HONG KONG (Reuters) - When Chinese developers started offering in-house services such as beauty treatments to boost the value of their properties three years ago, few expected the sideline to become one of their fastest-growing revenue streams in otherwise tough times.
What began as something of a gimmick to attract middle-class buyers with premium concierge perks has blossomed into a new financing platform, with developers rushing to spin off their management units to unlock their value.
Traditionally, Chinese developers offered little more than security and maintenance services at their residential projects, but more and more apartment towers now offer bonuses like in-house takeout and grocery delivery, tour reservations and even personal financial products.
“Two, three years ago there was no problem with selling any new projects even in the third- and fourth-tier cites, so people didn’t really care about services,” said Peterson Liang, deputy executive director of Colliers International Real Estate Management Services in Shanghai.
“But today sales are not as good and there’s more competition, so there’s a need to enhance after service.”
Top developer China Vanke (2202.HK) is now looking to join the growing list of its peers that have sold their one-stop shop management businesses following the successful listing of Fantasia Holdings’ (1777.HK) management unit, Colour Life Services (1778.HK).
Colour Life’s shares had soared 230 percent nine months after their listing in June last year, and even with the turmoil that has recently battered Chinese markets they are still about 43 percent ahead.
While management services provide only a fraction developers’ of total revenue, any new income sources are welcome as the traditional real estate sector has struggled in recent times with high land costs and excess supply.
Developers make an income from the services by charging commission fees from outside contractors.
Developers call it the “last-mile advantage”, the distance from the gate of the housing complex to the elevator that outsiders such as delivery staff are not allowed to enter for security reasons.
It’s here, it turns out, that developers can make money by offering in-house services directly to residents or, more commonly, charging commissions from third-party providers.
“Working with third-party providers saves developers a lot of labor costs because they don’t need to keep staff on-site to do repairs, for example. Even better, they can charge the provider to do that work for their tenants,” one developer said, requesting anonymity as he was not authorized to speak to the media.
Margins vary depending on the service and the company’s accounting method. Color Life’s gross margin was 73.9 percent in the first six months, while China Overseas Property Holdings’ was 19.2 percent in the first five months.
Country Garden (2007.HK), China’s sixth-largest developer by sales, saw its revenue from property management soar 86 percent in the first half from a year ago, and said it expected the segment to continue to drive profit in future. Even so, it still only accounted for 2 percent of its total revenue.
Together with smaller peer CIFI Holdings (0884.HK), Country Garden is in talks with financial advisors about a potential listing of its management unit.
State-owned China Overseas Land & Investment (COLI) (0688.HK) is also jumping on the bandwagon, submitting a listing application to the Hong Kong stock exchange last month.
China Vanke is setting up a property management unit which it said it would spin off eventually, without providing a timetable. Guangzhou R&F Properties (2777.HK) last week said it was exploring similar options.
Analysts said China’s recent stock rout would not affect such plans as the units were relatively small.
“Even after the market turmoil COLI’s still valued at HK$200 billion ($25.80 billion), while its spinoff unit is estimated to be only HK$3-4 billion. It’s not a big value compared to the parent,” China Merchants Securities analyst John So said.
Jefferies analyst Venant Chang said spin-offs could unlock the potential value of property management businesses over core property development operations, citing Colour Life’s 2015 estimated price-to-earnings ratio at 31 times, much higher than its parent’s 4.7 times.
One pampered resident, a 35-year-old company manager who moved to Beijing from Hong Kong four years ago, said the services he enjoyed in the mainland were much better than he remembered in his home town.
“The best service I found is they offer to wash all the curtains in our home once a year for free,” he told Reuters, giving his name only as Yu.
“They also give the whole family free tickets to an acrobat show.”
Editing by Stephen Coates