Developers Post Strong Profits But Shy Away From Buying Land
China’s Hong Kong-listed developers have posted strong profits for the first half of 2018. Of the 12 listed firms, only one failed to hit its target. The main reasons behind a strong first half were a bank of cheap land and rising home selling prices.
With newer land plots being sold at a premium, and the recent stream of regulations, this profit-driving mix may be coming to an end. Since late 2016, over 80 cities across China have imposed regulations meant to curb prices and dampen market fervor.
In Tier I cities, residential projects are barred from selling if authorities believe that the project fails to meet certain price controls. Recently, Sanya, a city in the south of China, made the news for introducing one of the toughest controls by requiring developers to cut prices and freeze them for the next six months.
At the same time, the government’s mission to cut down on the industry’s debt levels has increased pressure on many firms. Potential financing avenues have slowly been narrowed down, and many firms are facing liquidity and debt issues.
While developers initially maintained a high volume of land purchases in the belief that regulations would soon ease, they are now shying away from snatching up new plots. A record number of 300 plots failed to attract a buyer this year.
“Investors are primarily concerned about the future. From their perspective, looking at the sector down the road, they can only see downside risk, not much upside,” said David Hong, Head of Research at CRIC Hong Kong.
The results of a strong first half of 2018 have been mixed. China Resources Land posted a core net profit growth of 152%, and its shares initially rose 8.3% before falling the next day. China Evergrande posted a growth of 101.1%. Its shares closed down 1.35%, but by Wednesday they were up 7.4% for the year.
“The general picture is earnings are good, gross margin improved though gearing ratio also rose in some firms.,” said Alan Jin, a property analyst with Mizuho Securities. “This is a continuation of last year,”
“We are in a time when new policies could come out any time,” said Yan Jianguo, Chairman of China Overseas Land and Investment. “So prudency is needed. We would rather miss a plot, instead of investing in a wrong plot.”
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