Real Estate

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

(Updated )

Home sales are booming in China, prompting local authorities to try to control prices. That's great news for investors awaiting a series of earnings reports from developers that operate in the mainland.

On the surface, the numbers are encouraging. Home sales reached 9.9 trillion yuan ($1.4 trillion) last year, and the 36 percent increase was the biggest since 2010.

If Only It Were That Simple
Total value of home sales in China hit a record 9.9 trillion yuan last year
Source: Blooomberg

But as stock and bondholders cheer the likely boost to the bottom line that will become apparent in the coming weeks, they should look carefully at a couple of entries in the balance sheet that tell a different story.

The 152 publicly traded developers that operate in China have been reporting a steep rise in inventories, for one thing. As of June 30, 2016, they held a combined $757.2 billion of unsold stock on their books. That's twice what they had at the end of 2012, and the equivalent of 2.8 million American homes or 126.8 million square meters of residential property in Asia's largest economy, based on respective average selling prices. 

As Big as a Country
Unsold property carried by 152 listed developers in China has reached almost the entire value of the Indonesian economy
Source: Bloomberg

Based on government data for January and February, it would take almost six months of total property sales in China to clear the inventories on the books of listed developers.

Perhaps more worrisome is the recent spike in investment properties.

Several developers have chosen to change the accounting treatment of some of their property in recent years. Instead of "up for sale," they have moved a good chunk of homes to the investment basket.

For accounting purposes, these no longer are counted as inventory and, more importantly, can now be carried at market value instead of cost. Gains from revaluing such properties have helped many a bottom line. Longfor Properties Co., for example, on Monday reported a 1.5 billion yuan profit last year from that item. The pile keeps growing: Listed developers had $122.1 billion in investment properties on June 30, up from $43.6 billion on the same date in 2012.

Return to Investment
The amount that listed Chinese developers classify as investment property has almost tripled since June 2012. Much of it was once for sale
Source; Bloomberg

China Evergrande Group, the largest private developer in the world, tops the list with $18.3 billion in investment properties at the end of June, followed by China Resources Land Ltd., with $11.6 billion. China Overseas Land & Investment Ltd., ranked  third, announced Wednesday that its investment properties had increased 2.5 percent to HK$67 billion ($8.6 billion) and the revaluation of those assets added HK$7.7 billion to its net income.

While companies did diversify into managing some of the properties they developed, rather than selling them all on completion, this bulge in investment properties should be treated with skepticism.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Updates with COLI results in ninth paragraph. An earlier version of this column was corrected to remove a reference to Australia in the chart headlined `As Big as a Country.')

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net