Shenwan Hongyuan Group Co.,Ltd. has released a research report indicating that while property sector financial statements continue to face pressure, home prices in core cities are stabilizing, leading the firm to maintain its "Overweight" rating on the sector. The report suggests that the presale system reform represents a major shift in real estate development models, pushing developers to transition from a financial-driven approach back to a manufacturing-oriented model.

Following the new policies, new home supply is expected to decrease significantly. Combined with a medium-term peak and subsequent decline in secondary market listings, this will collectively drive a synchronized reduction in housing supply. However, demand remains strongly supported, which should improve the supply-demand balance and further reinforce the establishment of a price floor in core cities such as Shanghai.

While developers may experience temporary operational challenges, the stabilization of core city home prices, declining land costs, rising market concentration, and equity and debt financing support will all contribute to the growth of quality enterprises. Additionally, secondary homes are increasingly substituting new homes, and the rising penetration rate of this trend benefits intermediary companies.

Where to begin

In the first half of 2026, sector revenue declined while gross margins slightly improved, expense ratios increased, and impairment provisions decreased as a proportion of revenue, resulting in weaker earnings performance. Revenue in H1 2026 fell 21.9% year-over-year, a 4.8 percentage point drop compared to 2025. By developer tier, first-tier companies saw revenue decline 16%, third-tier companies grew 27%, and second-tier companies fell 29%.

Net profit in H1 2026 decreased 10% year-over-year, improving by 59 percentage points compared to 2025. All tiers of developers reported average losses, although the magnitude of losses narrowed. This was driven by weaker settlement, slightly higher gross margins on completed projects, increased expense ratios, and lower impairment provisions. By tier, second-tier companies saw profits grow 33%, while third-tier companies declined 24% and first-tier companies fell 30%.

Looking ahead, the report estimates that Shanghai home prices bottomed out in early 2026. The August introduction of new property policies in both Beijing and Shanghai, which came earlier than expected, will solidify the bottom in core cities. The report also anticipates further policy optimization space. The August 28 presale system reform marks a significant evolution in real estate development models, transitioning developers from financial models back to manufacturing models.

After the new policies, new home supply will shrink notably while demand remains resilient, improving supply-demand dynamics and further confirming the price floor in core cities like Shanghai. The report projects that sector performance will experience weak recovery amid bottoming fluctuations during 2026-27, with increasing divergence in performance across companies.

Key financial metrics for H1 2026

Gross margins improved to 15.3% in H1 2026, up 1.0 percentage point from 2025, as developer settlement cycles typically lag land acquisition by 2.5-3 years. Inventory from 2021 and earlier is still undergoing price reduction and destocking, carrying residual impairment risk. By tier, third-tier companies achieved gross margins of 21%, followed by second-tier at 18% and first-tier at 12%.

The three expense ratios totaled 12.9% in H1 2026, up 2.3 percentage points from 2025. Minority interest profit ratio was 0.6%, with both numerator and denominator negative. Impairment losses accounted for 0.5% of revenue, down 3.1 percentage points year-over-year. These factors combined to lift the net margin to -6.8% in H1 2026, an improvement of 7.6 percentage points from 2025. By tier, second-tier companies reported net margins of -6.0%, third-tier -6.4%, and first-tier -7.4%.

The report expects gross and net margins to remain weak in 2026, though with signs of bottoming, and select quality companies may see improvement. By 2027, developers will begin settling projects from the 2024-25 "good housing" period, potentially improving sector gross margins.

Leverage levels rise while cash coverage weakens

As of end-H1 2026, the sector's asset-liability ratio stood at 73.3%, down 0.1 percentage point from end-2025. Excluding advance receipts, the ratio was 70.4%, flat versus end-2025. The net debt ratio rose to 94.9%, up 1.7 percentage points from end-2025. First-tier developers saw their net debt ratios decline, while second and third-tier companies saw increases, driven by stable interest-bearing debt, declining cash reserves, and sustained losses eroding net assets.

However, with ongoing supply-side risk prevention policies, developers are expected to maintain stable leverage levels going forward. Unsold inventory as a percentage of total assets has declined to historic lows, indicating future restocking demand. The sector's cash-to-short-term-debt ratio was 0.9 times at end-H1 2026, down 0.1 times from end-2025, with first, second, and third-tier developers at 0.8, 0.7, and 1.0 times respectively, all showing declines.

Sales collections decline, advance receipts lock-in at historic lows

Sales collections continued to decline in H1 2026, with cash inflows from sales of goods and services down 16% year-over-year, reflecting the broader slowdown in industry sales growth. The coverage ratio of these cash inflows to revenue was 89% in H1 2026, up 20 percentage points from 2025. Advance receipts fell 35% year-over-year at end-H1 2026, up 0.7 percentage points from end-2025.

The advance receipt lock-in ratio stood at 0.87, 0.69, 0.62, and 0.49 times from 2022 through 2025, further declining to 0.45 times at end-Q1 2026, a historic low. This indicates further reduction in future settlement resources, with first and second-tier developers maintaining relatively higher levels.

Risks to consider

Key risks include weaker-than-expected sales absorption, tighter-than-expected financing conditions, and higher-than-expected labor cost increases in the property management industry.