Apr 22, 2019 07:31 PM

In Depth: Nothing Makes Money Like Real Estate. For China’s Developers, That’s The Problem

A Country Garden real estate project in Guangzhou, pictured on Feb. 22. Photo: IC
A Country Garden real estate project in Guangzhou, pictured on Feb. 22. Photo: IC

A soccer team, hotels, theme parks, movie studios, agribusiness, dairies, high-end spring water, railway transport, ski resorts, health care, elderly care, education — and more recently — robotics and electric cars.

These are just some of the businesses that China’s biggest property developers have gotten into over the last decade during their periodic hunts for lucrative businesses to propel sales should the real estate market ever falter.

That time might have arrived. Although total floor space sold across the country hit a record 1.72 billion square meters (18.5 billion square feet) and contract sales reached an all-time high of 15 trillion yuan ($2.24 trillion) in 2018, according to National Bureau of Statistics, some industry observers have suggested that the market has reached its zenith. Analysts from China International Capital Corp. Ltd., S&P Global Ratings Inc. and CGS-CIMB Securities have predicted that property sales growth will slow between 5% and 10% this year.

Facing dimming prospects for their core business this year, China’s four largest property developers to one degree or another have again decided to move into businesses outside of real estate.

“These top-tier developers can’t afford to rest on their laurels,” said one property executive who asked not to be named. “They have to trumpet diversification if they want to maintain their multibillion yuan sales.”

Concern about the industry’s growth outlook could be detected in their recent earnings conferences. China Evergrande Group and Sunac China Holdings Ltd. have adopted a more reserved attitude, but China Vanke Co. Ltd. and Country Garden Holdings Co. Ltd. have chosen to move forward with their diversification plans.

As of March, 70% of China’s top developers had embarked on some sort of diversification strategy, according to Zhang Yan, president of E-House (China) Enterprise Holdings Ltd., a real estate agency and consultancy.

However, even if Chinese developers ignore their past experience with diversification, which has been checkered, they still have to confront one troubling truth: Regardless of how high they aim, there are few businesses that will ever make them as much money as real estate.

Grand ambitions

As developers have diversified over the years, most have ventured into property management, commercial real estate development, industrial parks, rental apartments, health care, elderly care, financial services and education, Zhang said at an industry forum in late March, citing industry data.


Evergrande, China’s third-largest developer by sales, was one of the earliest to begin testing the waters outside of real estate.

In 2010, it spent 100 million yuan to take over Guangzhou Football Club, which would go on to become champion of the Chinese Super League seven times. It then entered the food and beverage industry in 2013, launching a high-end spring water brand that extracted water from the Changbai Mountains in northeastern China. The company also got into hotels, theme parks and movie studios, among other businesses.

One of its most ambitious moves has been into new-energy cars, which it doubled down on this year. In January, its subsidiary Evergrande Health Industry Group Ltd. announced that would pay $930 million for a 51% stake in National Electric Vehicle Sweden AB — an automaker that had been owned by Tianjin’s municipal government, wireless carrier China Unicom and the State Research Information Technology, a think tank.

The same month, Evergrande Health announced it had made a 1.06 billion yuan investment to take a majority stake in car-battery maker Shanghai CENAT New Energy Co. Ltd. Such moves will complement Evergrande’s vision to produce as many as 1 million new-energy vehicles within the next three years.

One might wonder why the new-energy car industry holds such an allure for one of China’s largest real estate developers. Evergrande founder Xu Jiayin has said that China’s electric vehicle market, the world’s largest, will be worth hundreds of billions of yuan over the next five to 10 years.

Evergrande Health already owns 32% of Faraday Future, an electric vehicle startup launched by blacklisted entrepreneur Jia Yueting, in a deal that seized media attention for much of last year.

Vanke, China’s second-largest real estate developer, has expanded into railway transport, long-term rental apartments, ski resorts, elderly care and education, among others.

In 2017, it acquired Singapore-based Asia’s biggest warehouse operator, Global Logistic Properties Inc., as it aspires to become the world’s largest logistics property developer.

According to Deng Haozhi, a real estate industry expert based in the southern metropolis of Guangzhou, the government’s curbs on speculation are another reason why developers are looking elsewhere to boost revenue.

Take China’s top developer Country Garden. It envisages an empire of real estate, agriculture and robotics.

Country Garden billionaire Chairman Yang Guoqiang hopes to tap robots for building houses, as he announced in August the construction of a 10-square-kilometer (3.8 square miles) robotics industrial park in Foshan, South China’s Guangdong province, where the company’s headquarters is located. He then said Country Garden aims to spend no less than 80 billion yuan on robotics over the next five years.

Drops in a bucket

The problem with past diversification moves, at least for Evergrande, isn’t so much that they were unsuccessful — though some were — but that they simply couldn’t move the needle for a company whose core business generates more than half a trillion yuan in annual sales.

“Evergrande was the first developer to dabble in agribusiness, dairy and mineral water … but we have realized that a multi-billion yuan a year market is just a drop in the bucket compared with our property business, which has sales of 600 billion yuan a year,” Xu said.

In 2016, the company offloaded its agribusiness, dairy and spring water divisions, none of which were profitable.

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Mainland real estate developers’ bets haven’t always paid off

These past failures beg the question of whether developers have any business getting into other businesses.

“Developers ask themselves: ‘am I losing out if I don’t follow our competitors in diversification?’ But then they realize such fields involve a completely different set of know-how, and isn’t as easy as expected,” said Ding Zhuyu, CEO of E-House.

The situation has left them in a quandary. “All developers are on the lookout for new industries that are able to generate as much income as real estate, but from what experience tells us, it seems like an impossible mission,” Vanke Chairman Yu Liang said at an internal meeting late last year.

There are a limited number of economies that can support the emergence of

hundred-billion-yuan enterprises, Yu wrote in a letter to the shareholders in its 2018 financial report. “In those economies, there are only a few sectors that are yet to be saturated and still have room for new entries,” he wrote. “And we need to build at least six hundred-billion-yuan business operations to replicate Vanke’s present magnitude.”

Vanke’s contract sales reached a record 606.9 billion yuan last year, up 14.5% from 2017.

In his letter to shareholders, Yu summed up the developers’ predicament in a way that suggested they may have no choice but to diversify. If Vanke ventures into new businesses without the necessary know-how, it’s going to run into problems, he wrote. But it never diversifies, it will never learn what it needs to make diversification a success.

As China’s property market is expected to generate more than 10 trillion yuan in contract sales a year over the next 10 years, industry watchers have said real estate will remain the focal point for developers.

“The norm in the market is this: you can diversify as much as you want to, but if the property market picks up again, every resource will be directed back to the core business,” said one industry source. “After all, where else can you generate so much cash?”

Contact reporter Jason Tan (

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