Inventory is basically what every enterprise will have, but it is particularly important for the real estate industry, because the inventory of real estate companies is basically several times their net assets, which means that as long as house prices fall sharply, the inventory of real estate will be impaired. It will have a greater impact on net assets. In addition, coupled with the high leverage factor, the inventory also has to pay a certain amount of interest every year, which makes the operating condition of the real estate company even worse.

The inventory of real estate companies is mainly divided into land (products to be developed), projects under construction and completed projects.The land is easy to understand, that is, the bought land, this asset is very liquid and easy to realize; secondly, the completed project is a property that has been built for sale, and it is easy to cash when the market is good, and rent can be collected when the market is bad. Secondly, projects under construction, including unsettled products for sale, products to be built for sale and products not for sale under construction, have the greatest risk of impairment of value of products for sale and non-sale, especially in the context of a slump in the real estate market. you have to face the risk of impairment and repay the interest on the loan.

1. About the impairment of inventory

Take Vanke as an example. As of June 30, 2019, the company's inventory is mainly divided into completed projects, projects under construction and products to be developed (land). The total book value of inventory is 790.46 billion yuan, of which land accounts for 22.9% of inventory, projects under construction account for 68% of inventory, and completed projects account for 9.0% of inventory.

From the picture above, we can find that Vanke's price reduction preparation reported to the completion project preparation in 2019 accounts for 0.02% of the book balance (the price reduction preparation is provided in advance, not already occurred, but is a prudent approach of the enterprise). The price reduction preparation for products under construction accounts for 0.3% of the book balance, and the price reduction preparation for land accounts for 0.09% of the book balance.

The least preparation for a fall in land prices. The inventory of real estate companies is basically priced by the cost method, and the fair value is greater than the cost most of the time, especially when the real estate industry is booming, the fair value of the land will be greatly increased, and the inventory of the company is underestimated.Even if the industry is in a downturn, the probability of land price drop is small.. This is also why Hong Kong real estate developers like to speculate on land, because the money is quick and there is no need to bother to build houses.

The second is the preparation for the price drop of the completed project. At least the completion of the project will not come to a bad end, as long as there are no major fluctuations in the market, the probability of large-scale impairment of inventory is not great, and most enterprises do not make money. In addition, when the market is bad, the company can collect rent on its own, as long as the overall cost of capital of the company is not high.

The project under construction is the most prepared for price reduction, and it should be. For the unsettled projects under construction, there is basically no risk, because the customer has already paid, and the probability of default is low, unless the price of new housing in China generally falls by more than 30%, which is basically impossible, because at that time, it is estimated to be a serious financial crisis. Sellable and unsellable projects are the real risk, because these two projects need to speed up the turnover, otherwise enterprises can not stand the interest expenses alone. in addition, some projects have higher land costs and thin profits, and if housing companies start to reduce prices, individual projects may be impaired.

On the whole, the inventory of real estate enterprises is much higher than that of enterprises in most industries. In general, the real estate enterprise inventory impairment probability of a large area is not large, and there will be value-added, if there is a sharp drop in house prices, that is another matter.

two。 About the loan interest on inventory

The above we talk about inventory does not take into account the interest, the real estate industry generally has high operating leverage, and where is most of the borrowed money? The answer is inventory.

Why does the real estate industry need to speed up turnover even if it makes less money? It is not that such companies do not want to make money, but the interest brought by operating leverage forces enterprises to make small profits and quick turnover, or even lose money to ship goods, because interest companies at several points a year cannot bear it, which is magnified under a certain leverage.

Continue to take Vanke as an example, Vanke's loan interest expenditure in the first half of 2019 is 5.87 billion yuan, of which 2.64 billion yuan is capitalized and 3.23 billion yuan spent, while Vanke's first-half net profit is only 11.8 billion yuan (because the profits of real estate companies are concentrated in the fourth quarter. Interest expenditure is expected to account for about 1/4 of the total profit). Think about it. Vanke is notoriously low leverage and low borrowing costs (5.3% of borrowing costs in 2018), so the annual interest expenses generated by real estate companies account for so high profits. If readers look at some real estate companies with high operating leverage and high borrowing costs, annual interest expenses will account for more than half of the company's net profit. In this context, can real estate companies not accelerate turnover? Dare there be a big fall in house prices?

In addition, it is the capitalization of borrowing expenses, which is common in the industry. however, the capitalization of borrowing costs will transfer the interest expenses that have already occurred to the inventory as assets. Vanke as of June 30, 2019, the inventory contains borrowing costs capitalized to 15.66 billion yuan, this money will later lower the enterprise's gross profit margin, lower the enterprise's net profit.

For those housing enterprises with high leverage, high interest on loans and high capitalization of borrowing costs, the bet with high inventory is that house prices continue to rise. If house prices do not rise and houses are unsalable, the pressure on enterprises will be very great, for example.

1. The rent of self-owned commercial real estate is not as high as the loan interest.

2. Due to the high proportion of capitalization of borrowing costs, gross profit margin and net profit margin will be very ugly, and enterprises will have problems with blood recovery.

3. The high interest on borrowing makes it possible to make a loss on net profit.

This is the main reason why the market values low-leveraged housing companies much higher than highly leveraged ones.