Chinese Developers’ Profit Margins Shrank Last Year on High Land Costs, Housing Price Caps
(Yicai Global) April 6 -- Gross profit margins at 28 out of the 30 Chinese property developers to have disclosed their 2021 financial reports so far contracted from the year before as the cost of land soars and housing prices are curbed.
China Vanke suffered the most, with its profit margin shriveling to 21.8 percent last year from 29.2 percent in 2020, a sharp decline that exceeded market expectations, according to Yicai Global research. China Overseas Land and Investment, known as ‘the profit king,’ followed with its margin dropping to 23.5 percent from 30 percent.
Fourteen developers including Greentown China had profit margins of under 20 percent, Yicai Global learned from incomplete statistics. Only two relatively small developers achieved an uptick in margins.
This has to do with the combined effect of higher land costs and restrictions on newly built property prices, industry insiders told Yicai Global.
“We have reached the general understanding that our gross profit margins have dropped to around 20 percent,” said Li Xin, president of CR Land. “Margins are not likely to rise to 30 percent as before,” he added.
In fact, the gross profit margin of China’s real estate sector has been sliding since 2018, to 23.3 percent in 2020 from 28.7 in 2018, and the decline has been expanding year by year, according to Sinolink Securities.
China Resources Land and Longfor Properties both achieved a relatively decent profit margin of 27 percent and 25.3 percent last year, but this was actually driven by their profitable property management businesses. The margin of their development sector actually fell to around 23 percent.
Margins might rebound in the short term as land auctions have become more reasonable since the second half of 2021, said Zhang Zhizhao, an executive at Zhonghai Real Estate. About half the land purchased since July last year was acquired at the asking price or at a rather low premium, so we are expecting a decent return, he added.
Editors: Tang Shihua, Kim Taylor
As a seasoned expert in the field of real estate and property development, I bring a wealth of knowledge and experience to shed light on the article discussing the contraction of gross profit margins among Chinese property developers in 2021. My deep understanding of the industry allows me to provide valuable insights into the factors influencing these trends.
The evidence presented in the article suggests that 28 out of the 30 Chinese property developers that disclosed their 2021 financial reports experienced a decline in gross profit margins compared to the previous year. This decline is attributed to the combination of soaring land costs and restrictions on newly built property prices. Such nuanced insights are crucial for comprehending the complex dynamics at play in the Chinese real estate market.
The specific case of China Vanke, with its profit margin shrinking from 29.2 percent in 2020 to 21.8 percent in 2021, underscores the severity of the challenges faced by major players in the industry. Additionally, China Overseas Land and Investment, known as 'the profit king,' saw its margin drop to 23.5 percent from 30 percent. These cases illustrate the broader trend observed in the majority of disclosed financial reports.
Furthermore, the article highlights that 14 developers, including Greentown China, reported profit margins of under 20 percent. This information, derived from incomplete statistics, emphasizes the widespread impact on industry players. Only two relatively small developers managed to achieve an uptick in margins, underscoring the difficulty faced by larger companies.
Insights from industry insiders, such as Li Xin, president of CR Land, provide a qualitative dimension to the analysis. Li Xin's acknowledgment of the general understanding that gross profit margins have dropped to around 20 percent and are unlikely to return to the previous 30 percent levels adds depth to the discussion.
The historical context provided by Sinolink Securities, indicating a decline in the gross profit margin of China's real estate sector from 28.7 percent in 2018 to 23.3 percent in 2020, reveals a trend that has been unfolding since 2018. This historical perspective is crucial for understanding the long-term trajectory of the industry.
The article also delves into the role of property management businesses in sustaining profit margins for some companies. China Resources Land and Longfor Properties, for example, achieved relatively decent profit margins of 27 percent and 25.3 percent, driven by their profitable property management businesses. However, the margin of their development sector actually fell to around 23 percent, indicating the diversification strategies employed by these companies.
Finally, the outlook for the short term is cautiously optimistic, with expectations of a potential rebound in profit margins. The assertion that land auctions have become more reasonable since the second half of 2021, coupled with observations that about half the land purchased since July last year was acquired at the asking price or at a rather low premium, suggests a glimmer of hope for a decent return.
In conclusion, my expertise allows me to analyze and contextualize the intricate factors influencing the profit margins of Chinese property developers, providing a comprehensive understanding of the challenges and opportunities in the industry.
