Big developers to become bigger in China’s slowing property industry: analysts
With tightening restrictions on purchase, pricing, resale, and transfer of properties and home loans, China’s real estate market is entering a so-called “Bronze Age”, said some industry analysts, who believe big players boasting scale and competitive edge would achieve more growth and market share.

Before the October holiday, a new round of regulatory policies were introduced in several capital cities including Shijiazhuang, Changsha, Guiyang and Nanchang—till now, 39 Chinese cities require that newly purchased homes must be held for certain years before being resold. The restriction is among a raft of new measures designed to curb home market speculation.

Since March when the first round of home buying restrictions came out, the potency and dimension of government intervention have been escalating. In this climate, some industry analysts believe a long-term mechanism to regulate the market is forming, ushering China’s real estate industry into a phase featuring moderate growth after years of boom.

And this raises the question of how should developers adapt to the new situation and survive? “At the current stage, big developers would become even bigger,” said Hu Huaru, chief real estate analyst with Southwest Securities. Several industry insiders told the National Business Daily that the market would be more and more dominated by a few major players and their advantages in scale, financing and management would be especially called upon.

Looking back at the past 20 years since 1998 when China reformed the market to legalize privatization of properties, the sector has gone through explosive growth. Between 2004 and 2010, with strong figures in home sales, prices, investment, profits and supply-demand ratio, China’s property sector embraced its golden age.

Since 2011, its growth rate began to moderate, with less new developments and newly completely constructions. Meanwhile, urbanization, economic growth and unmet demand still could bolster the market. This period was labelled by industry analysts as the “Silver Age”.

“(Market) concentration will dominate the current phase (Bronze Age),” said Hu Huaru. In his analysis, the top ten developers are about to gain even bigger share of the market. “In the first half of the year, the top ten property developers had occupied nearly 30 percent of the market by sales volume, while in two years, the figure is expected to be near 50 percent,” said Hu.

Zhu Jin, the chief real estate analyst with Oriental Securities, predicts the market share of the top 10 players to stand steadily at 36 percent by 2022. He also thinks that major developers are to gain more solid growth in the coming years.

“When new home prices are fixed, developers with presence in fewer cities would find it hard to compete and make a profit. So they (smaller developers) must remodel their businesses or they will be acquired by bigger ones,” Hu said. Land is the key for developers to gain scale expansion, so the land market would also see increased concentration.

“Currently, when major real estate developers are vying for more land, the concentration in the land market is more obvious compared with that in the home-purchase market,” said Zhu Jin. According to him, big developers could always benefit from higher credit ranking and stronger financing capabilities, which would then widen the gap between big and small developers.

However, developers could no longer sit, do nothing but wait for land value to rise nowadays, said Shen Linan, the vice president of Tahoe Group, the first company that went public in the industry. “They are required to create new value on land through providing better products and services.” He warned that companies must pay more attention to allocating their resources and strike a balance among land, capital, people, products and services.

Government policies are aimed at curbing investment with focus on satisfying people’s housing needs. Zhu Jin predicts that more policies would be rolled out to crack down on speculation and relieve housing crunch in some cities. Under the circumstances, developers are suggested to take more prudent actions.

At present, although the leasing part merely occupies 6 percent of the market, the Chinese government keeps rolling out support policies to boost its development and compliance. Hu Huaru believes the new direction would call upon smaller developers to remodel themselves to divert to property management or financing.

But the property leasing market still faces the problem of low profit rate. Profit margin for long-term rental ranges between 5 and 10 percent; even for players boasting scale advantage, the margin would rarely exceed 10 percent. Meanwhile, the home developers could gain 10 to 15 percent profit rate. Zhu Jin proposed for the governments to work out more effective incentives like helping concerned companies widen their financing channels.

The past half year has seen increased land supply earmarked for rental use in first-tier cities. Hu Huaru expects the market to see rapid growth in the next five years. “Developers should engage more with the market, starting new developments and holding properties for long-term period to operate rental business.”

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