“Nowadays, many so-called first-time homebuyers in Beijing need to use the savings of three generations for a down payment and then use most of their monthly income to repay the mortgage.” Six months before Mao Daqing's internal speech circulated online, a brand head of a national real estate company expressed concerns about the rapid rise in land and housing prices in first-tier cities during a chat with a reporter from National Business Daily.

 

　　Not only Beijing and Shanghai, but many cities have caused market concerns because commercial housing inventory far exceeds sales since the first quarter of this year. Throughout the first quarter, except for a few cities, transaction volumes in most first-, second-, and third-tier cities have fallen sharply, and local governments' voices for market rescue are incessant.

 

　　However, except for Vanke, most real estate companies remain relatively optimistic about the market outlook. First-quarter reports from multiple real estate companies show that their funds spent on purchasing goods and services have increased significantly compared to the previous year. Statistics from CRIC further show that, except for April, developers' activity in the land market throughout the first quarter was still better than the same period last year.

 

　　On one hand, inventory of commercial housing far exceeds demand; on the other hand, companies are still increasing spending on land acquisition. Behind this seemingly contradictory phenomenon, there is a reasonable logic. An industry insider believes this is a gamble: many developers know the probability of housing prices continuing to rise is very small, but they all have a侥幸 mentality: if they win, they can make a lot of money. Moreover, the “payers” of the gamble are definitely not the developers' bosses, but the various financial institutions that are providing them with “ammunition” to buy land.

 

　　Development and Land Purchase Expenditures Still Growing/

 

　　Although data from CRIC and other institutions show that in the first quarter of this year, the sales area and sales amount of real estate in most cities across the country experienced a significant “double decline”, many real estate developers have not reduced their capital expenditures on land purchases and project development due to the decline in sales volume and sales area. Take Gemdale Corporation as an example: the company's first-quarter sales area was 577,000 square meters, and the amount was 7.71 billion yuan, down 11.8% and 10.8% year-on-year respectively. Its consolidated cash flow statement shows that cash payments for goods purchased and services received in the first quarter amounted to 10.429 billion yuan, while the same period last year was 4.576 billion yuan.

 

　　Under normal circumstances, real estate enterprises' expenditures on purchasing goods and receiving services are mostly used for land purchases, engineering construction, etc. Therefore, the above data in the cash flow statement is usually an important reference indicator for observing enterprises' judgment of the market.

 

　　In fact, Gemdale is not the only real estate enterprise to increase operating expenses despite declines in both sales area and sales amount. Poly Real Estate [Weibo], which also experienced declines in sales area and sales amount in the first quarter, also increased its cash expenditures on purchasing goods and receiving services by about 2.5 billion yuan in the first quarter. The company's new construction area in the first quarter increased by 32.12%, and the newly added land reserve building area exceeded the contracted sales area for the period by more than 1.5 million square meters. Another company among the “Zhao Bao Wan Jin” (China Merchants, Poly, Vanke, Gemdale), China Merchants Property [Weibo], saw its cash expenditures on purchasing goods and receiving services in the first quarter increase by more than double compared to the same period last year.

 

　　Among the above accounting items in the cash flow statement, the one with the largest expenditure is none other than Taihe Group, which expanded most aggressively last year. The company's expenditures in the first quarter of this year increased by 342.82%.

 

　　Among the leading enterprises, only Vanke's expenditures decreased. The cash outflow under the above accounting item was 32.088 billion yuan in the same period last year, while this year the figure is only 24.9 billion yuan.

 

　　Meng Yin, general manager of the Research Center of CRIC Information Group, said that in fact, in the first quarter of this year, various real estate companies were still spending huge sums to acquire land in the land market, and the enthusiasm in the land market did not officially fade until April this year. Information from the National Bureau of Statistics shows that while the sales area of commercial housing decreased by 5.7%, the land acquisition area of real estate development enterprises decreased by only 2.3% year-on-year.

 

　　Gamble: Housing Prices Will Still Rise/

 

　　When explaining the reasons for the company's high-priced land acquisitions in the first quarter, a brand manager of a real estate enterprise quoted the company's chairman at a results briefing: “If the national GDP growth rate can reach 7% or 8% this year, then the housing price increase in Beijing is expected to be at least 10%.” Obviously, the company is still very confident about the market prospects.

 

　　Shen Linan, assistant to the president of Taihe Group, explained the company's large-scale land acquisitions in Beijing in the first quarter, saying that supply in the Beijing real estate market is still insufficient relative to potential demand. Against this background, there will still be good opportunities in the Beijing market.

 

　　Meng Yin also believes that in cities like Beijing and Shanghai, supply is by no means far exceeding demand; the main reason for the current high inventory is the contraction of demand. There are two reasons for the rapid contraction of demand: first, the continuous rise in mortgage interest rates has made some purchase demand unable to afford housing prices due to the rate increase; second, the market generally expects housing prices to fall. Homebuyers, lacking confidence, postpone entering the market. Meng Yin believes that the second factor is the main reason for the sluggish sales in the first quarter.

 

　　Over the past decade, multiple macro-control measures on the property market have caused the market to slump rapidly in a short period. But as time passes, market views change, and transaction volumes can quickly rebound.

 

　　Developers have obviously noticed this phenomenon. A reporter from National Business Daily found that in the first quarter, real estate developers generally increased borrowing to enhance their companies' ability to “weather the cold”.

 

　　Xue Jiongwen, a partner at Ruixin Zhicheng Management Consulting, said that various types of funds, including insurance funds and underground private equity, are flowing into real estate, which enables developers to ensure ample funding even when sales are sluggish.

 

　　Investors' Risk: Paying for the Losers/

 

　　As housing prices have continued to climb, developers' risks are increasing. “Developers see this very clearly. They dare to do this because they have long since transferred the profits they made out of the real estate industry. Ultimately, it is not the developers' bosses who bear the risk,” Xue Jiongwen said.

 

　　If not the developers themselves, then who will “pay” for the market oversupply and falling housing prices? The answer is very clear: those financial capitals that are continuously channeling funds into the real estate industry.

 

　　Among them, the riskiest may be real estate private equity and trust loans that promise excessively high return expectations. Including issuance costs, the average borrowing and financing cost of real estate private equity and trusts once reached as high as 15% or more.

 

　　High investment returns have made these financing tools accustomed to seeking new investment opportunities in high-risk areas of the real estate industry. The reason these areas can achieve such high returns is usually because banks and other departments with higher risk control requirements are no longer willing to lend money to real estate companies.

 

　　James Morrison, senior executive director of Asia Pacific at Hines, admitted that the high returns of some domestic private equity funds are difficult to achieve. Of course, it is possible that some funds use higher investment leverage to achieve promised returns. But usually, this will bring greater risks to investors.

 

　　In Xue Jiongwen's view, the probability that real estate private equity or trusts chasing high returns will “pay” for high-risk real estate development investment behavior is increasing. In fact, there have already been trusts that had to choose rigid repayment due to overdue defaults on trust loan projects.

 

　　However, the real estate industry, which is under pressure from unsold inventory, still has many opportunities. As Vanke President Yu Liang said when publicly supporting Mao Daqing, “the refinement of real estate has just begun.” Whether for residential customers or customers of consumer real estate and industrial real estate, their needs will be different from before. The existing stock of real estate cannot meet their needs. Whether it is demolition and reconstruction or functional renovation, opportunities will arise. It's just that customer needs will become increasingly refined, not just simply larger areas.

 

　　Enterprises capable of seizing these opportunities will become leaders in the industry, and the operational advantages they possess are still considered highly confidential. Through clues provided by the organizing committee of the 2014 Value Real Estate Overall Ranking, a reporter from National Business Daily learned the secret of how industry leaders do not need to worry about high inventory. In the next two to three months, National Business Daily will gradually disclose these secrets to help investors find star enterprises that can still achieve good sales performance without price cuts in the environment of real estate overcapacity.