Chinese property companies seen facing profitability pressure despite positive growth in recent years

Published: 18 April 2013

Positive growth in capitalization and sales for Chinese property companies over the past few years are not indicative of optimism for the future because of pressure from slower growth, declining profitability, lower liquidity and surging gearing, according to the latest research from professional services firm Deloitte.

The latest Deloitte research analyses key financials of Chinese property companies in 2010 and 2011 with the objective to provide them with suggestions on strategies, operations and financing, based upon prevailing market and regulatory conditions in China. The analysis covers a sample of 168 real estate companies listed in Hong Kong, Shanghai and Shenzhen. To track the latest market conditions, our research also covers some selective data in 2012.

"Cost pressure was mounting for Chinese property companies in 2011 and there was a staggering increase in their finance expenses by about 44% as a result of tightening monetary policy. The impact from high land premiums paid since 2009 will start to surface from 2012 onwards and will weigh heavily on profitability," said Richard Ho, National Real Estate Industry Leader, Deloitte China,

Mr. Ho suggested the Chinese property sector will remain significantly influenced by regulatory regime and administrative measures, given the long term government's commitment to combat irrational increase in property prices. In fact, property prices rose steadily from July to December 2012 in more than 56 cities. "To stay competitive, it becomes imperative for property companies to embark on new market expansion or penetration in existing market, depending on their strategies, competitive advantages and resources. Other important measures include proactive sales strategy, diversification into other types of properties, tighter internal and cost control, as well as improving financing capabilities."

When it comes to outbound M&A opportunities, it appears that leading listed Chinese real estate companies are acquiring property assets in the U.S., Hong Kong, Singapore, Korea and Malaysia. "It has become an emerging trend since 2010 and we saw around 28 transactions during the past 2-3 years. There were also 6 shell company acquisition deals in 2012 with a range of HK$161 million to HK$1.654 billion," said Tony Kwong, Financial Advisory Partner, Deloitte China.

Mr. Gary Fung, Tax Partner, Deloitte China said the directives put forward by the Chinese government in February reflected its on-going commitment to curb the overheated property market. "It is not likely that the Chinese government will throw down the gauntlet and not to control property prices, but at the same time, policies do not seem to have been substantively tightened. Some measures announced in February, such as accountability system for provincial government officials and the increase of public housing were covered in the announcement in 2011."