Chinese property developers must diversify their income sources over the next three to five years as the old model of relying on large turnovers for profit growth is unlikely to pay off, according to Robert Fong, a senior Asian real estate analyst at Bloomberg Intelligence.
It will be unrealistic for developers to expect another exponential growth phase after the heady pace in recent years, as a massive baby boom or migration-related demand is unlikely to recur, Fong said in a media briefing in Hong Kong last Friday.
Major developers have seen their median overall core profit growth decline over the past four years. The figure stood at 11.5 percent last year, compared with 18.6 percent in 2013, 23.7 percent in 2012 and 32.2 percent in 2011, the analyst noted.
Developers’ borrowing costs are rising, putting pressure on their margins, he said. Median of major developers’ gross effective borrowing costs was 8.09 percent last year, compared with 6.24 percent in 2010.
Developers should go through a transition period in the next two years by reducing inventory and slowing their land-purchase plans, Fong said. The firms should focus on supplying smaller units in top-tier cities as high-end, larger units and properties in lower-tier cities will be harder to sell.
They ought to consider whether their hotel and rental assets are generating their cost of capital and if not, disposal may be an option to stay “asset light”, he said.
In the long run, developers should continue their scale expansion but in fewer cities. The focus should be particularly on the top 10-15 cities in the country. They should expand their rental and overseas businesses, following the footsteps of Hong Kong property giants such as CK Hutchison Holdings Ltd. (00001.HK) and Sun Hung Kai Properties (00016.HK), Fong said.
Over the next six to 12 months, Chinese property developers will see their share prices affected more by macro policies and broad liquidity conditions, rather than industry-specific news, he said.
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