Chinese developers’ profit margins shrank last year due to high land costs and housing price caps

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(Yicai Global) April 6 – Gross profit margins at 28 of China’s 30 property developers who disclosed their 2021 financial reports have so far contracted from a year earlier as land costs soar and housing prices are held back.

China Vanke suffered the most, with a profit margin that narrowed to 21.8% last year from 29.2% in 2020, a sharp decline that exceeded market expectations, according to research from Yicai Global. . China Overseas Land and Investment, known as the “king of profit”, followed with margin dropping to 23.5% from 30%.

Fourteen developers, including Greentown China, had profit margins below 20%, Yicai Global learned from incomplete statistics. Only two relatively small developers managed to increase their margins.

It has to do with the combined effect of higher land costs and price restrictions on newly built properties, industry insiders told Yicai Global.

“We have come to the general conclusion that our gross profit margins have dropped to around 20%,” said Li Xin, chairman of CR Land. “Margins are not expected to reach 30% like before,” he added.

In fact, the gross profit margin of China’s real estate industry has been declining since 2018, from 28.7% in 2018 to 23.3% in 2020, and the decline has been steepening year on year, according to Sinolink Securities.

Both China Resources Land and Longfor Properties achieved relatively decent profit margins of 27% and 25.3% last year, but this was actually driven by their profitable property management businesses. The margin of their development sector actually fell to around 23%.

Margins could rebound in the near term as land auctions have become more reasonable since the second half of 2021, said Zhang Zhizhao, an executive at Zhonghai Real Estate. About half of the land bought since July last year has been at asking price or at a rather low premium, so we expect a decent return, he added.

Publishers: Tang Shihua, Kim Taylor

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