This study assesses operating efficiency and its drivers in China's inefficient publicly traded real estate companies via dynamic slack‐based measure data envelopment analysis and panel regression techniques. This paper also investigates operating efficiency as a company characteristic impacting stock returns using a portfolio formation test. The results indicate that only 27 out of 106 listed real estate companies are operationally efficient. Return on assets, capital structure, higher education, and institutional ownership positively and significantly impact operating efficiency. The reward of an increase in operating efficiency is seen in its positive influence on stock returns. Listed real estate companies should improve the efficiency of their operational activities to generate higher stock returns.