Dropping housing prices have put pressure on real estate firms. But while smaller companies might fail, larger ones try to remain profitable by sometimes daring diversification of their investments, writes financial analyst Sara Hsu in the Diplomat.
Diversification has helped the largest companies maintain their financial performance. Dalian Wanda, which purchased AMC Cinemas in 2012 and revealed plans to build a film studio in Qingdao in 2013, expanded into the O2O (online to offline) e-commerce market this year, forming a venture with Baidu and Tencent. Wanda took the largest ownership of the new firm, with a 70 percent stake. Vanke signed off on a venture with the Carlyle Group to set up a financial platform for the sale of long-term commercial property assets. Vanke is the largest real estate developer in China, and profit margins remain healthy, at 23.8 percent, only 1.1 percentage points less than in 2013.
Evergrande Group diversified into grain and oil, announcing plans to invest more than 100 billion RMB ($16 billion) in commercial agricultural ventures in Inner Mongolia and Heilongjiang. The firm will market its food products as safe, in contrast to some products that were found to be tainted by non-food or harmful materials. Evergrande also has a 5 percent stake in China’s Huaxia Bank and launched its own bottled water brand in January of this year. Evergrande continued to experience some growth in recurring net profit in the first half of 2014.
Most real estate companies are unable to participate in these types of large-scale ventures and are looking to destock in 2015, with a heavy emphasis on boosting sales to combat excess supply. Excess housing stock exists in more than one-third of Chinese cities. Developers are also increasingly looking to the internet and big data analysis as a marketing channel. A new trend in the real estate industry for 2015 will also be the sale of small apartments that cater to younger buyers.
The slowdown in the real estate sector has put downward pressure on GDP growth. The Chinese government will be hoping that improvements in the sector contribute to a growth revival in 2015.
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