From a net profit perspective, real estate has never seemed to be a hugely profitable industry. Even in good years, a real estate company can show a net profit margin of more than 10%, which is quite good, which is one step behind liquor.

But net profit margin is not a good indicator of a business because it does not reflect the capital you invest.

A good business can be profitable, just like real estate in the past. Let me give you an example. There is a real estate project where the land payment is 1 billion, the development cost is 1 billion, and the product value is 3 billion. How much money does the developer need to leverage this project? The answer is no more than 500 million, not even a dollar. If you look at the IRR of this project, it will shock your jaw, and this is the indicator that real estate capital really cares about.

First of all, the land payment can be paid in installments. The first installment for public transfer can be 50%, which is 500 million, and this 500 million can also be financed, usually with own funds. 30% and 70% financing, so the self-owned funds only need 150 million. What’s more, this 150 million is also financed, which means that it is completely empty-handed.

Secondly, the early development costs, that is, the investment from the land acquisition stage to the pre-sale stage, can be paid by the construction unit in advance, and the developer can at most pay a little marketing fee and management fee, which are almost negligible.

At the same time, developers can apply for development loans, which are usually issued before pre-sale. This part of the money can replace the previous land investment, allowing the developer to continue investing in the next project.

Finally, when the pre-sale node is reached, the developer receives a large amount of pre-sale funds at the launch. This fund is used to pay for the early project payment and subsequent land expenses. The excess can be used for repurchase. invest.

The above four nodes are four different liabilities for developers, which can be called land acquisition leverage, project loan leverage, development loan leverage and pre-sale leverage.

These four major levers give Chinese developers the ability to leverage the world's top 500 companies. In 2021, 8 Chinese real estate companies will be shortlisted for the Fortune Global 500. The real estate industry finally relies on Chinese companies to win the respect they deserve on this list.

However, since 2021, these four major levers are rapidly disappearing and hitting players in this industry hard. Three of the eight Fortune 500 real estate companies have exploded, namely Evergrande, Greenland and Sunac.

Let’s take a look at how these four major levers disappear one by one.

First of all, the real estate strategy of using "clear stocks and real debt" to finance land acquisitions in previous years no longer works. The "Notice on Matters Concerning Further Promoting the Reduction of "Two Businesses" of Trust Companies" issued by the China Banking and Insurance Regulatory Commission to all local Banking and Insurance Regulatory Bureaus in November 2021 requires that "new financing businesses should be in compliance with laws and regulations, and penetrate and identify the underlying Assets must not be 'fake investments or real financing', and use investment as a form of financing to avoid quota control." This also means that the previous "clear stocks and real debts" model is no longer feasible. Against this background, in the first half of 2022, the issuance scale of real estate collective trust products dropped by 77.6% year-on-year, which basically announced that land acquisition leverage no longer exists.

Then, after the thunderstorm in Evergrande, all construction units began to be uneasy. Amidst the waves of thunderstorms among real estate companies, the confidence of the construction industry has dropped to freezing point. Preferring to miss rather than make mistakes has become the common sense of many construction units. It is becoming more and more common to reduce advances and even require developers to pay advance payments. Material suppliers do not accept full payment and do not deliver goods. All this means that projects The demise of financial leverage.

In addition, since the context of "deleveraging" in 2019, banks have begun to gradually tighten the issuance of development loans, first excluding real estate companies other than the top 100 real estate companies, and then followed by explosive real estate companies And quasi-exploding real estate companies, many banks now only provide development loans to real estate companies with a state-owned background. For most real estate companies, the door to developing loan leverage has been completely closed.

Finally, the direct impact of the recent loan suspension incident is that the supervision of pre-sale funds will be further strengthened. Many places may require special funds to be used exclusively. There are even many calls to "cancel pre-sales". If these changes becomes a reality, which means that the last lever of real estate - pre-sale leverage is about to disappear.

If the above four major levers all disappear, the business model of the real estate development industry will be completely changed, and it will change from a light asset model to a real asset-heavy model. Taking the same project example mentioned earlier, the self-owned capital invested in the early stage of the project will change from 0-500 million to 1-2 billion. This also means that with the same capital occupation, the development capacity of real estate companies will drop by more than 50%. The initial investment is large and the return cycle is long, which will greatly reduce the attractiveness of this industry to capital.

If this real estate market adjustment will clear 50% of the production capacity, the disappearance of the four major levers will clear 50% of the remaining production capacity, which means that the future production capacity will only be about 25% of the peak period, even considering If some new capital comes in later, the future production capacity level will not exceed the original 50%.

In 2021, domestic real estate sales will be 18 trillion, half of which is 9 trillion. Considering some factors of rising housing prices, around 10 trillion may be the bottom line of this industry.

The reason why it is said to be the bottom line is because all the players in this business will make all four major levers completely disappear?