A view of new residential buildings in Ganyu county, Jiangsu province. Major Chinese property developers expect a further pick-up in sales this year. Si Wei / for China Daily

Robust sales targets by property giants give room for comfort

When Jonathan Anderson, a former economist at the Swiss bank UBS, described the property market in China as the "most important sector in the known universe" in 2011, he was not too far off from the mark.

Though the industry went through a roller-coaster ride in China during the two years after the statement was made, it still continues to be an important barometer of the Chinese economy. But 2012 was also a watershed year for the property sector as the government came out with various policy initiatives to curb price hikes and check rampant speculation.

Though the initiatives did bring a sense of orderliness to the industry, as property transactions fell sharply, it did little to check the dominance of key players. The industry heavyweights gained from the consolidation moves and added several smaller players under their umbrella.

Industry experts are still not too sure of how this trend will pan out in the subsequent years as most of the expectations for the property sector are measured by the performance of a select few companies on the Hong Kong stock exchange. Some experts say that it is a property oligarchy consisting of no more than a handful of developers.

Most of the major developers on the Chinese mainland, including China Vanke Co Ltd, China Overseas Land and Investment Ltd and Poly Real Estate Group are all expected to post another year of robust growth, thanks to their abundant land reserves, home inventories and multiple fund-raising avenues. Industry experts feel that these companies will continue to expand their market shares this year.

The top 10 developers with minimum annual sales of 46 billion yuan ($7.37 billion; 5.52 billion euros) are widely expected to have increased their nationwide market share to 15 percent last year, compared with 13 percent in 2011. The performance was reflected in the share prices, which outperformed market expectations and almost every other sector. The index that tracks the property sector rose 32.53 percent in 2012, compared with a 1.02 fall in the benchmark Shanghai Composite Index.

Among the publicly listed property companies, Hong Kong-listed China Overseas Land and Investment saw a 59.75 percent increase in share prices, while the Shenzhen-listed China Vanke and Shanghai-listed Poly Real Estate saw increases of 32.29 percent and 29.52 percent respectively.

According to Eva Lee, an analyst with UBS Securities Asia Ltd, the combined market share of the top three developers grew from 5.5 percent in 2011 to 6.8 percent as of November 2012. "The heavyweights have benefited from the sluggish market conditions as smaller companies are forced to exit or seek mergers with bigger players due to dwindling sales," Lee says.

According to experts, most of the major domestic developers had to readjust their strategies and cut prices to boost sales. As a result, only the well-capitalized developers could stay in the game while many others had to drop out.

Statistics provided by the Hong Kong-based services firm, China Real Estate Appraisal, show that in 2012, China Vanke, the country's largest property developer by market value, generated 141.8 billion yuan in sales revenue, followed by Shanghai-based Greenland Group and Beijing-based Poly Real Estate Group, which posted revenue of 107.8 billion yuan and 101.8 billion yuan respectively.

China Overseas Land and Investment Ltd reported revenue of 93.5 billion yuan, while the Guangzhou-based Evergrande Real Estate Group posted a 14.8 percent year-on-year growth in revenue to 92.3 billion yuan. Evergrande, ranked fifth, sold 15.36 million square meters of floor area last year.

Most of these developers are expecting better fortunes this year and have set higher sales targets and plan to spend more on market expansion.

In January, Evergrande hiked its full year sales target by 25 percent to 100 billion yuan. Greenland Group was even more ambitious and set a higher growth target of 30 percent for full-year sales. The Shanghai-listed Shanghai Shimao Co Ltd raised its 2013 sales target to 10 billion yuan from 7 billion yuan in 2012.

"Their aggressive sales targets indicate their bullishness on the property market in China and is also evident in the higher inventories. Most of the companies have also indicated that they will buy more land and build more houses this year," says Song Huiyong, head of the research and consultative department at Shanghai Centaline Property Consultants Ltd.

According to analysts, most of the top developers are expected to further consolidate their market shares, especially if there are no fresh curbs on the sector.

Hui Jianqiang, research director of Beijing Zhongfangyanxie Technology Service Ltd, which provides information about the real estate market, also admits that purchase curbs in the housing market would actually help the leading property developers become stronger.

"Homebuyers will be more cautious in the housing market, and well-branded companies will become the first choice for mature buyers," he says.

In the future, we will see more and more developers have annual revenue of above 100 billion yuan, Hui says.

To realize their ambitious sales and land purchase plans, many heavyweights have unveiled financing plans. Beijing-based real estate consultancy Homelink said in a recent report that 12 major domestic property developers aim to raise a combined $5.25 billion in 2013.

Evergrande, which relished market success after raising 5.65 billion yuan from its Hong Kong IPO in 2009, announced on Jan 17 that it would raise HK$4.35 billion ($560 million; 420 million euros) by allotting 1 billion new shares. China Vanke Co Ltd is also mulling a plan to convert its less traded B shares to H shares to reduce its borrowing cost and fund its expansion plan.

Along with the impressive financing plans, developers have also purchased a lot of land plots. In December 2012, the nation's benchmark developers bought 43.1 billion yuan worth of land, the highest monthly land purchase value since 2011, according to Zhang Dawei, head of Centaline's research department.

"The major developers spent 161.7 billion yuan on land in 2012, an increase of 41 percent year-on-year. This can be attributed to their outstanding sales, eased capital situation and decreasing inventories," Zhang says.

Large developers now tend to buy land in first and second-tier cities on market expectations of an evident increase of land price there than minor cities in the future, the China Securities Journal reported, citing unnamed sources.

China Vanke bought 14 billion yuan worth of land parcels in December, and more than 60 percent of these were in first and second-tier cities. Poly Real Estate Group has spent 9.6 billion yuan so far on land purchases, with up to 70 percent in the first- and second-tier cities, according to China Securities Journal.

"During the early days of the tightening policies, many developers had decided to go to smaller cities to circumvent the restrictions. However, developers soon found that they had over-estimated the future market potential in the smaller cities, whereas the property value of first and second-tier cities remained steady," says Song Huiyong, head of Shanghai Centaline Property's research and consultative department.

There are some projects, such as Beijing's West Chateau, the Jin Mao Palace in Beijing, and Poly Real Estate Group's project in Guangzhou, that alone have posted revenues of more than 4 billion yuan each.

"Focus is extremely important for the development of a company, as it allows them to use all the energies and resources for a specific sector," says Song, adding that this is also a good way for the development of medium and small-sized companies.

"If you look at the top 10 developers, you will find each of them putting a lot of focus on some specific cities rather than scatter their projects around."

Citing China Vanke as an example, Hui says that the Shenzhen-based company has invested in each of the 50 cities where it had projects with investment of 2 to 3 billion yuan.

Another example is the Hong Kong-listed Central China Real Estate Ltd, which currently operates projects in every county of Henan province. By focusing on its headquarters in Central China's Henan province, the company has become a well-known developer nationwide.

Dai Fang, an industrial analyst from Zheshang Securities Co Ltd, says sales will see a further pickup this year as market expectations are rising for a rebound in home prices, and first-home buyers and those who look for larger living space will try to sign contracts before the home prices start to soar again.

"It's not clear if any change will be made toward existing property tightening policies, and uncertainties may refrain potential investors from making heavy buying in property stocks for the coming months," says Dai.

Fang Yan, an industrial analyst from Guosen Securities expects the property market to rally in both supply and demand in 2013.

"The ongoing urbanization campaign will ensure ample growth space for leading property stocks with relatively low valuations, and intensifying competition will lead to higher concentration," Fang was cited as saying by the Securities Times.

Meanwhile, analysts also note that investors should remain cautious as property stocks are unlikely to have a substantial price increase as they did during 2006 and 2007.

China's property sales will see a growth between 10 percent and 20 percent year-on-year in 2013, with price change limited to a 5 percent drop and a 5 percent increase, global financial services provider UBS said.

Supply surplus was one of the key factors that cooled property prices last year. However, the bulging inventories are expected to be consumed this year and contribute to a better demand/supply situation, says Eva Lee, analyst with UBS Securities Asia Ltd.

Lee expects residential sales to marginally recover thanks to an improved economic outlook, but admits that developers will continue to face more competition or pricing pressure in non-home purchase restriction cities even this year.

wang_ying@chinadaily.com.cn

(China Daily 02/22/2013 page6)