Mainland developers pay price for land acquisitions

After shelling out heavy premiums on mainland sites in recent months, property firms may face profit squeeze amid the cooling measures

PUBLISHED : Wednesday, 02 October, 2013, 12:00am
UPDATED : Thursday, 03 October, 2013, 4:34pm

Developers may have left themselves very little room for profits by paying high prices for sites on the mainland in recent months, say analysts.

"It's 2009 and 2010 all over again," said Lee Wee Liat, the head of property research at BNP Paribas Securities (Asia).

In those two years, developers acquired land aggressively, paying heavy premiums in anticipation of high appreciation. As a result, many sites in top cities exchanged hands at record prices.

"Developers' net profit margin on some of those projects ranged between 11 and 13 per cent, compared with the standard 18 to 20 per cent," Lee said, adding that the margin on some projects in second-tier cities such as Chengdu might have been less than 10 per cent.

Based on the acquisition cost at the time, property prices would have to rise 20 per cent a year for developers to achieve the standard margin.

As the luxury market was hit hard by the cooling measures in 2010, many developers that bought sites at peak prices were forced to postpone selling their projects to avoid losses.

CSC Land bought a luxury site in Shanghai for 32,484 yuan (HK$41,130) per square metre in late 2009. The going rate of nearby projects was about 25,000 yuan per square metre at the time. CSC pushed back the pre-sale to the second half of 2011. According to data from NetEast Property, the Grand Mansion project has sold 162 units only, with no takers for the other 253.

Guangzhou Asian Games City is another example of low appetite for high-priced flats built on expensive land.

Guangzhou R&F Properties teamed with Agile Property and Country Garden in late 2009 to buy the site for Asian Games City for 25.5 billion yuan, making it one of the most expensive sites on the mainland.

"The market response wasn't strong when they released the flats for sale in the second half of 2010," said Huang Tao, a Guangzhou project manager at Centaline.

The project's average asking price of 13,000 yuan per square metre was too high, compared with the going rate of about 9,000 yuan in the area, Huang said. The developers had to cut the prices to 11,000 to 12,000 yuan.

"Following a revival in market sentiment, the average price has risen to 15,000 yuan per square metre in recent months," he said. "But they could have doubled their profit had they used the money to buy other sites in Guangzhou."

Major cities such as Beijing and Shanghai recorded big-ticket land transactions in the third quarter of this year.

"Property prices won't rise as sharply as in the past because the government has introduced price controls. Developers can't secure pre-sale consent if their asking prices are too high. Developers that paid aggressively to acquire sites will face lower margins," Lee said. "They are betting the government will relax the cooling measures."

Chengdu also recorded steep land prices in recent months. Terence Chong Chak-bo, the managing director of Centaline in Chengdu, said many plots were sold at levels close to current home prices and developers were banking on a jump in values in the next few years.