China Real Estate: Government Moves To Curb Profits Of Developers28 April, 2011, 11:42. Posted by Zarathustra
Tags: Real Estate
The effect of the last round of real estate price curbing measures is mixed so far. While the government of Haikou claimed that revenue falls to a point that they have to suspend buying restrictions, real estate market in other parts of the country are doing alright. The central government still judge the price fall (if any) to be far from enough.
The latest weapon that they are studying is to limit the profits (margin) of real estate developers. According to a regulation announced in 1995 which allows the government to limit profits of some important industries.
It is still unclear how the latest move will look like exactly. For example, how much a developer can earn at most. This report cited that the average developers’ profit margin around the world is around 5%, but margin in China is much higher. Now I am not sure if 5% is a true figure, but it does not seem to me a reasonable profit margin that would justify the risk being taken by the developers, not to mention that real estate prices can both rise and fall.
The experience in Hong Kong shows that profit margins of property developers vary wildly, and it all depends on the timing of the purchasing of land and selling of the apartments. Hang Lung Properties, for example, they were able to fetch more than 70% of profit margin from one project because they bought the land at the bottom of the market and hoard the completed flats till the market is hot. On the other side, those developers who bought land in 1997 would have all lost money.
As the real estate market is hot, Chinese real estate developers could fetch a high profit margin in the last 2 years or so. A profit margin of 30-40% does not sound unusual. If the government does move to limit profit margin at somewhere around 5%, leave the actual implementation aside, that would be very bad news for property developers, as some developers are in very bad financial positions with negative operating cash flow and relatively high debt level. This may well put some real estate developers out of business.