Lower-tier cities usually suffer the most during any slowdown in China’s property market, as is the case now. Still, a number of developers prefer to focus on this difficult market segment. And records show that the strategy has indeed borne fruit. So, how can we explain this?
According to Ou Yangjie, senior vice president of Future Land Development, a real-estate developer based in Shanghai, there was an interesting phenomenon happening in the industry this year. Developers which focused their businesses on top-tier cities have seen their sales stagnate, while firms which concentrated on lower-tier cities have notched impressive revenues.
Poly Real Estate Group is among the companies in the first category, while Evergrande and Country Garden are in the latter group.
According to Evergrande’s latest announcement, the group’s contracted sales reached 80.1 billion yuan (US$13 billion) for the first seventh months of this year. The figure was 52 percent higher when compared to the same period last year, helping the firm already achieve 72.8 percent of the full-year sales target.
Country Garden, meanwhile, recorded 65 billion yuan contracted sales during the same period, an amazing feat given that the comparable figure at Poly Real Estate was just 13.4 billion yuan.
Now, how did the two developers manage to achieve such great performance despite a cooling market?
There are several reasons, but the main one is lower costs. In big cities, plots offered by the government are usually ready for construction work. But in small cities, Evergrande and Country Garden often get involved in the development process at an initial stage, when the land is yet to be turned into an inhabitable place. Cost of land is therefore much lower. For that reason, they also have a much bigger cushion to lower prices in a weak market and boost sales volumes.
In most lower-tier cities, nice community facilities are rare, and this is another area where Evergrande and Country Garden have built up their edge.
Zhu Yiming, an analyst with market research institute CRIC, took Country Garden as an example, noting that when the developer embarks on projects in lower-tier cities, the firm would typically invest a lot in building up facilities, such as parks, sports centers and sometimes even water plants.
The facilities are necessary for the cities to grow and develop, but it would be costly for the local governments to build them. So authorities would be willing to sell the land at a lower price, in exchange for the infrastructure, Zhu told the National Business Daily. Home buyers naturally prefer to live in areas with these facilities.
The developer enjoys economy of scale too, which brings down the construction costs. By beating small rivals in terms of quality and price, Country Garden can therefore grab market share and make a decent profit even in these tougher lower-tier markets.
Small cities usually suffer from lack of enough local demand because of limited populations, relatively low scale of economic activity and inadequate local job and business opportunities. A strong national sales team to search for outside buyers is another key for success in these fringe markets.
An insider from Country Garden told the National Business Daily that the group has a sales team of over 30,000. Thus, the company is able to target buyers from all across the country, and not just in the lower-tier cities where the projects are located.
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