Overseas ventures bring cheer for Chinese property companies

House prices continued their upward momentum in China during February with 66 of 70 major cities monitored by the National Bureau of Statistics reporting a sharp monthly rise in property prices. Guangzhou saw the largest increase of 8.2 percent, almost double the rate in January, followed by Beijing with a 7.7 percent rise.

The large price hikes followed the government announcement that it would introduce a capital gains tax on sales of non-self accommodation properties in the next few months as part of its efforts to rein in the real estate market and limit speculation and investment.

The soaring house prices had earlier stoked fears of a property bubble in China and triggered doubts among global investors, even as the nation continued to make impressive economic strides.

Although experts believe the government's measures may be beginning to bite and the upward price trend will end, there are still expectations that more steps are in the offing to check speculative and investment property purchases.

Not surprisingly, such a move would also find favor with leading realtors, as the stringent norms would further consolidate the market in their favor by squeezing out the smaller, cash-strapped players. Moreover, such measures will also give a boost to big developers who are scouting for investment opportunities in overseas markets.

In the face of the government's tough regulations on credit channels, the financing capability of real estate developers has become the key to their competitiveness.

The total paid-in investment in real estate development enterprises was 9.65 trillion yuan (1.16 trillion euros) in 2012, according to the National Bureau of Statistics, an increase of 12.7 percent on the total investment in 2011. Of this, domestic loans accounted for only around 15 percent - most of which went to several large-scale state-owned real estate developers.

Although the percentage of domestic loans in total investment picked up slightly last year, it had been continually declining for a number of years before that. Li Zhanjun, director of the Shanghai E-house Real Estate Research Institute Center, believes that a percentage around 12 to 16 percent is now accepted as normal by most developers.

Meanwhile, foreign capital is clearly being cautious. Although it only accounted for 0.42 percent of paid-in investment in 2012, it declined by 48.8 percent last year compared with 2011.

Therefore, tougher credit policies will not directly affect the leading developers' financing abilities in 2013, since they already rely more on sales and other financing channels such as trust funds and overseas financing rather than loans. Instead the policies will result in the industry becoming ever more concentrated in the hands of the large corporations.

According to the "Top 500 Real Estate Developers in China 2013" report, released by the China Real Estate Association, the competitiveness of the leading national and regional companies is significantly above the average. Among the more than 60,000 real estate companies in China, the revenue from sales of housing for the top 500 developers was 2.5 trillion yuan in 2012, 39.2 percent of the total sales revenue. Furthermore, the top 50 developers accounted for 59 percent of the revenue for sales of residential units and the top 100 accounted for more than 70 percent.

Zhu Zhongyi, vice-president of the China Real Estate Association, said that with the boom times for developers coming to an end, the market is starting to consolidate and the competition among real estate developers will become more fierce. He says that product quality, reasonable price and brand credibility will ultimately determine which companies emerge the victors, as these will be the factors that potential purchasers take into consideration when choosing a property.

Although the biggest demand is still for residential property, with demand remaining as vigorous, according to a survey by the association, some experts suggest developers should focus on commercial real estate if the government maintains or extends its curbs on housing. It is a strategy that some developers have already adopted.

"We believe the new policies from the government will have a huge impact on the market in the short term, but we didn't change our sales target because of that. We will invest more in self-use products and commercial properties," says Li Ming, president of Sino-Ocean Land.

Certainly developers have become more cautious about developing new projects, and they are purchasing less land for future projects. Construction dropped by 7.3 percent in 2012 and land sales declined by 19.5 percent.

With profit margins being squeezed in the domestic market, some of China's real estate developers are looking beyond the domestic market. Real estate giants, such as Vanke, Xinyuan Real Estate and Country Garden have already embarked on an overseas strategy.

"Considering the concentration ratio in the industry, an international strategy is inevitable," Li Zhanjun says.

Li says the strategy to look abroad will benefit the domestic market as it will make the Chinese companies stronger.

But Chris Brooke, president of CB Richard Ellis, thinks that it is still too early to access how successful this strategy will be and what the risks are.

Vanke, China's leading developer, which reported earnings growth of more than 30 percent last year, has set its sights on becoming an international company in the next 10 years. The group took its first step towards this in May 2012, when it purchased a 73.9 percent share in Winsor Real Estate from the Hong Kong-listed company Wing Tai Properties and named it Vanke Hong Kong.

Last month Vanke announced it was partnering with Tishman Speyer, the owner of New York's Rockefeller Center, to develop two high-rise residential condominium towers in San Francisco.

"We will not rule out the possibility to have long-term investment elsewhere and learn from good companies in other countries," Yu Liang, president of the group, said at a news conference.

The Vanke Group was the first real estate developer to break the 100 billion yuan barrier in 2011. Last year, according to a Real Estate Association's report two other developers, Hengda Group and Poly Real Estate Group, have joined the select group.. There are also seven developers whose sales revenues were more than 50 billion yuan in 2012.

Contact the writers at zhujin@chinadaily.com.cn and yaojing@chinadaily.com.cn

(China Daily 03/22/2013 page17)