How a Request from SASAC Fell on the Deaf Ears of Property Developers; Beijing asked central government-controlled businesses to exit the real estate industry, but its notice has been largely ignored

03.05.2013 18:55

How a Request from SASAC Fell on the Deaf Ears of Property Developers

Beijing asked central government-controlled businesses to exit the real estate industry, but its notice has been largely ignored

By staff reporter Zhu Yishi

(Beijing) – In early 2010 the central government enacted policies to cool the real estate market. While the curbs have, to some extent, had their intended effect, government-controlled companies that should be busy with other business have prospered in property.

In January, eight commercial plots were sold in Beijing, and the buyers were either central government-controlled companies or state-owned enterprises (SOEs), data from Yahao Real Estate Selling & Consulting Solution Agency shows. Last year 37 residential plots were sold in the capital, and central government-controlled firms and SOEs bought 24.

These central government-controlled companies are holding their own in their adopted field. Last year, residential property giant China Vanke Co. Ltd., which is not this type of firm, had sales of more than 100 billion yuan.

In comparison, state-controlled China State Construction Engineering Corp. (CSCEC) had a similar sales figure, and China Railway Group Ltd. and China Railway Construction Corp. Ltd (CRCC) both had sales of 20 billion yuan last year. The latter two only entered the real estate industry in 2010.

This is evidence that Beijing’s request for central government-controlled companies whose main business was not real estate to exit the industry is being ignored.

The reason is two-fold. Zhou Fangsheng, former deputy director of the State-owned Assets Supervision and Administration Commission’s (SASAC) enterprise reform bureau, says for starters the property sector is very profitable. Also, the companies are assessed on their profitability, and these assessments are linked to executives’ pay.

The companies’ path to success in the real estate industry is aided by two factors. First, because the companies are controlled by the state, it is easy for them to get bank loans needed to finance projects. Also, local governments offer them preferential prices on land.On Notice?

In March 2010, SASAC sent a notice asking 78 central government-controlled companies whose main business was not real estate to exit the field as they completed current projects. They were also asked not to buy more land.

The main reason the commission that oversees the management of government-owned and controlled businesses did this was a fear that their ability to pay high prices for land would drive up prices.

SASAC did not name companies in its notice, but the request would have affected giants such as Baosteel Group Corp., China Petrochemical Corp. and China South Industries Group Corp.

The giants, however, paid little heed.

“We haven’t cared about the notice for quite a long time,” a source at a central government-controlled company said. “SASAC has rarely mentioned the exit matter at its meetings since the notice was announced.”

Later, SASAC said that considering the different conditions of companies, the implementation of the notice should follow market rules, the source said.

Then in March 2011, SASAC approved five companies for real estate business, including Aviation Industry Corp. of China; China National Coal Group Corp; Luneng Group Co. Ltd., which is otherwise involved in energy and minerals; China Xinxing Corp. (Group), a trade and logistics firm; and Shenhua Group Corp. Ltd., a coal producer.

This increased the number of central government-controlled companies whose main businesses included real estate from 16 to 21.

Most central government-controlled companies ignored SASAC because it was difficult for them to exit the real estate sector, said Song Yanqing, president of Rand Consultation, which provided services for several central government-controlled companies’ real estate projects.

The difficulty related to the amount of land they owned and the deep financial involvement of their very profitable property subsidiaries.

In 2012, 15 central government-controlled companies, whose main business was not real estate, sold a mere 17 real estate projects to other companies for 964 million yuan, statistics from the China Beijing Equity Exchange, a Beijing equity transaction institution, show.

Many of the plots that central government-controlled companies bought years ago were in good locations in cities and very valuable, making the firms reluctant to part with them, the source in one of the companies said.

After receiving the notice, companies were adept at finding ways to ignore it, Song said. One of reasons for this, as the source in one of the companies pointed out, was that SASAC never set a deadline for the companies to act.

Profit and Pay

When SASAC assesses central government-controlled companies, profit margin is its top consideration, and the leaders of the companies have their salaries linked to this assessment.

Also, profits in property development are far higher than in the companies’ original businesses. CSCEC’s gross profit margin from real estate was more than 44 percent in 2011, but the gross profit margin of its other businesses, such as infrastructure construction, was between 8 percent and 10 percent.

China Railway and CRCC both had gross profit margins from their real estate businesses of more than 30 percent, but their engineering businesses enjoyed profits of less than 10 percent.

Meng Xiaosu, former president of China National Real Estate Development Group Corp., said that in a way these companies were fulfilling their responsibilities.

“Central government-controlled companies in different fields shoulder the task of maintaining and appreciating the value of state-owned assets,” he said. “At the moment, only involvement in real estate business does this.”

Amid an economic slowdown, most of these companies’ businesses – whether resources, manufacturing or shipping – were struggling, Meng said. Thus, investing in real estate was seen as rational.

Rand Consultation’s Song said the government should guide the firms in another direction.

“There should be government policies to lead these companies to shoulder more social responsibility, such as building infrastructures and affordable housing,” he said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: