cost pressure from land, financing, marketing and labour,” said Richard Ho, Real Estate Managing Partner, Deloitte China.

Hong Kong-Listed Firms Fared Better

In comparison with their counterparts in Shenzhen and Shanghai, real estate companies listed in Hong Kong fared better in terms of their market capitalisation, reflecting the better performance in Hong Kong’s stock market bolstered in part by global quantitative monetary easing policies. Meanwhile, real estate companies listed in Hong Kong also showed a better average net profit margin, which is indicative of their higher portfolio composition in investment properties and the associated tax impact.

“When it comes to finance liquidity, the sampled listed companies suffered from tight liquidity in 2012 as their current ratio edged down by 4.48 percent. It probably resembles the border challenging credit condition in China. However, the three markets differed in current ratio, where there was modest improvement in Shanghai, along with 5 percent and 9.3 percent reduction in Shenzhen and Hong Kong respectively. It is worth noting that the liquidity of all Hong Kong listed real estate companies worsened except for the super large ones,” said Matthew Sze, Developers Managing Partner, Deloitte China.

While the Deloitte study focused on 2012 performance there are outside confirmations that its findings may continue to hold true in 2014.

During January, analysts from investment bank Societe Generale predicted that investment in China’s property industry may only increase 15 percent in 2014, a major drop-off from the 19.8 percent expansion that the sector enjoyed in 2013.