China’s Rattled Developers Turn to Business They Once Disdained

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.

(Bloomberg) — 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 Co. to distressed Shimao Group Holdings Ltd., 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.

Li Jun, chief executive officer Greentown Management Holdings Co., 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 Li, who leads the country’s biggest construction management provider. Construction services may represent at least 30% of the real estate industry in the next five years, up from the current level of nearly 5%, he estimated. 

Chinese developers aren’t entirely new to contracting business. For several years, some have been helping local governments build subsidized housing or assisting small landlords with design and construction work. But the revenue, generated from fees amounting to 3% to 5% 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% for the six months ended June last year, 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. Competition heated up last year as traditional residential sales plunged, even attracting defaulters China Fortune Land Development Co. and Zhongliang Holdings Group Co., 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 only charged 1.15% to the government, the deal helped it 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 this year. 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. And smaller Landsea Green Properties, a Nanjing-based developer famous for building well-ventilated residences, even renamed itself — as Landsea Green Management Ltd. — to emphasize its overhaul. 

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’s reaching its limit. Urban dwellers already own about 36.5 square meters (393 square feet) of housing per capita, exceeding the goal of 35 square meters set by the Chinese Communist Party to build a “moderately prosperous society.” 

China’s residential sales plunged by almost a third last year to about 1 billion square meters, and are likely to stay around that level for a long time, Greentown’s Li estimates. 

Still, Li expects huge demand to come from redeveloping as much as 5% of the country’s outstanding real estate, which he estimates at 35 billion square meters. A quarter of China’s urban dwelling space was built before 2000, when the private property market was created, and needs upgrading, according to China Real Estate Information. 

Finish Projects

For now, opportunities have increased during the nation’s push to finish abandoned projects, which led to a sweeping mortgage boycott last year. Finance companies taking over controlling stakes in stalled developments as white knights need to outsource construction to speed up delivery. 

“While the business is new to many developers, it has become a field that everyone has to compete in,” said Fang Ling, a property analyst at CRIC. “And it could become a straw to clutch during the sector downturn.” 

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