The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the financial statements of China HGS Real Estate Inc. for the fiscal years ended September 30, 2012 and 2011 and should be read in conjunction with such financial statements and related notes included in this report.

As used in this report, the terms "Company," "we," "our," "us" and "HGS" refer to China HGS Real Estate, Inc. and its subsidiaries.

Preliminary Note Regarding Forward-Looking Statements.

We make forward-looking statements in Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report based on the beliefs and assumptions of our management and on information currently available to us. Forward-looking statements include information about our possible or assumed future results of operations which follow under the headings "Business and Overview," "Liquidity and Capital Resources," and other statements throughout this report preceded by, followed by or that include the words "believes," "expects," "anticipates," "intends," "plans," "estimates" or similar expressions.

Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in these forward-looking statements, including the risks and uncertainties described below and other factors we describe from time to time in our periodic filings with the U.S. Securities and Exchange Commission (the "SEC"). We therefore caution you not to rely unduly on any forward-looking statements. The forward-looking statements in this report speak only as of the date of this report, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise. These forward-looking statements include, among other things, statements relating to:

• our ability to sustain our project development

• our ability to obtain additional land use rights at favorable prices;

• the market for real estate in Tier 3 and 4 cities and counties;

• our ability to obtain additional capital in future years to fund our planned expansion; or

• economic, political, regulatory, legal and foreign exchange risks associated with our operations.

We conduct substantially all of our business through Shaanxi Guangsha Investment and Development Group Co., Ltd, in Hanzhong, Shaanxi Province. Since the initiation of our business, we have been focused on expanding our business in certain Tier 3 and Tier 4 cities and counties in China.

The real estate market in China plodded forward amid increasingly restrictive policies starting in 2011. In January 2011, Shanghai and Chongqing officially started to levy property taxes. In February 2011, Beijing issued a purchase restriction order on the number of homes a person is allowed to purchase to curb speculation and control rising real estate price, and more than 40 cities nationwide soon followed suit. In March 2011, the National Development and Reform Commission announced that from May 2011, each residential house must be marked clearly with a specific price as the ceiling price. Apart from administrative measures, to further tighten liquidity, the People's Bank of China increased banks' required reserve ratios six consecutive times and raised the benchmark interest rate three times since the beginning of the year, leaving a profound negative impact on the residential housing transaction volume. In 2011 and the first nine months of 2012, residential housing transaction volume in major cities nationwide recorded a decrease compared with that of the comparable prior periods. The first-tier cities with stricter policies witnessed a more extensive decrease in transaction volume. The restrictive policies started to have significant impact on the real estate market in Tier 3 and Tier 4 cities in late 2011. These policies also negatively affected buyers' confidence and consumption psychology. Some buyers are taking a wait-and-see attitude and may delay their purchasing decision.

With uncertainties in the PRC government's credit tightening policies, the market for real estate sales in 2012 was extremely challenging. Our sales volume dropped significantly in fiscal 2012. Our sales, gross profit and net income for fiscal 2012 were $ 18,856,978, $8,086,532 and $5,176,093, respectively, representing a 66.8%, 63.0% and 72.3% decrease from fiscal 2011, respectively.

In addition, we are using full accrual method to recognize revenue and only recognize sales revenue upon delivery of sold properties to buyers instead of upon pre-sale of the properties. This accounting method adds uncertainties in our future sales trend and causes uneven sales revenue from period to period as our sales revenue is depend upon the number of units delivered during the year. For the year ended September 30, 2012, we completed and started delivery of 4 new residential buildings with total GFA of 64,141 square meters, compared to 17 new residential buildings with GFA of 160,320 square meters completed in fiscal 2011. Currently, most of our real estate projects under construction are high-rise buildings with planned GFA over 709,038 square meters, which generally take about 2- 3 years for the construction, while our completed projects in the past were mostly multi-layer or sub-high-rise buildings and took 1-1.5 years for construction. It indicates that in certain future reporting periods, even if we have pre-sale contracts, we may not have any new construction work completed and delivered to buyers. This is a typical characteristic of our business and the uneven sales revenues from period to period are due in part to the rate at which units are completed and delivered to buyers under the current full accrual method of revenue recognition policy.

Despite the declining transaction volume and cooling real estate market, housing prices in Tier 3 and Tier 4 cities and counties have not shown a substantial correction. While short-term market correction is a process that the property sector is bound to undergo, the fundamental demand for residential housing will remain given the rising per capita income, accelerating urbanization and increasing demand for better living environment. For the year ended September 30, 2012, our average selling price ("ASP") for real estate projects (excluding sales of parking spaces) located in Yang County was approximately $417 per square meter, a slight increase of 3% from the ASP of $401 per square meter in fiscal 2011. The ASP of our Hanzhong real estate projects (excluding sales of parking spaces) was approximately $754 per square meter, an increase of 30.7% from the ASP of $577 per square meter in fiscal 2011. This was mainly due to the fact that we sold more commercial properties in Hanzhong during the first quarter of fiscal 2012. Generally, the ASP of commercial units is more than doubled from the ASP of residential units. For the year ended September 30, 2012, the ASP for commercial units located in Hanzhong was $1,586, comparing to the ASP of $543 per square meter for residential units in Hanzhong. The ASP for our commercial units located in Yong County was $865 per square meter, comparing to the ASP of $369 per square meter for residential units in Young County.

With respect to capital funding requirements, while many property developers must now worry about their debt leverage and working capital needs for debt repayment, in contrast, the Company does not have any external debt obligations outstanding at September 30, 2012 and 2011. The Company's cash flows from pre-sales and sales and, if necessary, shareholder loans should provide financial support for the current development and operations. In order to fully implement our business plan, however, we may need to raise capital in future to sustain our expansion. Therefore, we might seek to access the capital markets in both the U.S. and China to obtain the funds we require. At the present time, however, we do not have commitments of funds from any source.

Market Outlook

The Government's tightening policies should continue in the first half of 2013, which may make real estate developers face more difficulties in obtaining land use rights and bank loans. These governmental policies will also negatively affect buyers' confidence and consumption psychology. Meanwhile, with affordable housing construction still underway, it takes time for abundant affordable housing to appear in the market. The Company therefore expects the purchase restrictions and price ceiling policies to continue, which however, should have less impact on the Company's products comparing to the real estate market in Tier 1 and Tier 2 cities. Per a China 35 cities housing price report published by E-house China R&D institute (NYSE: EJ) for 2011, the average housing price to residence income ratio for Tier 1 and Tier 2 cities are in the range from 10.4 to 15.6, while the ratio for Tier 3 and Tier 4 cities generally ranges from 4.2 to 8.0. Our customers in Tier 3 and Tier 4 cities and counties have a constant growth in their disposable income. With lower housing price to family disposable income ratio and increasing urbanization level, there is a growing demand for high quality residential housing. The Company expects to continuously focus on developing real estate properties in prime locations of Tier 3 and Tier 4 cities and counties.

We believe the fundamentals underpinning real estate demand remain strong. We intend to remain focused on our existing construction projects in Hanzhong city and Yang County, deepen our institutional sales network, enhance our cost and operational synergies and improve cash flows and strengthen our balance sheet. In this respect, in late of fiscal 2012, we began the construction of two large residential projects in Hanzhong city and addition high-rise residential buildings in Yang County:

· Oriental Pearl Garden

The project is located in the downtown of Hanzhong City. It consists of 12 high-rise residential buildings with commercial shops on the first and second floors with an estimated GFA of 260,000 square meters. The Company started construction in the third quarter of fiscal 2012 and expects to complete the whole construction in 2-3years. The pre-sale license is expected to be obtained by the third or fourth quarter of fiscal 2013. As of September 30, 2012, there are no customer deposit balances for the project.

· Mingzhu Beiyuan

The project is located in the south west part of Hanzhong City. It includes 17 high-rise residential buildings with an estimated GFA of 350,000 square meters. The Company started construction in the third quarter of fiscal 2012 and expect to complete the whole construction in 2-3years. The pre-sale license is expected to be obtained by the second or third quarter of fiscal 2013. During fiscal 2011, we signed series of residential-apartment bulk-purchase agreements with Hanzhong Municipal Public Security Bureau, Hanzhong Municipal Bureau of Justice, Hanzhong Local Tax Bureau and the Hanzhong Social Insurance Center. The total residential units to be delivered in Mingzhu Beiyuan under these residential-apartment bulk-purchase agreements are 518 units with a total GFA of 68,752 square meters. As of September 30, 2012, the contracted sales under all residential-apartment bulk-purchase agreements and other individuals was approximately $33.5 million (RMB 211.6 million). As of September 30, 2012, the customer deposit balance related to these bulk-purchase agreements amounted to $ 14,703, 528 (RMB 92,911,594).

· Yangzhou Pearl Garden

During fiscal 2012, the Company also started the construction of 8 high-rise residential buildings and 1 sub-high-rise residential building with total GFA of 99,038 square meters in Yangzhou Pearl Garden located in Yang County. We have obtained a pre-sale license for 3 residential buildings. The rest of pre-sale licenses are expected to be obtained by September 30, 2013. During fiscal 2011, the Company entered into a preliminary contract with Yang County to develop affordable apartment buildings with a total GFA of 40,000 square meters. These units are mainly located in 4 of 8 high-rise residential buildings. We expect the construction of 1 high-rise residential building to be completed in the first quarter of fiscal 2013 and 2 additional high-rise residential buildings to be completed in the second quarter of fiscal 2013. The construction for the rest of buildings is expected to be completed in 2 years. As of September 30, 2012, the total contracted sales for these residential buildings were approximately $10.6 million (RMB 67 million). As of September 30, 2012, the customer deposit balance amounted to $ 7,958,739 (RMB 50,291,273).

In addition to the above residential projects, the Company was approved by Hanzhong local government to construct two municipal roads with a total length of 1,064.09 meters. The budgeted for these two municipal roads is RMB 18,716,489.34 (equivalent to $3.0 million) approved by Hanzhong Ministry of Finance. The related construction is expected to be completed by December 31, 2012. For these construction projects, the Company recognizes the fee as other revenue using full accrual method when the project is completed. We expect these initiatives will help us cope with this difficult period and better position us to capitalize on opportunities from a future market upturn.

RESULTS OF OPERATION

Revenues

We recognize revenue from the sales of real property in accordance with the full accrual method at the time of the closing of an individual unit sale. This occurs when title to or possession of the property is transferred to the buyer. A sale is not considered consummated until (a) the parties are bound by the terms of a contract, (b) all consideration has been exchanged, (c) any permanent financing of which the seller is responsible has been arranged, (d) all conditions precedent to closing have been performed, (e) the seller does not have substantial continuing involvement with the property, and (f) the usual risks and rewards of ownership have been transferred to the buyer. Further, the buyer's initial and continuing investment is adequate to demonstrate a commitment to pay for the property, and the buyer's receivable, if any, is not subject to future subordination. Sales transactions not meeting all the conditions of the full accrual method are accounted for using the deposit method in which all costs are capitalized as incurred, and payments received from the buyer are recorded as a deposit liability.

We provide "mortgage loan guarantees" only with respect to buyers who make down-payments of 30%-50% of the total purchase price of the property. The period of the mortgage loan guarantee begins on the date the bank approves the buyer's mortgage and we receive the loan proceeds in our bank account and ends on the date the "Certificate of Ownership" evidencing that title to the property has been transferred to the buyer. The procedures to obtain the Certificate of Ownership take six to twelve months (the "Mortgage Loan Guarantee Period"). If, after investigation of the buyer's income and other relevant factors, the bank decides not to grant the mortgage loan, our mortgage-loan based sales contract terminates and there is no guarantee obligation. If, during the Mortgage Loan Guarantee Period, the buyer defaults on his or her monthly mortgage payment for three consecutive months, we are required to refund the loan proceeds back to the bank, although we have the right to keep the customer's deposit and resell the property to a third party. Once the Certificate of Property has been issued by the relevant government authority, our loan guarantee terminates. If the buyer then defaults on his or her mortgage loan, the bank has the right to take the property back and sell it and use the proceeds to pay off the loan. The Company is not liable for any shortfall that the bank may incur in this event.

To date, no buyer has defaulted on his or her mortgage payments during the Mortgage Loan Guarantee Period and the Company has not been caused to refund any loan proceeds pursuant to its mortgage loan guarantees. As a result, based on the Company's historical experience, the Company believes that its revenue recognition policy is appropriate.

The following table summarizes revenue generated by project for the years ended September 30, 2012 and 2011, respectively:

                                                         For the Years Ended September 30,
                                        2012                          2011                                  Variance
                                Revenue           %           Revenue           %           Variance            %
Projects
Yangzhou Pearl Garden         $ 15,067,820        79.91 %   $ 28,612,053        50.31 %   $ (13,544,233 )      (47.34 )%
Mingzhu Xinju                      704,150         3.73 %     10,087,619        17.74 %      (9,383,469 )      (93.02 )%

Mingzhu Garden (Nanyuan and
Beiyuan)                         3,063,875        16.25 %     15,630,686        27.48 %     (12,566,811 )      (80.40 )%

Central Plaza                       21,133         0.11 %      2,541,051         4.47 %      (2,519,918 )      (99.17 )%
Total Revenue                 $ 18,856,978     $    100 %     56,871,409          100 %   $ (38,014,431 )      (66.84 )%
Sales Tax                       (1,180,437 )                  (3,544,584 )                   (2,364,147 )      (66.70 )%
Revenue net of sales tax      $ 17,676,541                  $ 53,326,825                    (35,650,284 )      (66.85 )%

Our revenues are derived from the sale of residential buildings, commercial front-stores and parking space in projects that we have developed. Revenues decreased by 66.8% to approximately $18.9 million for the year ended September 30, 2012 from approximately $56.9 million for the year ended September 30, 2011. The total GFA sold during fiscal 2012 was 40,397 square meters, representing a significant decrease from 130,556.81 square meters completed and sold in fiscal 2011. As compared to the last year, we are constructing more high-rise buildings, which need longer construction periods. We completed and started delivery of four new residence buildings in fiscal 2012. The ASP for fiscal 2012 approximately amounted to $467 per square meter, increasing by 7.1% from the ASP of $436 per square meter in fiscal 2011.

Sales taxes for the years ended September 30, 2012 and 2011 consisted of a business tax, 5% of the revenue, an urban construction tax, 7% of business tax, an education surcharge tax, 3% of business tax, and land appreciation tax. Land appreciation tax for the years ended September 30, 2012 and 2011 was assessed at the rate of 0.5% of the customer deposits in Yang County and 1% of the customer deposits in Hanzhong. The sales taxes for fiscal 2012 decreased by 66.7% from last year, primarily as a result of the decrease in our revenue.

We are developing more high-rise residential buildings, which requires longer construction periods. This indicates that in certain future reporting periods, we might not have any new construction work, completed and delivered to buyers, and the only available-for-sale properties would be from our inventories which are previously completed and unsold properties. Since we recognize revenue in accordance with the full accrual method at the time of the closing of an individual unit sale, the longer construction periods for high-rise residential building would have negative impact on our revenue recognition.

Cost of sales

The following table sets forth a breakdown of our cost of revenues for the periods indicated.

                                                          For the Years Ended September 30,
                                       2012                             2011                                     Variance
                               USD          Percentage          USD           Percentage        Variance            %
Land use rights            $   896,532             9.35 %   $  4,012,695            12.75 %   $  (3,116,163 )       (77.66 )%
Construction costs         $ 8,693,477            90.65 %   $ 27,464,754            87.25 %   $ (18,771,277 )       (68.35 )%
Total                      $ 9,590,009              100 %   $ 31,477,449              100 %   $ (21,887,440 )       (69.53 )%

Our cost of sales consists primarily of costs associated with land use rights and construction costs. Cost of sales are capitalized and allocated to development projects using a specific identification method. Costs are allocated to specific units within a project based on the ratio of the sales area of units to the estimated total sales area of the project or phase of the project times the total cost of the project or phase of the project.

Cost of sales was approximately $9.6 million for the year ended September 30, 2012 compared to $31.5 million for the year ended September 30, 2011. The $21.9 million decrease in cost of sales was mainly attributable to the decrease in total GFA sold during fiscal 2012.

Land use rights cost: The cost of land use rights includes the land premium we pay to acquire land use rights for our property development sites, plus taxes. Our land use rights cost varies for different projects according to the size and location of the site and the minimum land premium set for the site, all of which are influenced by government policies, as well as prevailing market conditions. Costs for land use rights for the year ended September 30, 2012 were $896,532, as compared to $4,012,695 for the year ended September 30, 2011, representing a decrease of $3,116,163 from last year. The decrease in costs of land use rights was consistent with the fact that the total GFA sold during for the year ended September 30, 2012 was significantly lower than fiscal 2011.

Construction cost: We outsource the construction of all of our projects to third party contractors, whom we select through a competitive tender process. Our construction contracts provide a fixed payment which covers substantially all labor, materials and equipment costs, subject to adjustments for some types of excess, such as design changes during construction or changes in government-suggested steel prices. Our construction costs consist primarily of the payments to our third-party contractors, which are paid over the construction period based on specified milestones. In addition, we purchase and supply a limited range of fittings and equipment, including elevators, window frames and door frames. Our construction costs for the year ended September 30, 2012 were approximately $8.7 million as compared to approximately $27.5 million for the year ended September 30, 2011, representing a decrease of $18.8 million. The decrease in construction cost was due to the decrease in units sold reflected in the decreased revenue recognized.

The total cost of sales as a percentage of real estate sales before sales tax for the year ended September 30, 2012 decreased to 50.9% from 55.4% for the year ended September 30, 2011, which was mainly attributable to more commercial property and parking spaces with higher selling price sold during the first half of fiscal 2012. Most of properties sold during the year ended September 30, 2011 were residential units with lower selling prices.

Gross profits

Gross profit was approximately $8.1 million for the year ended September 30, 2012 as compared to approximately $21.8 million for the year ended September 30, 2011, representing a decrease of $13.7 million, which was mainly attributable to the decrease in revenue. The overall gross profit as a percentage of real estate sales before sales tax increased to 43% for the year ended September 30, 2012 from 38% for the year ended September 30, 2011, mainly due to more commercial properties and parking space with higher selling prices sold in Mingzhu Garden project during the first half of fiscal 2012. During the year ended September 30, 2012, revenue from sales of commercial property and parking space represents 28.9% of the total revenue. But, for the year ended September 30, 2011, revenue from sales of commercial property and parking space only represents 11% of the total revenue. The gross margin for Yangzhou Pearl Garden project decreased by 3% from 49% in fiscal 2011 to 46% in fiscal 2012, due to less margins in promoting high-rise residential units in fiscal 2012. The ASP for Yangzhou Pearl Garden was $423 per square meters for the year ended September 30, 2012, representing a 10.4% increase from fiscal 2011. But, due to more high-rise buildings completed and sold in fiscal 2012, the unit cost of Yangzhou Pearl Garden increased by 16.8% to $227 per square meters for fiscal 2012, comparing to unit cost of $195 per square meters in fiscal 2011.

                                                       For the Year Ended September 30
                                    2012                             2011
                                            Gross                            Gross                          Variance
Project                 Gross Profit        Margin       Gross Profit        Margin         Variance           %

Yangzhou Pearl Garden   $   6,971,605             46 %   $  14,084,671             49 %   $ (7,113,066 )          (51 )%
Mingzhu Xinju                 164,714             23 %       2,444,508             24 %     (2,279,794 )          (93 )%

Mingzhu Garden
( Mingzhu Nanyuan and
Beiyuan)                    2,117,018             69 %       7,131,850             46 %     (5,014,832 )          (70 )%
Central Plaza                  13,632             65 %       1,732,931             68 %     (1,719,299 )          (99 )%
Sales Tax                  (1,180,437 )                     (3,544,584 )
Total Gross Profit      $   8,086,532             43 %   $  21,849,376             38 %
Total Revenue           $  18,856,978                    $  56,871,409

Operating expenses

Total operating expenses increased by 26.5% or $536,979 to $2,566,413 for the year ended September 30, 2012 from $2,029,434 for the year ended September 30, 2011, as a result of an increase in general and administration expenses of $677,043, which was offset by the decrease in selling and distribution expenses of $140,064.

The increase in general and administrative expenses for the year ended September 30, 2012 was primarily attributed to higher legal expenses paid to previous and existing legal firms' in dealing with listing and compliance matters, higher Director and Officer liability insurance expense, increased compensation due to addition of a new financial officer, and higher professional expenses resulting from the engagement of more consultants to provide advice on our real estate operations. In addition, there was a significant recovery of general administrative expenses for the year ended September 30, 2011 as the Company entered into a settlement agreement in December 2010 with respect to fees owed in connection with its reverse acquisition in 2009, pursuant to which approximately $167,000 of general and administrative expenses were recovered.

Additionally, selling expense decreased by $140,064 to $517,025 for the year ended September 30, 2012 from $657,089 for the year ended September 30, 2011, which was consistent with decreased sales activities.

                                          As of September 30,
                                         2012            2011
General and administrative expenses   $ 2,049,388     $ 1,372,345
Selling expenses                          517,025         657,089
Total Operating expenses              $ 2,566,413     $ 2,029,434
Percentage of Revenue                          14 %             4 %

Interest Income (expense)

Net interest expense was $73,608 for the year ended September 30, 2012, compared to net interest income of $2,128 for the year ended September 30, 2011. The interest expense for fiscal 2012 was from the one-year shareholder loan of $1,810,000 we entered on June 28, 2011 with our Chairman and CEO - Mr. Xiaojun Zhu. The interest rate for the loan is 4% per annum. On July 19, 2012, the . . .