Interpreting the New Chinese Real Estate Regulations: Evergrande Benefits Significantly With Its 15% Discount Promotion

BEIJING, Aug. 5 /PRNewswire-Asia/ -- In the couple of months the new Chinese real estate regulations will be carried out, which has caused endless complaints from developers. With the sharp decline of turnover due to the change in housing prices, which has hurt the developers in the past half-year, there are few developers who have completed 50% of their sales targets. However, among these developers, only one, Evergrande Real Estate, seems to be thriving in the current market situation, with not only good sales performance, but also a confident further increase in the sales target. An original report from Sina Leju assesses the situation as follows:

According to the June sales briefing released on July 12th by Evergrande Real Estate, the sales amount of June was 4.8 billion yuan, with an increase of 19% month on month, which was the only developer with a month-on-month sales increase in May and June under the new Chinese real estate regulations. With the accumulative sales amount of 20.98 billion yuan in the first half- year, Evergrande also announced that its annual sales target would be raised from 36 billion yuan set at the beginning of the year to 40 billion yuan. One must ask why Evergrande could achieve such feats under the impact of the new Chinese real estate regulations. The answer lies in the market position of Evergrande: second-tier cities.

Evergrande is a large-scale developer entering into second-tier cities with the earliest and largest scale. Ninety percent of its sales in the first quarter of 2010 were attributable to second-tier cities. For the new Chinese real estate regulations, second-tier cities were not in the advanced positions, where the market was not inflated by the real estate speculators or the developers. The housing prices in the second-tier cities basically stayed the same or even increased slightly under this adjusting control, while the fallback range of turnover was not as large as that in the first-tier cities. Most Evergrande projects focused on the second-tier cities such as Changsha and Taiyuan. Featuring high quality and the high cost-effectiveness, Evergrande's buildings were very popular in the second-tier market. The layout in advance in the second-tier cities made Evergrande top others under the new Chinese real estate regulations, becoming the champion in terms of sales area in the first half-year.

Because second-tier cities were less affected under the new regulations, Evergrande came out on top in the market of second-tier cities, becoming the "beneficiary" of new Chinese real estate regulations. Why did Evergrande risk giving a 15%-discount promotion throughout the country? Evergrande's development style has the answer.

One of Evergrande's distinctive features is abundant land reserve, which is among the best all the time. The land reserve has increased sharply from less than 6 million square meters at the end of 2006 to nearly 55 million square meters currently. In the face of such huge land reserves, Evergrande has adopted the "rolling" development mode, that is, the supplementation follows the development in the amount of land reserve. The "rolling" development mode, just like a huge ball rolling forward, has been providing profits for the enterprise continuously. Such a development mode certainly requires that each link should operate steadily, especially the link of capital in the chain, which is the top priority for Evergrande. This is also the explanation why Evergrande rapidly called its money in under the market to its own benefit.

Another key factor of this operational mode is speed. The shortening of time means the saving of debt cost, as well as the increase of circulatory efficiency and the increase of profit. In this way, the chain capital and land can operate fast and effectively, just as Evergrande says, "It only took six months from land occupation to opening."

Evergrande's 15%-discount sales promotion was not only decided by its operational mood, but also took its market strategy into consideration.

Firstly, Evergrande expanded its market share to compress the space of its rivals.

Secondly, Evergrande took the lead in reducing prices to expand its brand influence.

Thirdly, Evergrande sought the new market of first-tier cities.

In the rankings of developers' achievements in the first half-year released earlier, Vanke and Evergrande ranked first in sales and sales area respectively. Due to strong support from the second-tier cities, going after the lower-end market was good choice when the first-tier city market was depressed. Therefore, Evergrande needed to rapidly call its money in to make a big splash in the market of the first-tier cities and broaden its business scope.

Undoubtedly, Evergrande was the "beneficiary" of the new Chinese real estate regulations. One might find the reason in the above analysis that Evergrande rapidly adopted the promotion strategy throughout the country in face of the new policy. Whether Evergrande, the first of the "Five Tigers of Guangdong," can change the new regulations into the opportunity of becoming the leading real estate enterprise in China depends on its follow-up actions under the background of the new Chinese real estate regulations.

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SOURCE Sina Leju