20 February 2019
Top 10 developers have about 13 percent of the Chinese property market, and the ratio is expected to climb further in coming years.  Photo: China Daily
Top 10 developers have about 13 percent of the Chinese property market, and the ratio is expected to climb further in coming years. Photo: China Daily

Diverging fortunes of China’s large and small property firms

China’s housing market has shown signs of moderation after local and central governments took some measures to rein in the sector and keep a lid on prices.

New-home price gain in 70 large cities narrowed for eight straight months. In the month of August, housing sales in the country were reported to have fallen 31 percent from a year earlier. The overall picture looks fairly worrying, on surface.

But if we dig deeper, the nation’s top 10 property developers actually reported strong sales growth last month, bucking the overall market slowdown. 

Country Garden (02007.HK), Vanke (02202.HK), Poly Real Estate Group (600048.CN), Sunac China (01918.HK) and Longfor Properties (00960.CN) posted sales revenue growth of 52 percent, 101 percent, 48 percent, 236 percent and 38 percent respectively in August from the year before.

In fact, most of these leading property developers have actually revised upward their annual sales targets.

Generally speaking, China’s housing market boom has cooled off slightly after various government tightening measures. But while small and medium-sized developers have suffered, big players have been little affected, with the firms actually managing to expand their market share.

Why are small players losing ground? There are two factors.

As land prices kept spiking in recent years, new development sites have becoming increasingly unaffordable for small developers with limited resources.

Smaller developers with annual sales revenue of around 10 billion yuan simply can’t compete with bigger rivals.

Amid this situation, numerous small players were acquired by the big boys. The value of M&A deals in the sector hit a record high 96.7 billion yuan in the second quarter of this year, according to Bloomberg.

Also putting small players at a disadvantage is the increasing complexity of the business.

Chinese authorities have added various restrictions to curb land speculation. For example, developers will be required to build a certain number of public housing units, public facilities, office buildings, shopping malls or hotels in order to win a land auction.

Recently, Shanghai municipal government launched five land plots in prime locations, and requested developers to hold all properties for rental purpose after completing construction. The simple build and sell model is not allowed.

Against this backdrop, land development has become much more complex nowadays. Developers should have strong capability in planning, project development, financing, etc.

The past decade was a heady time for the nation’s housing market. Anyone could reap a big fortune if they were bold enough. However, the industry saw the entry threshold rise considerably in recent years as some leading players built their dominance.

Smaller developers are being phased out due to lack of competitiveness.

In the US, market share held by the top ten property developers surged to 22.6 percent in 2005 from 9.6 percent in 1994. Currently, the ten largest developers in China have a combined market share of 13 percent.

This suggests there is further room for consolidation. We can expect the big developers to continue to strengthen their leading positions in coming years.

This article appeared in the Hong Kong Economic Journal on Sept 5

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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