[2014] Vanke, the Industry Leader, Is a Little Rattled This Year

Top 15 Year in Review: Vanke

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What Is Vanke Worried About?

In 2014 Greenland overtook Vanke as the industry's No. 1, with sales of 240.8 billion yuan against Vanke's 215.1 billion. Vanke president Yu Liang once said, "Vanke has been number one for a very long time. If someone wants to take that off our hands, that's really fine." He may not have meant it. What has really rattled Vanke is how the property market changed this year.

China's economy in 2014 was officially described as the "new normal." It is a political term, but it fits the 2014 property industry just as well. In 2014 Chinese developers bought 293.76 million square meters of land, down 14.5% year on year. In the first 11 months, they sold just over 1 billion square meters of commercial housing, down 8.2%, for 6.4481 trillion yuan, down 7.8% on the same period last year. The days of wild growth, when you could make a fortune just by acquiring land and building on it, are over.

Property-market policy also changed sharply in 2014. The government began to step back from administrative intervention. The purchase restrictions rolled out nationwide in 2011, for example, are now enforced in only 5 cities. While loosening those restrictions, the government also introduced measures to prop up the market, such as the central bank's first interest rate cut, which lowered rates on mortgages and other long-term loans by 0.4 percentage points.

The property market is under enormous pressure. Housing is no longer as scarce as it was, and Ma Jiajia's line that "the post-90s generation won't buy homes" seemed to rattle Vanke even more. Yet demand from the post-90s generation has not really arrived: the average Chinese homebuyer is 27. This is what truly worries Vanke. It does not know where its future customers will come from, a question developers never used to have to ask.

Policy and the market are changing, and so are consumers' needs. All of this may force changes to the business model. What worries Vanke is what it will rely on to remain a distinctive company in the property industry, and to keep setting the rules of the game.

So you see Vanke trying all sorts of things, especially anything to do with the internet.

Vanke's Internet Gimmicks

"Internet thinking" was close to the keyword of 2014 for Vanke, and for the property industry as a whole. At the start of the year Yu Liang took his management team to visit tech companies such as Xiaomi, Alibaba and Tencent. Xiaomi chairman Lei Jun asked him, "Could the price of the homes you build drop by half?" By the end of the year, Mao Daqing was saying, "The internet can't build houses." All year, Vanke was busy circling the internet.

In June Vanke signed an agreement with Baidu to bring technology into the running of its commercial property, introducing three core technologies — "positioning engine, big data and marketing tools." The idea was to use the positioning engine and big-data analysis to adjust the leasing strategy for its commercial real estate, and to track how shoppers move through malls and what they buy, so it could target its marketing precisely.

In August Vanke Group launched Wanxianghui, a public interactive marketing tool built on WeChat that lets anyone register as an online Vanke broker. It has two main features. "Everyone a Broker" encourages registered users to refer buyers to Vanke projects. "Sharing Star" encourages them to spread Vanke news, which helps Vanke identify opinion leaders and potential customer demand.

Soon afterward, Vanke and Taobao announced that whatever a Taobao user had spent on the site over the year could be deducted directly from the price of a home at 23 Vanke developments in 21 cities, up to 2 million yuan. Media reported that this could cut a Taobao user's cost of buying a home by as much as 10%. Vanke called it an innovative use of the internet and said it would explore every possibility with an open mind and a willingness to learn.

In short, Vanke's internet thinking comes in two kinds: marketing gimmicks and so-called O2O.

Vanke's Finances Are Still Growing Normally

According to Vanke's financial reports, in the first three quarters of 2014 it sold 12.638 million square meters of floor space worth 149.06 billion yuan, up 15% and 16% year on year respectively. Cash collected from sales rose 43.54%. On paper, Vanke is still growing.

But its profit margin keeps falling: from about 21% in the first quarter to about 16% in the second and about 15% in the third. In fact its gross margin started falling much earlier. According to Rand Consulting, Vanke's gross margin fell from 28.79% in 2011 to 21.78% in 2014. Evergrande, China Overseas, Poly, Shimao, Country Garden and other developers are on the same slide. Across the industry, the profit margin on property sales fell from 21.13% in 2010 to 16.63% in 2013.

The era of high profits in property is over.

Mao Daqing Said "Internet Thinking Can't Build Buildings," and He Meant It

Vanke played plenty of internet gimmicks, but Mao Daqing's year-end remark that "the internet can't build buildings" is in fact the most honest thing anyone there said. Vanke is still judged by how many homes it sells, and for that it first needs homes to sell.

Vanke has been fairly cautious about buying land this year, mainly because of heavy inventory pressure. From 2012 through the first three quarters of 2014, its inventory grew by more than 100 billion yuan. With new homes coming to market at year-end, it will grow further.

Vanke's cash flow is getting tighter and tighter, yet in November it still snapped up 6 plots of land in one go. Its current ratio and quick ratio, which measure its ability to pay short-term debts, are both falling. On long-term debt, listed property companies have an average debt-to-asset ratio and average net debt ratio of 65.81%, and Vanke has been above that average for three years running. That means Vanke carries a high and persistent financial risk compared with its peers. If sales fall while its loans are outstanding, or the market enters a correction or downturn, Vanke could easily struggle to turn over cash and repay its loans, and a credit squeeze on top of that would make things worse.

But the Market as a Whole May Be Changing, and Every Developer Will Have to Redefine Itself

China's property industry has produced a large share of the country's richest people. They benefited from local governments' reliance on land sales for revenue and from GDP-based performance targets; most local governments treated property as a pillar industry and backed it with financing and other policies. Only on top of all that came the demand created by China's urbanization. But according to the Hurun rankings, over the 10 years from 2004 to 2014 the share of China's 20 richest people with real estate interests fell from 56% to 32%. In 2014, half of the top six on the rich list ran internet companies.

At the same time, urbanization is slowing, and officials may in future be judged less strictly on GDP growth. "De-administrativization" will erode the government connections that big developers like Vanke have long relied on.

All of this makes it less and less likely that property will remain a pillar industry. Once high growth gives way to normal growth, every developer may have to rethink how it will do business.

O2O, at Least for Vanke Today, Is a False Proposition

For developers, Vanke included, the core chain has not changed: acquire land, build homes, sell them. Break it down further and it runs from market research to land acquisition, design, construction, interior finishing, sales and property management. None of the important links in this chain has anything to do with the internet, least of all the two most important: land acquisition and sales (dealing with buyers). Besides, property competes mainly on location. Every city has a limited supply of prime sites, and that too has little to do with the internet.

So O2O, for Vanke today and for the industry as a whole, is still a false proposition.

The market moves with supply and demand, and supply and demand set prices. Of the rise in Chinese house prices, 40% comes from genuine housing need, 30% from rising land prices (in recent years land prices in China have actually risen faster than house prices), and the remaining 30% from investment and speculation. None of these are problems the internet or O2O can solve.

But the Internet Is Not Worthless: It Needs to "Understand" Consumers Better

The internet's real value is efficiency. It can find target users more accurately, reach them faster and get their feedback faster. Xiaomi is the classic example: it cuts out every middleman and sells straight to its customers.

The property industry's current internet experiments — crowdfunding, online viewings, pre-sales — all amount to steering online traffic to offline sales offices and lining up buyers for new developments in advance. The internet can also organize potential buyers more effectively than traditional methods, and that is worth something to developers.

And when the traditional model of selling homes changes and Vanke needs to offer buyers more services — making money from "services," for example — the internet will be useful too. Take Vanke's experiments in property management. In September Vanke and Alibaba reached the agreement-signing stage of a smart-community partnership, planning a community of the future that combines the Internet of Things, remote monitoring and management, and neighborhood social networking. The remote monitoring system lets managers see, remotely and in real time, the operating data and status of a community's power, water, fire safety, elevators, air conditioning and other equipment, and it folds in property management functions. This is groundwork for what comes next.

But for the internet to be useful, it first has to understand consumers better. Vanke has launched developments aimed at its core customers: urban white-collar workers with some money behind them. Small-apartment projects such as Vanke Orange and Qingdao Vanke Mi are not only priced within young people's reach but also cater to their tastes and needs. The interiors are simple and arty. The communities offer a range of amenities, including gyms and community libraries. All this information about demand can be collected and analyzed through online platforms. Perhaps made-to-order property services are not out of the question.

The average Chinese homebuyer is 27; the average Chinese internet user is 25. When it comes to marketing, the internet may hold even more possibilities for property.

Every Property Company Is Looking for Its Own Niche

If developers still want to make money over the next 10 years, their business models may have to revolve around one group of people: residents. Developers will need long-term relationships with them, and services rather than buildings will become the focus. Vanke has already begun shaping its customers' spending habits. Its plan for the future is to become a provider of urban support services.

Vanke's community model, for example, brings together cafes, cinemas, supermarkets and canteens, along with VC Town, a play area for children, youth education centers and retirement communities. Its partnerships to build children's hospitals and its exchanges with schools all lay the groundwork for this model.

Vanke needs some innovation to keep the company running over the long term. It has been experimenting for a while. By partnering with the global private-equity giant Carlyle and using private equity funds, Vanke has made its commercial real estate asset-light. Its commercial property arm not only holds properties that provide services to its residential projects but can also recover cash, ease financial pressure and reduce risk.

Facing a slumping market, China's hard-pressed developers have started to park their bulldozers and look at all kinds of new businesses, from pig farms to solar panels to online shopping. Residential developers have two main paths. One is to find a service specialty and do it with great care: Longfor with landscaping, Greentown with high-quality homes, Vanke as a provider of urban support services. The other is to find more sources of financing and spread risk: Evergrande looking for land overseas, Greenland partnering with governments on urbanization projects.

Chen Fengyang, executive president of Shenzhen-based Laimeng International, believes that crossover and integration — "real estate + X" — is the main way for developers to find new growth, diversify and widen their profits. Albert Lau, head of China research at Savills, also thinks these extra services will "enrich residents' living experience" and help developers and their projects stand out.

History shows what such a shift can achieve. Many Hong Kong developers, such as billionaire Li Ka-shing's Cheung Kong Holdings, started out as builders and now run diversified business empires.

Back to Vanke: Constant Trial, Error and Adjustment Are a Normal Part of a Company's Growth

An investment banker who covers the property industry said: "It used to be that you put in 100 dollars and got back 150. Now you put in 100 dollars and next year you get only 5 or 6 dollars back, and maybe 7 the year after." From an investor's point of view, property is slowly heading downhill.

The market and consumers have both changed, and the time may have come for Vanke to transform itself. In 2014 Vanke said and did a great deal; whether trial and error or adjustment, all of it was a search for a model that would let it keep going. A developer's ultimate goal is to build an "ecosystem" that brings in sustainable income.

If, years from now, Vanke is still China's finest property company, it will probably have started this year.

*The Top 15 are: Apple, Google, Baidu, Alibaba, Tencent, Amazon, Disney, McDonald's, Starbucks, Nike, Xiaomi, IKEA, Uniqlo, Wanda and Vanke. This list will change as the companies' businesses, the market and trends change. *We will keep watching them, and their competitors and partners too.

As for why we set up the Top 15 reporting project, please read this article, which we think turned out rather well.

Cover image source: Vanke Real Estate