Developer funding: the importance of pre-sales
Primary Residential Sales are recovering from the COVID-19 Effect. Sales volumes are recovering to « normal levels » but remained down 27% as of March 2020 on the equivalent time last year.
Chinese property owners and developers rely on financing their operations via pre-sales; Developers have some ability to accelerate the timing (and proportion of units sold) via pre-sales, meaning that they can accelerate the timing of their cash receipts and recycle liquidity tied up in existing developments.
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Over the last decade, for every 187 square meters of construction started, only 100 square meters have been completed. Developers are starting more developments than they are completing and selling units earlier and earlier – pre-sales represented 90% of total residential sales in 2019 vs 78% in 2009.
Stabilized financing for properties is getting harder
Disruption of the Developer Financing Cycle; A breakdown in the developer financing cycle will emerge and this could lead to financial difficulties for developers, headaches for existing lenders – and opportunities for credit funds to deploy capital.
Land Auctions are delayed, construction sites were shut down and sales centers were temporarily closed which makes the financing heavier for developers.
In Shanghai, CBRE estimates cap rates on the best prime offices were as low as 3.0% in mid-2019. At this level, the operating profit from owning a Shanghai prime office (from rental proceeds, fewer costs) does not appear to be enough to pay the interest on a typical onshore bank loan.
In time, this may lead to banks reducing the amount of finance they are willing to lend to landlords upon refinancing as Chinese consumers stay away from crowded commercial locations and companies look to negotiate rent concessions.
Funding land purchases and CAPEX on development projects
Obtaining finance on land purchases and CAPEX is also getting tougher for developers. Historically, a significant proportion of land purchases – certainly for the mid-tier players who have been “VIP clients” of the banks – have been financed through onshore bank lending. This financing channel has started to close as liquidity in China’s shadow banking space has dried up over the past two years.
In May 2019, China’s banking regulator warned banks and trust companies who were financing developers’ purchases of land plots, would face “tightened scrutiny” – this included lending to Chinese real estate companies where the proceeds were used to fund acquisitions of land banks that hadn’t yet obtained the relevant construction certificates.
Offshore US dollar bonds / 1 in 5 Dollars raised featured an interest coupon in excess of 10% p.a.
It is estimated that China’s listed real estate developers issued US$ 75 billion of offshore debt in 2019 (2018: US$ 53 billion), making them the largest category of issuers in Asia’s offshore dollar bond markets.
Whilst these rules now prevent offshore bonds from being used to finance land purchases and development CAPEX, the rules don’t currently apply to short-term debt (with a contractual maturity of 364 or fewer days).
By June 2019, 19 of 50 top developers in China had lower cash and cash equivalent reserves as a proportion of short-term debt. This leads to a handful of developers continuing to use this loophole to secure short-term debt to finance bridging loans or working capital.
How bad could the downturn ?
To the extent additional cash flow can be raised, stronger developers may be able to capitalize on the challenges in the market by buying land banks and other projects from weaker competitors.
For landlords, it is even more critical to proactively talk to tenants: not all are feeling the strain equally (online and/or offline presence). Lenders will already have processes to monitor the CRE (Corporate Real Estate) credits and given the heightened level of risk and to better understand the on-the-ground situation, relationship managers should continue to invest time to proactively liaise with debtors.
An opportunity to deploy capital would be to invest in secured real estate debt or providing customized financing solutions to real estate businesses to fund their growth, has become an increasingly popular strategy for credit and special situation investors over the last 18 months, with at least US$ 1.4 billion of capital deployed.
How can developers increase their pre-sales in China?
Chinese developers already know that but E-reputation is key
E-reputation is the image your company has online. It is the combination of all the Digital channels your properties development company uses to get visibility and gain the trust of Chinese buyers. Now, for real estate some channels and marketing strategies are more appropriate than others, so let’s have a look.
Chinese Website + Baidu SEO/SEM: Properties developers’ base for success in China
Why a Chinese website?
There are 2 reasons why you need a website in Chinese mandarin:
- The users: If many Chinese businessmen do speak English, they prefer the use of Chinese. Using Chinese on your website also shows you care about your target audience.
- Baidu: Baidu is a mandarin only platform and will always favor Chinese websites over English websites. Because, the search engine is specialized in Chinese mandarin, its keyword algorithm is extremely precise in Chinese.
So, getting yourself a Chinese website is the base if you want to get any visibility of one Chinese search engine but Chinese is not the only requirement. Indeed, Chinese UX habits differ from what you are used to in your own country.
- Featured contact Info
- Easy contact for quick answers such as a live chat
- Listing with many pictures and a lot of details. Visitors want the information now.
- No google plugins whatsoever. Google plugins in China = Broken. Not cool right?
Now that we have the website, we need to index your page for SEO and visibility
- Frequent Original Content in Chinese
- Landing page optimization for low bounce rate
Should properties developers use Baidu SEM & paid ads?
Paid advertising is a great way to get your first traffic on your website. It is usually best used during the 6 first months of your marketing effort in China.
However, paid ads are also great to test new target audiences on different platforms: search engine (Baidu, Sogou, Qihoo), media (blogs & online newspapers banner) but also apps (here I think of Toutiao for instance).
A strong SEO effort with an optimized website will play a major role in your Chinese success story, but it is not enough. Baidu is a great channel, it will not only rank your pages but also pages from platforms, Q&A, forums, social media, and media talking about you. And that is the goal. You want the 2 first pages of your keywords to show only results that refer to your company.
If you can achieve that, you’ll earn the trust of Chinese Buyers. Trust and convenience are the two words to keep in mind when doing any business in China.
Press release, Q&A and Forums: content marketing
Press release: they talk about you
Having specialists in real estate referring to you is the best type of advertisement you could get. It is not you saying “hey look at me, my services are great” but rather the trusted media recommending your services.
Q&A and Forums:
The same logic applies here, but instead of specialists media, you have other properties investors sharing their experience with you.
A big part of forums and media content is not organic but sure does look like it when consumers are consulting them. It is called content marketing and GMA is pretty good at it.
Social media and properties development
You may be wondering why I’m mentioning social media in the very B2B industry that Properties development is. Well, social media has gone far in China. It has developed not only for your everyday normal users but also for businesses. Let’s talk about WeChat, as it is the biggest and the most useful one in the case of property developments.
How to nurture leads on Wechat
Let’s start with the obvious: It is indispensable for any company to be on WeChat in China 2020. The app is too big, to used to ignore if you want to have any chances to be taken seriously.
All the effort with Baidu SEO/SEM, content marketing, and so on, will pay off in the form of leads. However, we are talking about big money here, and it may take a bit longer to convert potential customers.
This is where Wechat becomes essentials. Reminder: Emails are not a thing in China. Everythings goes through WeChat (eventually QQ which also belongs to Tencent).
Anyone familiar with B2B marketing in the west knows how important emailing and community management are to nurture leads. So, here you have it Wechat, is your alternative to a well oiled CRM and email management software.
- Set up a CRM to manage, follows, and promote to your followers
- Weekly corporate communication
- Integrated payment
- Company intro under the form of a WeChat H5 brochure
- Wechat group marketing to share useful info
- And so on
Well guys, that is it for today, feel free to reach out to us to discuss more in-depth, ask for our properties development case studies, etc