Companies

Developers seek profits below the surface

(China Daily)
Updated: 2011-06-20 11:04

BEIJING - With the volume of home sales continuing to fall amid strict measures aimed at tightening the property market and lowering house prices, some real estate companies are trying to dig their way out of the uncertainty by getting into mining.

By June, at least 15 property developers, buoyed by rising metal prices and significant potential returns, had tapped into the mining industry, with a total investment of 19.26 billion yuan ($2.98 billion), according to the China Mining Association (CMA).

Most of the investment went into mines producing gold, lead, zinc and molybdenum, according to the CMA.

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The change in developers' investment strategy came after it became harder for them to cash in on the housing market, which has been impacted by a series of government measures since last year aimed at cooling it.

The measures include requirements for larger down payments, interest rate rises, home purchase restrictions, price controls, third-home purchase bans and a real estate tax trial in the cities of Shanghai and Chongqing.

Ma Zhipeng, a spokesman for the China Beijing International Mining Exchange, said the nation's current anti-inflation monetary tightening and the rising prices of mineral products and other commodities would inevitably induce real estate developers to seek higher returns from other sectors.

From January to May, land sales in 128 Chinese cities fell by 5 percent year-on-year to 665.9 billion yuan ($102.45 billion), while residential land sales fell to 519.3 billion yuan, according to data from CEBM Group Ltd, a Shanghai-based real estate investment advisory firm.

"For those developers with sufficient cash in hand, it is natural for them to enter the mining market for greater profits," he said.

According to financial statements by housing companies, more than half of property developers enjoyed a profit margin of around 60 percent from their investments in mining, while about a third posted a 20-percent return on mining-related investment. Only a few companies suffered losses.

For example, the Shenzhen-listed Shandong Zhongrun Investment Holding Group swung back into the black last year after a two-year losing streak, boosted by its investment in the mining industry, according to the company's annual report.

The Jinan-based housing developer invested 500 million yuan last November in setting up a subordinate company to carry out mining development.

A handful of housing developers - including Zhuhai Port and Shanghai Wanye Enterprises - also rode the wave of companies looking to invest in mines.

Analysts urged caution, however, saying mining may not save some housing developers because of underlying risks.

"The risks can be huge because the country has imposed stricter controls over the mining industry and getting a mining license isn't as easy as before," said Shi Jingxi, a member of the CMA.

Xinhua