Real Estate

Property developer China Vanke core profit hits record but misses forecasts

Two citizens pass by Vanke's buildings near the explosion site happened on August 12 at Tianjin Binhai New Area which brought at least 165 people including workers, citizens and firefighters into death on February 4, 2016 in Tianjin, China.
ChinaFotoPress | ChinaFotoPress | Getty Images

China Vanke, the country's largest property developer, said its core profit rose 13.1 percent in 2015 to a new record, slightly below forecasts, helped by a resurgence in China property sales that has left some government officials concerned a real estate bubble may be forming.

In a statement, the developer said its core profit, excluding items such as sales of non-current assets, grew to a record of 17.6 billion yuan ($2.7 billion) last year from 15.6 billion yuan in 2014. That was slightly below an average forecast of 18 billion yuan in a poll of 15 analysts by Thomson Reuters SmartEstimate.

Net profit attributable to shareholders climbed 15.1 percent to 18.1 billion yuan.

"In the short term, the market segmentation will continue. Most areas of China are still under great de-stocking pressure," chairman Wang Shi said in the statement.

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"In view of a substantial rise in trading volume in 2015, the main cities rank top in terms of de-stocking and some of them are even under pressure of insufficient stock and rise of housing price," Wang said. "The group will continue active selling and smartly respond to market changes."

Senior Chinese officials raised alarm over the country's overheated housing market during an annual parliament meeting in Beijing last week, throwing the spotlight onto a potential bubble forming in parts of the property market.

Rattled by a rapid rise in home prices in cities like Shenzhen and Shanghai, land minister Jiang Daming said China will announce measures to boost land supply.

Standard & Poor's warned last week that competition for land in top-tier cities could intensify, eroding developers' profit margins. The agency warned that developers will face significant credit risk once the government tapers price growth in these cities.

China's property market overheats in tier 1 cities, stagnates in lower tiers

Chinese real estate developers are acquiring more land outside the primary market - purchasing from other companies and through redevelopment - as escalating land costs crimp profit margins.

Vanke has already acquired 28 plots of land in January and February this year - 5 in China's tier-one cities - mostly through joint ventures with local developers in order to lower competition and bidding prices.

"All of the tier-one city land acquired by Vanke in January and February cost less than half of the expected selling prices," Credit Suisse analyst Jinsong Du said in a report last week.

"We expect this to make Vanke's return-on-equity more sustainable than most peers," Du said, adding he expected the upgraded land bank would lead to higher revenue in 2017.

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