Due to the rising price of land acquisition, Chinese real estate developers’ profits are being squeezed. Recently, Hangzhou’s largest real estate company Binjiang Group revealed that the company’s profit can only strive to achieve a level of 1%-2%, which is already lower than the profit performance of manufacturing and financial products.
On May 14, Binjiang Group, the largest real estate developer in Hangzhou, held an earnings presentation and when asked about the profit performance of its recently acquired projects in Hangzhou, Qi Jinxing, chairman of Binjiang Group, said that the company was “trying to achieve a net profit level of 1-2%,” according to a May 19 report in China Business News.
This profit level is already lower than the performance of manufacturing and bank wealth management product returns, but it is not easy to achieve, the report said.
According to the calculations of CITIC Investment Securities, among the plots taken by Binjiang, there are three plots with house ratio over 80%; the implied gross profit margin of Ningwei unit plot jointly taken with Rongxin is only 1.5%; the house ratio of Shankou unit plot of Chengxiang street acquired alone is 81.9%, and the implied gross profit margin is -1.9%.
According to Kerry’s calculation, C&D’s Huli 2021P03 plot in Xiamen was sold for 2.63 billion yuan, with an allotment area of 13,200 square meters; after excluding the allotment, the floor price was as high as 67,800 yuan/square meter, while the average sales price of commercial housing on the site could not exceed 71,800 yuan/square meter, with a difference of only 4,000 yuan/square meter, making it very difficult to achieve profitability.
According to CITIC Construction Investment’s calculations, among the cities where land supply has been concentrated recently, Chongqing, Wuxi, Hangzhou and Beijing have a land-to-goods ratio of more than 60%, of which the average implied gross margin of each project in Hangzhou is 12.8%, 17.4% in Wuxi and only 6.7% in Chongqing.
YIHAN Intelligence statistics show that as of 2020, the average net profit margin of the 50 typical real estate enterprises it tracks is 11.6%, down 2.3 percentage points from 2019, with 37 enterprises experiencing a decline in net profit margin; a total of 28 have net profit of 10% or more, down 9 from 2019. During the same period, the average gross profit margin of 50 real estate enterprises was 24.7%, 5.1 percentage points lower than the same period in 2019, with 47 real estate enterprises experiencing a decline in gross profit margin.
The constantly low earnings performance also directly affected the market trend of real estate stocks. East Finance Choice data show that in July 2020, the real estate (Shenwan) sector had stood at a high of more than 4,700 points, and has since shocked lower, hitting a low of 3,506 points in February this year.
2021 Since the beginning of the year, industry leaders Vanke A, Poly Real Estate, China Merchants Shekou, Greentown China and other leading companies’ share prices are down, as of Wednesday (May 19) closing, the cumulative decline of 4.91%, 13.21%, 11.21%, 18.78%; Vanke A’s dynamic P/E ratio is only 7.63 times.
The profits of real estate enterprises are compressed by high land prices
As of May 14, the implementation of the “two centralized” land supply in 22 hot cities, 12 have opened the first batch of centralized land supply auction, including Beijing, Shenzhen, Hangzhou, Guangzhou, Wuxi, Chongqing, Fuzhou, Xiamen, Qingdao, Shenyang, Changchun, Tianjin and other cities, the total transaction amount of more than 500 billion yuan.
Kerry statistics show that the performance of the premium rate of the first batch of concentrated land supply in each city is clearly differentiated, and the degree of hot and cold is also uneven.
Among them, the average premium rate of Qingdao, Changchun, Beijing and Shenyang remained at 10% and below, with Qingdao as low as 2%; while the average premium rate of Chongqing was the highest, reaching 43%; the overall premium rates of Shenzhen and Xiamen were around 30%.
The average premium rate of Hangzhou is 26%, which is lower than that of Chongqing, Shenzhen and Xiamen. However, among the 57 land lots sold, nearly 20 of them have set a new high price in the area where they are located, and more than 40 of them have capped their premiums and have been transferred to the bidding for the self-holding ratio, with the self-holding ratio of some lots reaching 40%.
In Wuxi and Guangzhou, the average premium rate was relatively low due to factors such as “land price restrictions”, both at 12%; however, among the first 16 lots in Wuxi, only one did not touch the maximum price limit, and the rest entered the bidding for self-sustainability or the lot-shaking stage.
The report says that the small profit margin of the project is a phenomenon that exists in the recent land auction in many cities.
Kerry statistics show that in the market is relatively high in Wuxi, Xiamen, Chongqing city land house ratio of up to 70%, the profit margin is relatively small; according to its calculations, “capped + high construction” under, Wuxi, a number of plots of land is likely to be a loss.
CITIC Construction Investment Securities real estate industry chief analyst Zhu Jin believes that “land prices continue to rise, some cities such as Chongqing, Hangzhou, Wuxi new housing prices there is upward pressure, the future sales end of the price limit is difficult to say under the release of these cities is expected to have improved the speed of demolition, but the profit margin of real estate enterprises will continue to compress.”
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