Understanding China Housing's operations
Our core competencies, listed below, are woven into every phase of our real estate development business. Our staff works as one integrated team on each phase. China Housing's core competencies include:
- Land analysis and acquisition,
- Site planning and development,
- Design, architecture, engineering, and construction,
- Environmental responsibility,
- Project management,
- Marketing and sales,
- Joint ventures and co-developments,
- Government relations,
- Property management, and
- Demolition and recycling.
How our real estate development business operates
Marketplace Our selected marketplace is greater Xi'an. We may expand to other similar or smaller Chinese cities where we find the conditions that will permit us to perform as well as we do in Xi'an.
What we do We are in one business, the real estate development business, and we operate in most phases of that business.
That means that first, we evaluate the potential for land that is or may be available for housing, commercial, or industrial uses. Our evaluation includes all the factors that determine the site attractiveness and probability of operating and financial success. Those factors, of course, also include our relationships with the national, provincial, and local governments that often perform a significant role in emphasizing and supporting development in specific areas and sites.
Next, for the parcels we find particularly attractive, we acquire the use of the parcels at attractive prices. In China, the government owns all the land and sells rights to use the land for specified long-term periods.
After acquiring the rights to use and develop the land, we create the detailed architectural, engineering, and operating plans for the site, based on our preliminary work that we completed during our evaluation.
Some developers buy land rights then sit on the site without action for years. We do not. We only acquire a site when we know we can move promptly to arrange the financing, design and engineer, build, sell, and manage the site after sale.
When we buy the land rights and find that someone else, usually another developer, would like to buy land rights for part of the acreage from us at a price much higher than we believe it is worth to us, we will sell them.
We are environmentally sensitive, paying particular attention to -
- the sourcing and consequences of the construction materials we select,
- the effects of our construction and our properties over their lifetimes on the land, water, air, and all living beings,
- the effectiveness and efficiency of our buildings and their electrical, heating and air conditioning, water, waste disposal, communications, sound, and other systems. Within those, we try to maximize the total energy efficiency and minimize the electromagnetic emissions from our choices.
- our prudent choices in alternative energy, especially solar, that can reduce the energy required from outside utilities, and
- the recycling potential of all the materials when the demolition of the buildings inevitably happens many years into the future.
So we consider not just womb to tomb, but back to womb.
When we complete a building, transfer the ownership to the new buyers, and have a few units that have not yet sold, which is unusual, we rent or lease them out until the units are sold. The same can happen with commercial spaces.
So we do the entire process from acquiring raw land to selling completely finished units, and can stop at any phase of that sequence, depending on the buyers and potential return on investment.
The real estate development business is a long-term effort. For example, in 2007 we acquired the right to develop the Baqiao project, and expect to complete its final building in 2017.
To extend the performance of our residential communities and commercial buildings, in 2009 we acquired a property management company that will expand our direct involvement over the life of the communities we design and construct. In that way, we can help maintain the attractiveness of our properties and further assure our customers that the value of their apartments and commercial facilities will be retained in the most professional and cost-effective manner possible.
How we execute We provide, or contract for, the site design and detailed architecture. For buildings, we provide the design, architecture, and engineering; we can also contract parts of those to other companies. The detailed mechanical, electrical, plumbing, and interior finishing work is contracted to local companies with whom we usually have worked before. We perform the financing, project management, marketing and sales, government relations, and property management work
Financial objectives We are focused on operations, because we know and have proven, that if we excel in operations, the probable financial performance will result in an internal rate of return that is considerably higher than our incremental cost of capital. Our financial objectives, therefore, are to create the highest realistic returns on our assets and on our shareholders' equity.
How we count During 2007, we accounted for our business and recognized revenues only when the projects were completed, using the full accrual method of accounting.
Beginning January 1, 2008, we adopted the percentage of completion method of accounting for building construction projects. This method in our case uses two major factors to determine when we recognize revenues: (1) customer pre-sales of apartment units and (2) our progress in the related housing construction. This method will permit us to report revenues and expenses more frequently (than the one-time reporting used in the full accrual method) and should give you better visibility of our progress. The percentage method, by its nature, is conservative, with costs skewed toward the front of the project and profits skewed toward the end of the project, when both revenues and costs are known with reasonable certainty.
Infrastructure construction projects and land sales will continue to be reported only at the end of the contracts, using the full accrual method of accounting.