Real Estate

Central China Real Estate's Hu says 3rd, 4th tier cities not in a housing bubble

Key Points
  • China Entrepreneur Club meeting in Zhengzhou
  • Annual gathering looks across economic, social and company development in China

Hong Kong-listed Central China Real Estate (CCRE), the biggest developer in Henan province, may be facing tough times. However, its founder and chairman Hu Baosen denies that oversupply in the property market in China's third and fourth tier cities is one of the reasons.

"I don't think there's a bubble," the property tycoon tells CNBC's Martin Soong from the sidelines of China Entrepreneur Club annual summit, held in Hu's homeground, Zhengzhou, this year.

Pedestrians cross a road in front of residential buildings in Beijing, China, on Friday, Nov. 25, 2016.
Qilai Shen | Bloomberg | Getty Images

In its latest earnings report released last month, CCRE posted just 403 million yuan (US$58.4 million) of net profit for 2016, roughly half of its profit in the previous year. However, Hu said market demand is not to be blamed.

According to Hu, a key indicator used to judge overheating in the market is the rise of property inventory. "Right now, it takes about 8 to 10 months to clear up inventory in Zhengzhou. If that climbs to 16 or 18 months, then there's danger, but right now it hasn't, so no bubble."

Hu admits that there are properties by other developers that are not selling well in third and fourth tier cities in Henan province, but that, he said, is not due to lack of demand in the market.

Hu Baosen, chairman of Central China Real Estate

"In the second half of last year, a number of our property projects were sold out on the day when they were launched," he said. There were others that were sold out 70-to 80-percent on the first day.

"It's true that rising inventory in third or fourth tier cities is partly due to supply growing faster than demand," he said.

However, another big reason is some developers are unable to provide products that meet the market's needs. "For those properties, even if they are out in the market for two years, they would be hard to sell. I think that has more to do with the product than the market."

Hu said part of the reason why CCRE's profit took a hit in the last couple of years was because of the company's venture into areas outside its core business of residential property development, investing in sectors such as hotel, tourism and agriculture.

To maintain profitability Hu said CCRE needs to manage the pace of its investment into these sectors. "We can take a certain portion of our profit to experiment in these ventures, but the investment should not be more than 20 percent of our profit, otherwise our
bottomline will suffer," he explained.

Hu also told CNBC that CCRE continues to add to its land bank. "In fact, we plan to buy more. In the first half of this year, we made a number of investments in land purchases," he said. While CCRE will continue to focus on Henan, it did secure a piece of land in Sanya through an auction by paying 2.6 billion yuan, just a few days ago.

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