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China Property

Yuzhou Properties plots safe course in choosing a few cities with strong housing demand

"We want to stay in a few selected regions so as to maximize our profits. Such a strategy will also help us reduce operational risks and cut financial cost"

PUBLISHED : Wednesday, 14 January, 2015, 3:00am
UPDATED : Wednesday, 14 January, 2015, 8:07am

 

In his seventh year as the chief financial officer of Yuzhou Properties, a Xiamen-based developer listed in Hong Kong, Chiu Yu-kang is not in a hurry to grow it bigger, even though his firm had only contracted sales of 12 billion yuan in 2014, with numbers for the biggest players nearly 20 times larger.

He prefers a safe voyage, piling into only a selected few cities with strong housing demand, with financial and operational risks under control.

Q: Can you talk about how Yuzhou Properties will benefit from China’s expansion of its trial on free trade zones?

A: The government has picked Fujian, Guangdong and Tianjin (to expand a trial initiated in Shanghai). Fujian province mainly wants to attract investment from and trade with Taiwan. The cities of Fuzhou and Xiamen are better developed and will probably benefit more.

The free trade zone test in Fujian will probably include Xiamen, Pingtan island and Fuzhou, covering a total of 118 square kilometres.

Q: Yuzhou Properties have many projects in Xiamen, but only a few in Fuzhou and Quanzhou, right?

A: We have land reserves of 2 million square metres in Xiamen, worth about 30 billion yuan at the current price. In Quanzhou, our land bank is about 1.3 million square metres, worth 1 billion yuan due to low land prices. In Fuzhou, we have between 400,000 square metres to 500,000 square metres.

We will focus our development on these cities and they will all benefit from the free trade zone trials.

Q: I noticed that you bought an expensive land plot in Nanjing. (Jiangsu province)

A: Nanjing has been developing fast in the past few years and it enjoys a rapid increase in the number of permanent residents. Many university students stay in the city after graduation, which means strong increase in housing demand.

So in the last two years, home prices in Nanjing have kept rising with transactions recovering now. Nanjing is close to Hefei (of Anhui province), and our Hefei team can manage projects at both cities. We often fly to Nanjing first, and then take a 1.5-hour ride to Hefei, as Hefei only has two or three flights per week.

But Hefei accounts for 30 per cent of our sales revenues. That shows our team there is very strong. Although the land cost (for the plot in Nanjing) is high at 16,657 yuan per square metre, the neighbouring projects are selling at around 28,000 yuan per square metre now.

Q: What is the proportion of your sales in Xiamen?

A: Xiamen contributed almost 60 per cent (of total sales in 2014). We are the biggest developer, in terms of floor space sold, in Xiamen for the past five years.

Q: It seems the cities Yuzhou Properties is in performed pretty well during last year’s market downturn. But we see the government’s anti-corruption crackdown spreading to more cities including Nanjing. Are you concerned?

A: As long as market demand is there, changes of top local officials won’t affect business very much. The only way to avoid risks is to stay away from those officials. So we mainly look at which cities still enjoy big demand and where projects can sell well and bring profits.

Currently, the ideal cities to us are still those situated at the southeastern part of the country such as Xiamen, Fuzhou, Nanjing and Hefei. We are less interested in northern or western inland cities such as Tianjin, Chengdu and Chongqing.

We are more interested cities located in Fujian, Jiangsu and Zhejiang provinces. We will only consider other regions after five or even 10 years. So far, the southeastern provinces are big enough to bring us sales revenues of several tens of billions yuan. If we can achieve 10 billion yuan of sales in Fujian, plus another 10 billion yuan in Hefei, Shanghai and Nanjing combined, that will easily hit 20 billion yuan. If we want to grow bigger, then we can consider cities in Zhejiang province.

Q: So Yuzhou Properties is very cautious in geographical expansion?

A: Yes, fast expansion will sacrifice sustainable development, as teams will become overburdened and financial costs will skyrocket.

If you look at the stock prices, you’ll know that investors will not buy into growth with no profit. Even profit is high, share prices will be under pressure from heavy debts.

Strong sales are a plus to property stocks, but sales alone will not bring much value. You can see that a few developers’ sales revenues have exceeded 100 billion yuan, but their market cap has fallen.

Q: Is Yuzhou Properties now more focused on profit margin? Most mainland developers suffered weakening profitability in interim reports, except for a few.

A: Yes, that’s why we want to stay in a few selected regions so as to maximize our profits. Such a strategy will also help us reduce operational risks and cut financial cost. It will be a heavy blow if a company buys a wrong piece of land in its blind expansion nationwide. That will eat up the company’s profits earned in one or two years, as a parcel can easily cost 1 billion yuan or more.

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