Mainland property developers feel heat from rail builders
China Railway and CRCC turn heat up on the mainland's real estate sector with their ability to build integrated transport hubs
There are two new kids on the property block on the mainland, namely the nation's big railway builders, China Railway Group and China Railway Construction Corporation (CRCC), which are fast becoming major property developers that are likely to overtake leading mainland and Hong Kong players in the near future.
On a recent trip to Xian, I saw several blocks of flats built and owned by China Railway Group, evidence of a rapidly growing real estate business that generated revenue for the group of 17.14 billion yuan (HK$21.3 billion) in 2011, an increase of 43.4 per cent from the previous year's property contribution.
CRCC's property revenue for 2011 rose by an even more spectacular rate of 160.7 per cent to 13.54 billion yuan.
At the end of last year, CRCC had property projects under way in 30 cities, including Beijing, with land area for construction of 7.24 million square metres and a planned gross floor area of 3.15 million square metres, according to the Hong Kong and Shanghai-listed firm's annual report.
Yet property is a tiny fraction of these two state-controlled companies, which together build most of the country's railways. In 2011, property constituted only 3.9 per cent of China Railway's turnover of 442.22 billion yuan, and 3 per cent of CRCC's turnover of 457.37 billion yuan.
Their property sales still lag behind those of the biggest developers in the mainland and Hong Kong. The turnover of the largest Hong Kong-listed property firm, Sun Hung Kai Properties, was HK$68.4 billion in 2011, while that of the mainland's top developer, Vanke, was 64 billion yuan.
Nonetheless, the property turnover of China Railway and CRCC, at 17.14 billion yuan and 13.54 billion yuan respectively, already surpassed that of many leading Hong Kong-listed property firms. For example, the revenue of Swire Properties was HK$9.58 billion, while that of Shui On Land was 8.48 billion yuan. Hang Lung Properties achieved HK$5.16 billion in revenue, and Henderson Land Development's was HK$9.48 billion.
Moreover, with these two railway companies commanding annual revenues of more than 400 billion yuan each, their vast financial resources dwarf Hong Kong-listed property firms, giving them a powerful advantage. From 2012 to 2014, CRCC would spend 69.6 billion yuan on property projects, said a company bond prospectus.
Dollar figures aside, the two railway companies possess a competitive edge that sets a different paradigm from traditional property business models, namely the combination of transport infrastructure with real estate.
Many Hong Kong and mainland property developers try to locate their projects near metro rail stations because readily accessible transport links make their properties more attractive to prospective buyers. However, few (with the notable exception of the MTR Corporation) own the transport infrastructure.
In contrast, the mainland's big railway builders are able to build and own both the transport infrastructure and associated property developments.
China Railway has a subsidiary, China Railway & Airport Construction Group, which builds airports. Thus, China Railway is able to build integrated transport hubs that combine airports with high-speed-train stations and metro rail stations.
By building integrated transport hubs that also include residential property, hotels, restaurants and shops, China Railway and CRCC are able to create lucrative multi-use complexes guaranteed to attract high volumes of human traffic.
One example of an integrated transport hub is the 26 square kilometre Hongqiao Comprehensive Transportation Hub in Shanghai, which includes an airport, high-speed-railway lines and metro railway. The hub is located on 3.7 square kilometres of land available for development, one square kilometre of which was sold to property firms including Shenzhen-listed Vanke and Shui On Land.
Through land sales, the hub has recovered its 57.3 billion yuan investment, according to Liu Wujun, chief technical officer of Shanghai Airport Group. The Hong Kong Airport Authority and Shanghai Airport Group are the major developers of the hub.
The mainland's 12th five-year plan for 2011-15 calls for the construction of more integrated transport hubs throughout the nation.
China Railway and CRCC are building these hubs linked by high-speed railway throughout the country. This gives them a competitive advantage over mainstream developers.
Imagine the convenience of living in a flat near the high-speed-train station in Tianjin and taking a 45-minute high-speed-train journey to work in Beijing.
This model of "property plus transport" is similar to the MTR Corp's model in Hong Kong of earning revenue from property projects near MTR stations. Such a model offers a viable way to resolve the challenge of funding the mainland's incredibly expensive high-speed-railway network.
Beijing is committed to spending about 600 billion yuan annually over the next few years to build high-speed-rail links, but the Ministry of Railways is more than 2 trillion yuan in debt with a gearing ratio above 60 per cent. Having property projects around high-speed-train and metro railway stations is a feasible method to earn substantial revenue to finance their construction.
So, in just a few years, Hong Kong and mainland developers may find themselves overtaken by the new kids on the property block.