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.

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, 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.

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.

To realize their ambitious sales and land purchase plans, many heavyweights have unveiled financing plans.

Evergrande 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.

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.

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)