Reality check for real estate companies(2)

Despite the wide range, most of the diversification falls into two categories. The first is "specialization", which means expanding further into property-related services and management sector, or find alternative niche markets such as tourism property, property for elders. The second option involves developing businesses that are not directly related to property such as finance, agriculture and consumer products.

Companies like Vanke, Country Garden Holdings, Longfor Group and Fantasia Holdings Group Co Ltd represent the first mode of development. For example, Fantasia in early July listed its "community service" branch in the Hong Kong stock market. Within three days, the market capitalization of the branch exceeded that of its parent company, underscoring the popularity of the concept. Vanke has also been expanding its various service businesses for several years now.

But beyond the buzz, the value generated from the service business has remained trivial compared with the earnings from home sales. Country Garden, a developer known for its exceptional service, reaped 777 million yuan from its property management business in 2013, a 31 percent growth from 2012. But it sold just 58.4 billion yuan worth of homes in the first half of this year.

"The problem with holding and managing property is you have to endure a tough time, probably five to six years, during which period you can't cash out, before the cash inflow from rents becomes meaningful," said Chang from Fitch Ratings, adding that "properties that are worth holding on to are also becoming rare."

Given the less mature phase in the mainland market, there is still a long road ahead before the mainland can produce developers holding assets as strong as the assets of HK investment property giants, like Sun Hung Kai Property, which mainly relies on proprietary properties as recurring revenue, he said.

Chang said that only three developers from the mainland have established a solid base in property-holding model: CR Land, Wanda and Franshion Properties (China) Ltd.

Companies like Evergrande, Wanda and Greenland Group have been at the forefront of the second diversification model.

However, most of these companies have developed businesses that are somehow related to property. For example, finance, a sector that has attracted many developers, has its natural proximity with property: developers deal with banks on a daily basis, and their clients－homebuyers－have huge financing demands.

"Evergrande is a standalone example. It could tap into the consumer goods market because it already had brand recognition on a mass basis. Most developers do not have that kind of recognition and hence it's difficult for them to do the same," Lin from China Real Estate Information Corp said.

Zhang Hongwei, head of the real estate consulting firm ToSpur's research branch, said behind Evergrande's multiple businesses, such as agriculture, is its quest for land. By building production bases, it can build a relationship with local governments and also ease the process of land acquisitions.

Though most of these efforts are yet to fructify, industry experts feel that such efforts would definitely pave the way for future success in a market that is becoming increasingly characterized by differentiation.

"The mainstream practice is still that of high turnover and fast fund recovery. Developers are still at the early stage of learning in terms of diversification. But the efforts are important because if you don't explore now, you might loose the advantage five years later," Chang from Fitch Ratings said.