Analysis of Chinese real estate follow-up investment operation effect and mechanism

• Main Author: HE, Yinyu
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2021
• Subjects: Real estate; follow-up investment; profit sharing; leverage; incentive; Business Administration, Management, and Operations
• Online Access: https://ink.library.smu.edu.sg/etd_coll/338; https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=1332&context=etd_coll
• Institution: Singapore Management University

Follow-up investment system has become a fundamental system for the development of most real estate development enterprises. In the upward cycle of real estate, follow-up investment based incentive mechanism is of great importance for performance growth of real estate development enterprise. However, real estate development enterprises lack a relatively mature model to effectively build a follow-up investment system. While building a follow-up investment system, most real estate development enterprises find a benchmark object and copy it mechanically. The author explored the basic implementation status of follow-up investment system of Chinese real estate enterprises through 310 questionnaires survey, interview and literature research on 101 among China’s top 500 real estate enterprises, comprehensively analyzed and optimized follow-up investment system through case study and tried to provide a referable basic system model for the real estate industry. To be specific: (1) Entrance mechanism for follow-up investment of real estate enterprises includes selection of follow-up investor, follow-up investment amount and follow-up investment operation platform: Mandatory follow-up investor mainly includes top management of enterprise headquarter, city enterprise and project company; follow-up investment amount (including leverage limit) is often limited to 10% of maximum project fund; the higher level is the larger follow-up investment amount is. Low-income employees have a low follow-up investment amount and most follows up the investment voluntarily. Follow-up investment is realized through business partnership shareholding platform architecture. In the downward cycle of real estate, we should try to reduce mandatory follow-up investment amount and relieve pressure on core employees. (2) Return mechanism for follow-up investment of real estate enterprises: Return frequency, amount and ratio are the key to design the return mechanism. The principal is mainly returned 2-4 times on the condition that the project company has positive operational cash flow and returns 50% of the principal to the follow-up investment company within 30 days with operating expenditure of the coming 6 months reserved. (3) Profit sharing mechanism for follow-up investment of real estate enterprises mainly includes profit sharing condition, time node and frequency. Profit sharing condition: Profit should be shared 2-4 times in advance and formally. Conditions for sharing profits in advance: First, operational cash flow of project is positive; second, net profit is positive; third, sales rate of project reaches up to 90%. Then, profit should be shared formally by two steps according to project yield upon settlement. (4) Leverage and bottoming mechanism for follow-up investment of real estate enterprises: There is a big difference in bottoming and leverage of real estate enterprises. However, the basic logic is: Level should often be 2-4 times. In the upward cycle of the real estate market, follow-up investment should be provided with beverage. However, high turnover does not exist and the principal can hardly be returned in the downward cycle, so beverage is unnecessary. Bottoming is necessary in the upward cycle but unnecessary in the downward cycle of real estate. The primary purpose of follow-up investment is to achieve high turnover of project development. For this reason, the author found from case analysis that the precondition was to standardize operation, product and service and the fundamental guarantee was to optimize and improve evaluation, compensation and incentive systems, which were closely connected to the implementation of follow-up investment system. (1) The essence of quick turnover is to improve capital usage efficiency, which requires quick land acquisition, quick construction, quick sale and quick return. (2) To realize “quick land acquisition, quick construction, quick sale and quick return”, standardization is needed: Including operation standardization, product standardization and service standardization. That is, standardize land acquisition, orientation, product, cost, purchase, implementation, marketing, handover and property service and accelerate green fast channel of project development. (3) In the meantime of operation standardization, investment risk and operation cost of project should be controlled, which relies on team, especially team leader’s ability and work efficiency. Therefore, the core of realizing quick turnover and implementing the follow-up investment system is to maximize the value of people, improve talent competition, evaluation and incentive systems, build a collaborative, efficient and competitive team, improve efficiency and achieve organizational goals and individual goals.