China’s property management industry: a major beneficiary from COVID-19

For the longest time, investors have looked primarily to Chinese property developers to tap into China’s property market. This is about to change. Property management – the business of overseeing and managing residential, commercial real estate and/or public facilities – is undergoing a transformation that may well expand the sector’s revenue opportunities and profitability.

In contrast to property development, property management is an asset-light business, and one which earns stable streams of recurring cash flow. The business is generally labour intensive as the appointed property manager must keep properties in safe and habitable conditions, providing, among other things, security, cleaning and maintenance services. Basic management fees (monthly average RMB 2.25/sqm)¹ – collected from property owners and based on the gross floor area (GFA) managed – are the primary revenue source for most property managers. Such recurring income makes property management less sensitive to macro-economic trends or changes to monetary policy.

In the past, price controls and long-term service contracts have prevented many residential property managers from raising management fees during their first 8–10 years of service. Amid rising labour costs, property management in China has not always been a lucrative business.

This changed at the end of 2014 when the Chinese authorities removed price controls for property management fees². Today, although certain cities still have regulated caps for welfare housing estates (during the first contract period of residential projects), many have been actively reviewing their guidelines, and further deregulation is underway.

This relaxation of price controls, the increasing willingness of Chinese households to pay for better living standards, plus the sheer scale of space needing management, are strong drivers for the property management sector.

According to the China Real Estate Index System (CREIS), China’s GFA under management exceeded 21 billion square metres (sqm) in 2018, of which 66%³ was from commodity properties (residential, office and commercial spaces). With such a large supply of property space, the total addressable market (TAM) – the revenue opportunity available for property managers – amounted to RMB 1.4 trillion in 2018. As the GFA under management is expected to grow by 1.5 billion sqm annually³, the TAM will increase to RMB 3.2 trillion in 2030, representing a compound annual growth rate (CAGR) of 7.4% p.a. (see Fig. 1).

Fig. 1: Total addressable market (TAM) size to hit RMB 3.2 trillion by 2030

Besides the large amount of space that requires property management, community value-added services are another important driver for the sector. This segment, which is highly lucrative, is expected to have a TAM of RMB33 billion in 2030, up from RMB 8 billion in 2018, representing a CAGR of 33% p.a. (see Fig. 1). While the top 100 players’ net profit margins from basic property management services averaged a mere 5-6%, community value-added services can command net margins of more than 18%⁴. Such margins have further room to increase as value-added services enjoy economies of scale given the generally fixed operating expenses. It is therefore not surprising to see in recent years, China’s property managers ramping up such services, which typically include:

• Public space utilisation;
• Property brokerage;
• Electronic services;
• Lifestyle services;
• Financial services; and
• Housekeeping services

Still at a preliminary stage, some property managers have even started to explore other value-added services in advertising, online retailing, retirement care, and medical services.

A good property manager is important for value preservation or the creation of properties. More recently, Chinese households and authorities have come to recognise the value of property management in light of the coronavirus (COVID-19) outbreak. To contain the spread of the virus, property managers have been rigorously carrying out preventive measures such as temperature taking, record keeping and ensuring that residents as well as tenants wear a mask when leaving the premises. According to anecdotal reports, many community households have voluntarily compensated property management staff as a means of expressing their gratitude for these kinds of services. In addition, a local property management vendor which failed to carry out preventive measures in its property, was reportedly banned by the authorities from expanding its services in Dezhou, Shandong province⁵.

Over in Shenzhen and Hangzhou, local governments have announced they will provide a subsidy of RMB 0.5/ sqm for two months to property managers, in recognition of their work and the related costs incurred in helping manage the fallout from the outbreak. We also expect that there is a high likelihood of more supportive policies for the property management business, such as temporary cuts in value-added tax, as property managers are now taking up more social functions (e.g. community-level governance).

This shows the important role of property managers in community management for tenants and property owners. It is likely that there will be more government policies aimed at encouraging property managers, with well-established infrastructures and wider coverage, to offer value-added services.

The property management sector is highly fragmented with more than 127,000 property managers currently in China⁶. In 2019, the top 100 of these companies managed 44.5% of the GFA across the country, whilst the market share of the top 10 managers was only 13.1% (see Fig. 2). As sizeable property managers look to solidify their positions and mid-size players rush to catch up with the rising demand for premium services after the coronavirus outbreak, Citi Research believes that the industry is poised for rapid consolidation, with the top 10 players expected to double their GFA market share to 30.0% by 2025.

Fig. 2: Top-10 market shares of property management companies

The financial resources required for M&A have driven more privately-owned property managers to list on the stock exchanges. Additionally, more developers may also look to list their property management operations in order to unlock the potential value in the capital markets. Investors can expect about 10-15 Chinese property managers to be listed on the Hong Kong stock exchange over the next three years, according to a 2019 study by CGS-CIMB⁷.

Relative to other service businesses, the property management sector has seen less disruption and decrease in demand during the pandemic. In the short term, despite the increased preventative/hygiene measures now included in management processes, the core business of property managers has seen only slight cost increases, and these have largely been offset by government subsidies and support measures. Furthermore, as virus control measures are gradually relaxed, the demand for non-essential value-added services – property agency, property sales office management and decoration services halted during the lockdown – will likely recover in Q2 2020.

In the mid-to-long term, quality property managers who can safeguard households’ health and well-being, fulfil daily demands, offer transparent communications and ensure a higher level of convenience, will be in high demand. Such premium services, however, are currently in limited supply. Only by offering such premium services can property managers stand out from others when they pitch for third-party contracts for both new and second-hand projects in the future, which, in turn, will help them gain greater market shares, raise management fees and improve profit margins.

The Chinese property management stocks which we track are expected to register robust earnings growth of 34.4% p.a. from 2019 to 2021 as revenues from business expansion and value-added services add to the industry’s stable income stream (see Fig. 3). The sector is trading at reasonable valuations considering its stronger growth potential in comparison with global peers.

Fig. 3: China’s property management companies versus international peers

Nevertheless, after a strong rally in 2019, we prefer to be selective and look for companies with the following attributes:

Developer-backed. Developer-backed property managers can leverage their parents’ large reserves of planned or under-construction GFA, as well as a recognised brand name. This also helps them when bidding for third party and secondary market projects amid industry consolidation, as well as when raising funds from the capital markets.

Execution capabilities. Detail oriented and efficient execution is critical to improve management fee collection rates, renewal rates and residents’ commitment/stickiness. All these are key drivers of organic growth in GFA and improved margins.

Technology. Given the high labour costs involved in property management, managers that make use of technology in daily management – such as smart video surveillance and parking systems (see Fig. 4) – will be able to reduce labour costs significantly and improve profitability.

Fig. 4: Smart technologies that help improve property management quality and lower staff costs

Diversification. Property managers need to be on the lookout for more space to manage, not only in respect of residential projects, but also commercial spaces and public amenities. The latter segments tend to have higher entry barriers and require a track record in property management but come with higher profit margins.

We believe that China’s property management industry is at an inflection point from which it will reinvent its labour-intensive business model and adopt a higher value-added service approach. This will offer investors another viable avenue to tap into China’s growing property demand and the rising trend towards urbanisation, as well as the increased demand for quality property management services triggered by the COVID-19 outbreak.