After enjoying an extraordinary growth phase, the construction agency industry in China is beginning to encounter signs of stagnationThis trend is visible as businesses are experiencing a noticeable slowdown in expansion rates, indicating an impending growth bottleneck that could redefine the landscape of the sectorWith a decline looming on the horizon, analysis points to a stark reality – this year marks the lowest growth rate the industry has seen in the past five years.

Data from the China Index Academy reveals that since 2018, the growth of newly contracted scales among construction agencies has consistently surpassed 10% annuallyThe growth rate dipped to its lowest at 11.3% in 2022 and spiked to an impressive 56.3% in 2023. Yet, forecasts suggest that 2024 is destined to see a fall below the 10% mark for the first time.

Upon honing in on specific firms, it becomes evident that major players in the construction agency scene are grappling with varying outcomes

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For instance, in 2024, three prominent enterprises – Greentown Management, CIFI Construction Management, and Blue City Group – are making headlines with newly contracted planning areas of 36.49 million square meters, 15.88 million square meters, and 15.70 million square meters, respectivelyThese three key firms now account for more than 30% of the industry’s overall new contracts.

However, a closer look at the growth dynamics reveals a concerning trend among these top firmsCIFI Management exhibited a robust year-over-year growth exceeding 60%, tantalizingly against the backdrop of Greentown Management's paltry growth rate of just 3.4% and Blue City Group's unexpected declineCompounded with the larger picture, the growth rate of the top five companies merely reached 3.5% – signaling that even industry leaders are finding it increasingly challenging to maintain their upward trajectories.

This decline in growth rate among leading companies is believed to be a contributing factor to the broader slowdown the industry is experiencing

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Liu Shui, the Director of Enterprise Research at the China Index Academy, insightfully points out that construction agencies, as service enterprises, are inherently bounded by the characteristics of their sectorAs scale reaches a certain height, maintaining rapid growth becomes a formidable hurdleMoreover, with leading construction agencies holding staggering market shares, sometimes brushing against the 40%-50% mark, a slowdown in their scaling invariably leads to a deceleration across the sector.

One of the underlying issues is the current lackluster performance in real estate salesZhou Xuan, the Director of Product Research at Yiheng Think Tank, provides candid insight into this dilemma, suggesting that the “ceiling” for construction agencies is quite concreteAs new home sales continue their downward trajectory, it signals constricted growth potential for the construction agency industry

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Given these conditions, the market cannot accommodate the currently inflated number of enterprises, leading to cutthroat competition and price warsMany leading firms are finding it increasingly difficult to navigate this landscape, while smaller entities are particularly vulnerable and face an uphill battle for survival.

As Liu Bingyang, President of CIFI Construction Management, articulated, the pressures on the real estate industry are considerable, with a noticeable shrinkage in sales scalesUnder such market pressures, construction agencies also find themselves squeezedOnce projects commence, the associated risks abound, particularly when hefty investments don’t correlate with favorable sales outcomesIn light of such uncertainties, many clients are opting for a “wait-and-see” approach before entering the market.

Currently, the primary clients for construction agencies are city investment entities that are trying to secure land

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However, these city investment companies are experiencing noticeably low rates of project initiationAccording to statistics compiled by CRIC, the percentage of city investment projects that have actually commenced since 2021 sits at a mere 22%, with only 20% of the land parcels being fully developedThis drastically low figure indicates a bottleneck that constrains opportunity for construction agencies reliant on these clients.

Moreover, since 2023, there has been a steady decline in land acquisition by city investment entities, consequently leading to fewer entrusted projects in the pipelineDuring the past year, the influx of real estate development companies into the construction agency market catalyzed a brief surge in growth; however, this high base outlined the sharp drop-off in growth rates for 2024.

Nevertheless, while the current backdrop presents significant challenges for the construction agency industry, it is essential to reconcile these challenges with growth potential when compared to foreign mature markets

Indeed, there lies substantial room for development within China’s construction agency segment.

Reports from CRIC regarding 29 pivotal cities and an extensive catalog of nearly 10,000 active residential projects reveal that construction agency penetration within core urban centers is strikingly lowThe data indicates that merely 1.67% of the projects are handled by construction agenciesBreaking it down by city grades, first-tier cities display a dismal construction agency involvement of just 0.8%, while second-tier cities achieve 1.6%. Interestingly, third and fourth-tier cities present relatively favorable figures at around 2.6%. This imbalance underlines the vast untapped potential within the industry for future growth.

Liu Bingyang further emphasizes that with the emergence of favorable regulatory policies, the housing market is undergoing a repair processMoreover, initiatives aimed at addressing localized debt and reclaiming idle land present newly emerging opportunities

He posits that many parcels held by city investment entities have unfavorable development conditions partly due to previous high land acquisition prices, instilling fear of potential losses upon market entryHowever, a strategic repossession followed by efficient pricing could breathe life back into these projects, opening avenues for redeveloping opportunities.

To successfully maneuver through the current bottleneck and enhance their competitive stance, construction agencies must focus on leveraging their strengths and honing in on their models for sustainable development.

According to Liu Shui’s analysis, enhancing sales liquidation capabilities surfaces as a pivotal competency for firms aiming to break out of the constraints they presently faceA significant percentage of construction agency projects cater to dual roles of construction and salesSurveys conducted by the China Index Academy reveal that nearly 60% of respondents believe that effective product positioning significantly contributes to the favor construction agencies receive from clients

By delivering precision in project positioning and ensuring high-quality products, construction agencies can elevate their product marketability, furthering their brand reputation while amplifying client satisfaction.

In addition to honing core competencies, brand-centric enterprises can explore novel partnership mechanisms to diversify project channels and expand brand outreachThe idea of a partner-based regime germinated from China’s Central Real Estate Development in 2022, emphasizing collaboration with external partners to access their project assets or networks in an effort to quickly penetrate new markets and secure additional projectsThis approach has empowered construction agencies to rapidly capitalize on opportunities searching for growth within a competitive framework.

In a progressive move, certain construction agencies are further advancing service provision

Many agencies are now engaging during the preliminary stages of land acquisition, assisting clients in site assessments, investment calculations, and giving professional advice on investments, thus reversing the previously passive notion of mere project processing and securing greater control over collaborative outcomes.

CIFI Construction Management is taking substantial strides toward instilling this approachPresident Liu Bingyang recognizes that regional city investments have foundational requirements, mandating proactive investment from construction agenciesThis entails assisting in judicious project assessments to foster investor confidence and secure profitable land acquisitionsThis strategic shift towards “actively seeking out partners” over “passively searching for projects” marks a notable evolution in the operational landscape.

Moreover, Liu Shui posits that construction agencies could innovate their business modalities to carve out unique niches and stand out amid the competition