In this round of real estate adjustment, the performance of development-oriented real estate developers and holding-oriented real estate developers has begun to diverge. Many companies in the former category have defaulted, and profits have not yet seen the dawn of recovery, while the latter has basically achieved a zero default rate, and profits have also shown a trend of stabilization. This is related to the financing characteristics of property assets, cash flow, and liquidity of holding-oriented real estate developers.

The 2024 semi-annual report has concluded, and real estate companies have continued their previous adjustment trend but have begun to show differentiation. Compared with the loss and profit decline of more than 30% for real estate leaders mainly focused on development, holding-oriented real estate developers represented by China Resources Land, Longfor Group, and Seazen Holdings saw most of their profit decline controlled within 30% in the first half of the year, with an average decline far better than the industry average.

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Unlike those mainly focused on pure real estate development, holding-oriented real estate developers adopt a business model that balances the construction and operation of shopping centers with residential development and sales. Due to the ease of making money in residential real estate and the heavy asset model of holding-oriented real estate, the real estate market is dominated by residential companies, while holding-oriented real estate is a minority. Listed companies on the Hong Kong and A-share markets are mainly represented by Seazen Holdings, China Resources Land, Longfor Group, Joy City Property, and Hopson Development, with Wanda Commercial being a non-listed company. Among them, there are 2 state-owned enterprises and 4 private enterprises. The leading holding-oriented real estate companies with total assets exceeding 300 billion yuan are mainly Seazen Holdings, China Resources Land, and Longfor Group. In addition to residential development business income, the important income for the three companies comes from the rental income of shopping centers.

Holding-oriented real estate developers have shown good debt repayment ability in this round of real estate adjustments, maintaining a zero default record. According to statistics from "Securities Market Weekly," since the real estate market began to regulate in the second half of 2020, more than 40 of the top 100 listed companies in 2021 have experienced varying degrees of default, but no holding-oriented real estate developers have defaulted.

Overall, holding-oriented real estate has leveraged the long-term nature of its shopping center operational property loans to match the debt pressure brought by the continuously slowing sales. Coupled with the good cash flow of high-quality shopping centers and the relatively low difficulty in selling in the public market or privately, they have been able to resist the impact of the real estate market adjustment cycle to a certain extent.

Performance Differentiation

Looking at the mid-term performance, there has been a certain degree of differentiation between the leaders of holding-oriented real estate developers and residential developers.

On August 23, Longfor Group released its mid-term performance announcement, with its first-half revenue and net profit attributable to the parent company being 46.855 billion yuan and 5.866 billion yuan, respectively, down 24.48% and 27.2% year-on-year.

Subsequently, China Resources Group also released its mid-term performance report. In the first half of the year, the company's revenue and net profit attributable to the parent company were 79.127 billion yuan and 10.253 billion yuan, respectively, up 8.4% and down 25.37% year-on-year. The revenue increased slightly, but the profit decline was controlled within 30%.

Finally, at the end of August, Seazen Holdings announced its revenue and net profit of 33.904 billion yuan and 41.768 billion yuan, respectively, down 18.83% and 42.16% year-on-year.The adjustment range for residential-type leading companies is even larger. In terms of revenue, Vanke, Poly Development, and China Overseas Development rank in the top three, among which Vanke's semi-annual report shows a loss, Poly Development's profit decreases by more than 30%, and China Overseas Development also decreases by over 23%.

The average profit decline of the three companies with total assets exceeding 300 billion yuan does not exceed 30%, which is also better than the average of the entire real estate industry. According to the monitoring data of the China Index Academy, in the first half of the year, the average operating income of 105 (excluding defaulting real estate companies) A-share and H-share listed real estate companies was 11.591 billion yuan, a year-on-year decrease of 13.00%; the average net profit was 145 million yuan, a year-on-year decrease of 82.05%.

Xingye Securities statistics show that by the end of the first half of the year, the asset-liability ratio of listed companies in the real estate sector, excluding advance receivables, was 68.5%, a decrease of 0.7 percentage points from the end of 2023; the net debt ratio was 76.3%, an increase of 7.3 percentage points from the end of 2023; the cash-to-short-term debt ratio was 0.95, and in 2023 it was 1.19.

The real estate industry has continued the characteristic of reducing leverage over time in the past three years. However, the debt of holding-type real estate companies is at a relatively low level. Against the backdrop of the industry's downturn, most real estate companies have chosen to operate steadily, with the overall asset-liability ratio in the first half of 2024 being 76.8%, a decrease of 0.26 percentage points from the end of 2023. Among them, the asset-liability ratios of China Resources Land, Longfor Group, and Xincheng Holdings are 67.51%, 65.12%, and 76.06%, respectively, all lower than the industry average.

At present, the net debt indicators of China Resources Land and Longfor Group are continuously optimized, and the net debt ratios are also at relatively low levels; although Xincheng Holdings has a higher asset-liability ratio, the proportion of interest-bearing debt to total assets is also at a lower level, and the long-term bank loans are increasing. The debt indicators of the three holding-type real estate companies show a trend of stabilization.

Longer debt duration can better cope with sales adjustments.

From 2021 to 2023, the sales volume of commercial housing in China was 18.19 trillion yuan, 13.33 trillion yuan, and 11.66 trillion yuan, respectively. After setting a historical high in 2021, the national commercial housing sales volume has been declining year by year. In the first half of 2024, the commercial housing sales volume decreased by 25%, continuing the adjustment trend, which has brought certain challenges to the repair of the balance sheets of real estate companies.

When it comes to individual companies, the impact is greater. In this round of real estate adjustments, many real estate companies have defaulted, and an important reason is the mismatch between sales cash flow and debt, which is particularly evident in pure development-type residential properties. Generally speaking, development loans are the main financing mode for real estate companies, and the loan duration generally does not exceed 3 years. When real estate sales are affected, the sales cycle is prolonged, and the medium and long-term loans within 3 years before are not enough to support the project until settlement. Once banks tighten credit or bonds mature for repayment, pure development-type real estate companies are prone to loan defaults or debt defaults, especially when public bonds involve many investors, it is difficult to realize the extension or delay repayment in advance, which is also the main reason for the continuous default of public market bonds of real estate companies in this round.

For holding-type real estate companies, in addition to the high proportion of inventory in their assets, another part with a high proportion is investment properties such as shopping centers. Although the former will bear pressure with the adjustment of the real estate industry, holding-type real estate companies can avoid the problem of too short development loan duration through the method of operational property loans, and operational property loans have become an important means of financing for holding-type real estate companies.

This is more evident in Longfor Group. In 2021, when the real estate industry fell into difficulties, Longfor Group also faced pressure, but later overcame the risk of debt default, precisely by relying on its high-quality properties to continuously extend the loan term. Public information shows that after the 2008 financial crisis, Longfor Group extended the average loan term, from 1.58 years in 2009 to 6.59 years in 2021, and to the latest semi-annual report, it is 9.19 years. The extension of the term provides Longfor Group with room to cope with short-term sales adjustments.As of the first half of 2024, Longfor Group's net debt ratio (net debt divided by net equity) was 56.7%, with cash on hand amounting to 50.06 billion yuan. The total comprehensive borrowings stood at 187.42 billion yuan, with an average financing cost of 4.16% and an average contract borrowing term of 9.19 years.

Industry leader China Resources Land also adopted similar financing methods. As of the end of June 2024, China Resources Land obtained a financing quota of 97.8 billion yuan through asset mortgages, with a loan balance of 61.5 billion yuan under this quota, and the mortgage terms for the assets ranged from 1.2 to 25 years. China Resources Land's comprehensive borrowings were approximately 251.13 billion yuan, with cash and bank balances amounting to about 118.33 billion yuan. The net interest-bearing debt divided by fixed equity (including minority shareholders) was 33.6%, which, although increased by 1 percentage point compared to the end of 2023, is still a very low level in the entire real estate industry.

Although the loan terms were not disclosed, shopping center mortgages are also an important financing method for Future Land Holdings. On September 2nd, during the semi-annual report investor communication meeting, Guan Youdong, Senior Vice President and Financial Officer of Future Land Holdings, introduced that as of the end of June 2024, the company had mortgaged investment properties worth 94.1 billion yuan, with nearly 30 billion yuan of investment properties still unencumbered to meet future financing needs. At the end of the period, Future Land Holdings' total interest-bearing debt was 55.9 billion yuan, including about 7.2 billion yuan in corporate credit bonds (corporate bonds and medium-term notes), about 8.2 billion yuan in foreign dollar bonds, about 33.6 billion yuan in bank loans, about 2.7 billion yuan in loans from non-bank financial institutions, and about 4.2 billion yuan in other interest-bearing debts.

It is reported that from January to August, Future Land Holdings added 12 billion yuan in financing obtained by mortgaging Wu Yue Plaza. In 2023, Future Land Holdings obtained about 14 billion yuan in operating property loans and other financing through Wu Yue Plaza as collateral. The financing in the first eight months is not far from the total amount in 2023.

In early January 2024, the central bank and the Financial Regulatory总局 issued the "Notice on Doing a Good Job in the Management of Operating Property Loans," which further clarified the direction for property operating loans. Previously, the mortgage ratio in actual operations of property operating loans did not exceed 50%-60%, but this regulation stipulates a maximum of 70%; previously, property operating loans were only used to repay loans used for the construction of the operating property or for upgrading and transformation, and the new regulations have relaxed the loan usage. Before the end of 2024, they can be used to repay the company and its group's controlling company's existing real estate-related loans and public market bonds; in addition, the new regulations also stipulate that the term of operating property loans generally does not exceed 10 years, with a maximum of not more than 15 years, and the loan maturity date should be at least 5 years earlier than the expiration date of the property rights certificate of the loan-bearing property.

Huatai Securities' fixed income team believes that the term of operating property loans generally does not exceed 10 years, with a maximum of not more than 15 years, and the general loan term is 5-8 years. Compared with real estate development loans and public bonds, operating property loans have a longer term, larger loan amounts, and fewer restrictions on the use of funds.

Shopping centers contribute cash flow and profits.

Shopping centers can not only obtain financing through operating loan mortgages but also bring good cash flow. In the past three and a half years, with the continuous opening of new shopping centers, rising occupancy rates, and increasing rental income, the commercial income of the above three property holders has maintained annual growth.

From 2021 to 2023, China Resources Land's income from shopping centers was 13.9 billion yuan, 13.76 billion yuan, and 17.85 billion yuan, respectively. Longfor Group's rental income excluding tax was 10.41 billion yuan, 11.88 billion yuan, and 12.94 billion yuan, respectively. Future Land Holdings' income was 7.969 billion yuan, 9.224 billion yuan, and 10.631 billion yuan, respectively.

In the first half of 2024, China Resources Land's related income from shopping centers was 9.48 billion yuan, a year-on-year increase of 9.7%; Longfor Group's rental income excluding tax was 6.66 billion yuan, a year-on-year increase of about 5%; Future Land Holdings' total commercial operation income (including tax rental income) was 6.212 billion yuan, a year-on-year increase of nearly 20%.Since the COVID-19 pandemic, due to changes in consumer habits, the growth rate of physical commerce has not been fast, and there have been many vacant street shops, but the impact on shopping centers has not been significant.

According to the semi-annual report of China Resources Land, its 82 operating shopping centers achieved a retail sales of 91.62 billion yuan, a year-on-year increase of 21.9%, with 69 shopping centers ranking in the top three in local retail sales, and the occupancy rate of 6 newly opened shopping centers reached 97.8%. According to the semi-annual report, the occupancy rates of Longfor Group and Xincheng Holdings' shopping centers were 96% and 97.24%, respectively, both maintaining a high occupancy rate.

Rental income not only provides cash flow, but also, the gross profit margin of commercial leasing business is mostly above 75%, and it brings high profits after deducting related costs and expenses.

Longfor Group also stated in the semi-annual report that the group's core net profit was 4.75 billion yuan, of which, the revenue from operations (mainly rental income) and service business was 13.1 billion yuan, a year-on-year increase of 7.6%, and the profit share further increased to more than 80%.

Xincheng Holdings is also the same. Since 2021, the continuous commercial income has exceeded the current interest expenditure, and this proportion increased to 2.71 times in the first half of 2024. The company's chairman, Wang Xiaosong, stated at the shareholders' meeting at the end of May 2024 that the company's commercial management income for the year is about 12.5 billion yuan, with a gross profit margin of 70%, and there will also be tens of billions of yuan in cash flow as a supplement, and the net profit should be between 4 and 5 billion yuan.

The asset liquidity is relatively strong

It is precisely because of the relatively good cash flow of shopping centers that property owners can obtain funds in the public market by selling or transferring when encountering liquidity risks, which has been a common occurrence in the past two years.

Since some real estate companies have defaulted, many real estate companies have found it difficult to issue bonds in the domestic and foreign public markets, and financing channels have narrowed. Taking US dollar bonds as an example, real estate companies issued $60.2 billion in bonds at the peak in 2020, but only $9.18 billion in 2023.

However, property owners with high-quality properties can still find new financing channels, and REITs are the emerging financing methods in the past two years. In recent years, regulatory authorities have vigorously promoted the development of REITs. In April 2023, the China Securities Regulatory Commission issued a document on promoting the regular issuance of REITs, stating that priority support should be given to commercial network projects such as department stores, shopping centers, and farmers' markets, and community commercial projects that ensure basic livelihoods should issue infrastructure REITs. In this regard, China Resources Land has also made some attempts.

In mid-March 2024, the first batch of consumer public REITs - Huaxia Jinmao Commercial REIT and Jia Wu Shi Mei Consumer REIT were listed on the Shanghai Stock Exchange, and Huaxia China Resources Commercial REIT was listed on the Shenzhen Stock Exchange. Among them, Huaxia China Resources Commercial REIT has the largest issuance scale, reaching 6.902 billion yuan.The China Resources Commercial REIT that was recently listed has its inaugural underlying asset as the Qingdao MixC. This shopping center is one of the largest in terms of construction area and the number of brands in Qingdao, and it is also a flagship commercial project in the core area under China Resources Land, boasting nearly 300,000 square meters of high-quality commercial space with an occupancy rate maintained above 98%.

Subsequently, the issuance of consumer REITs has entered a fast track, with a total of 7 issued to date. These products are favored by investors due to their stable returns. Taking the China AMC-Joy City Commercial REIT, which was just concluded at the end of August, as an example, the fund intended to raise 3.323 billion yuan, but ultimately received 4.812 billion yuan in subscriptions, which is 1.44 times the intended amount.

In addition, real estate represented by shopping centers, characterized by stable rental income and long-term sustainability, is gaining favor with insurance funds. This is also the reason why non-listed property owners like Wanda Commercial can obtain funds through monetization.

Since the industry adjustment in the second half of 2020, Ping An Life has been a leader in insurance capital investment in real estate. In 2021, it acquired a portion of the equity in six Raffles City asset packages under CapitaLand Group for 33 billion yuan, and in 2022, it took over the Ocean Center project in Beijing under the Far Ocean Group for 5.015 billion yuan. According to information on the website of the China Insurance行业协会, as of now, Ping An Life has invested a total of 54.951 billion yuan in five major real estate projects.

At the beginning of 2024, New China Life Insurance initiated a ten-billion-yuan fund investment in real estate, signing a limited partnership agreement with CICC Capital to jointly establish a fund with a scale of ten billion yuan. New China Life Insurance plans to subscribe for 99.99 billion yuan, while CICC Capital, as the general partner, subscribes for one million yuan. Tianyancha information shows that on April 12, Dalian Wanda Commercial, the original sole shareholder of Beijing Wanda Plaza, withdrew, and the joint venture established by New China Life Insurance and CICC Capital holds 99.99% of the shares.

Dalian Wanda Commercial is not the only buyer of assets. In May 2023, Dajia Life took over three projects from Dalian Wanda Commercial Management, namely Shanghai Songjiang Wanda Plaza, Jiangmen Taishan Wanda Plaza, and Qinghai Xining Wanda Plaza.