China’s rattled developers turn to business they once disdained

BEIJING - China’s embattled real estate developers are flocking to a field of business that they derided a decade ago, as the country’s worst housing downturn dries up cash and income.

Instead of buying land and owning projects from scratch, a growing number of property firms have begun providing construction services as contractors.

From

blue-chip giant Country Garden Holdings

to distressed Shimao Group Holdings, dozens of developers are competing even though the business provides much smaller revenue than more traditional sources.

Firms are turning to contracting with the knowledge that the boom days of debt- and speculation-driven property development are over, following a clampdown on excess leverage in the industry.

Some see opportunities working with local government financing vehicles that are hoarding land and need to outsource construction work to professionals.

There is also the prospect of completing stalled housing projects for distressed developers.

Mr Li Jun, chief executive of Greentown Management Holdings, has seen work increase dramatically since the second half of 2021, when the crisis leading to the default of giant China Evergrande Group emerged.

“We’ve always seen the business as the future of the property sector, but the change has come faster than expected,” said Mr Li, who leads the country’s biggest construction management provider.

Construction services may represent at least 30 per cent of the real estate industry in the next five years, up from the current level of nearly 5 per cent, he estimated.

Chinese developers are not entirely new to contracting business.

For several years, some have been helping local governments build subsidised housing or assisting small landlords with design and construction work.

But the revenue, generated from fees amounting to 3 per cent to 5 per cent of project sales, is much slimmer than what development provided during its heyday.

Still, contracting can earn healthy profit margins due to its asset-light model.

Not having to spend large amounts acquiring land has a lure for cash-strapped developers.

Net margin at Greentown climbed to a record 29 per cent for the six months ended June 2022, almost triple the average profitability seen at 33 major mainland developers listed in Hong Kong.

More than 60 developers have started providing construction services, according to a tally by property agency China Real Estate Information Corp (CRIC).

Competition heated up in 2022 as traditional residential sales plunged, even attracting defaulters China Fortune Land Development and Zhongliang Holdings Group, it said.

In September, the government in northern Shenyang city tendered a 15-month contract to finish building a stalled tourism project left by Evergrande. Surprisingly, the work went to another defaulted builder, Fortune Land.

Even though Fortune Land charged only 1.15 per cent to the government, the deal helped the company establish a business line that looks viable.

The following month, its construction unit snapped up seven projects, growing the operation rapidly to form part of a non-core portfolio that creditors can swap some of their unpaid bonds into.

Other rivals have also made the transition.

Months after top-20 player Zhongliang defaulted, it established a construction service provider unit and vowed to pounce on the business in 2023.

A top-10 developer has been exploring such contracts to avoid large-scale layoffs, hoping to keep half of its workforce in the development division, according to a person familiar with the matter.

Challenging era

The shift also stems from the pressure to adapt to a prolonged property slowdown dragged down by slower economic growth, a population crisis and a market that is reaching its limit.

Urban dwellers already own about 36.5 sq m of housing per capita, exceeding the goal of 35 sq m set by the Communist Party of China to build a “moderately prosperous society”.

China’s residential sales plunged by almost a third in 2022 to about 1 billion sq m, and are likely to stay around that level for a long time, Mr Li estimated.

Still, he expects huge demand to come from redeveloping as much as 5 per cent of the country’s outstanding real estate, which he estimates at 35 billion sq m.

A quarter of China’s urban dwelling space was built before 2000, when the private property market was created, and needs upgrading, according to CRIC.

For now, opportunities have risen during the nation’s push to finish abandoned projects, which led to a sweeping mortgage boycott in 2022.

Finance companies taking over controlling stakes in stalled developments as white knights need to outsource construction to speed up delivery. BLOOMBERG