Chinese property developers face downward cycle: Deloitte

Nearly 60 percent of listed Chinese mainland real estate companies registered a decline in net profit margin in 2012, reflecting the beginning of a downward profitability cycle, according to a research report from Deloitte.

The accountancy firm compared the financial data of 174 property companies listed in Shanghai, Shenzhen and Hong Kong in 2012 against 168 companies in the previous year.

The report, published last week, said the sampled property companies achieved an average total revenue of 7.91 billion HK dollars (1.02 billion U.S. dollars) in the reported period in 2012, against 6.35 billion HK dollars in 2011.

Net profit margin dropped 2.65 percent from 2010, albeit a slight increase of 0.5 percent from 2011. A reduction pattern has emerged for returns on equity, which weakened to 9.98 percent in 2012, against 10.72 percent in 2011 and 11.5 percent in 2010, according to the report.

In 2013, the Chinese mainland property market witnessed a constant increase in volume and prices in top-tier cities, and sufficient demand also continued to provide a shelter for the housing market in tier-two cities against policy risks, said Deloitte China's Real Estate Managing Partner Richard Ho.

"Cooling measures will remain in place this year as there is no sign for any change in policy tone," Ho said.

Overall, lower profit margin will be a likely scenario for Chinese real estate companies amid cost pressures from land, financing, marketing and labor, he said.

In comparison with their counterparts in Shenzhen and Shanghai, real estate companies listed in Hong Kong fared better in terms of their market capitalization, reflecting the better performance in Hong Kong's stock market bolstered in part by global quantitative monetary easing policies, the Deloitte report said.

Meanwhile, real estate companies listed in Hong Kong also showed a better average net profit margin, which is indicative of their higher portfolio composition in investment properties and the associated tax impact.

The report also provides some forecast about the mainland's property market for the future. In particular, there is a strong likelihood for continuous integration within the industry to wipe away weaker companies.

The Chinese government will impose policies that drive the real estate industry from high and extensive growth towards more stabilized but sustainable expansion, the report said.

Also emerging as a long-term trend is the rapid development of energy efficient properties, which adopt green and environmentally friendly concepts, it said.