• Fri
  • Apr 18, 2014
  • Updated: 12:40pm
BusinessChina Business

Developers told to diversify portfolios

Mainland firms advised to optimise their land banks and ensure they build in various tiers of cities to counter policy and industry risk

PUBLISHED : Tuesday, 17 December, 2013, 12:51pm
UPDATED : Wednesday, 18 December, 2013, 5:34am

Mainland developers need to optimise their land bank portfolios because while first- and second-tier cities are safer bets, some exposure to selected third-tier and even fourth-tier cities is necessary to counter policy and industry headwinds in the next few years, analysts said.

A private report in July on the 50 riskiest cities for property investment - all third-tier including Ordos, Lhasa and Quzhou - sparked concerns about oversupply and stagnating sales in the mainland's many lower-tier cities. Some developers, including Evergrande, the country's fifth-largest homebuilder by sales, reacted by snapping up land plots in top-tier cities this year to diversify their geographical mix. However, others remain confident about their growth prospects in smaller cities during the next phase of urbanisation.

"Many mayors [of third- and fourth-tier cities] want to build their own cities into the superstars in the neighbourhood. So there will be winners and losers," said Harry Lu, president of Century 21 China Real Estate. "Those losing the battle will end up with oversupply.

"First- and second-tier cities are safer but the entry barrier is relatively high," he added, referring to soaring land prices in the four first-tier cities - Beijing, Shanghai, Shenzhen and Guangzhou - as well as second-tier cities, which are mainly provincial capitals such as Hangzhou and Nanjing.

Economists predict that successful developers in third- and fourth-tier cities will benefit from the mainland's new urbanisation push and its efforts to overhaul the rural land system, with farmers to be granted a bigger share from sales of collectively owned land and encouraged to move to small, nearby cities instead of bigger cities. Some young families unable to cope with record-high home prices in big cities may also want an easier life in smaller cities.

At a meeting on urbanisation last week, the leadership rolled out guidelines for the next decade that will restrict population growth in big cities such as Beijing, Shanghai and Guangzhou, and boost the development of regional hubs in the northeast and southwest, including Shenyang, Harbin, Chengdu, Xian, Wuhan and Chongqing.

While demand for housing is strong in top-tier cities, they are also more vulnerable to policy curbs once home prices surge beyond the comfort zone of top leaders. That was how lower-tier cities caught the attention of developers in 2011 and last year, after several dozen big cities introduced tightening measures to check housing inflation and temporarily choked off property transactions.

It gave debt-ridden local governments in lower-tier cities a chance to cash in on their massive land reserves, regardless of aggregate housing demand, leading to frequent media accounts of "ghost cities" where unoccupied residential blocks line empty streets.

Developers are now switching gears again, refocusing on top cities where demand for housing demand has revived. "We need to optimise the geographical distribution of our residential property projects," said Evergrande, which has projects in more than 140 mainland cities, mostly second- and third-tier. "We are currently quickening up our expansion in first-tier cities to build up our brand name there."

The company bought five residential lots in Shanghai earlier this month for a combined 4.8 billion yuan (HK$6.1 billion) and has poured 12.7 billion yuan into Beijing land this year.

Other developers, including China Merchants Property and Kaisa Group, have also been stepping up land purchases in first- and second-tier cities.

"Although medium and small-sized developers also participated in bidding for land this year, cash-rich firms such as Evergrande and Greenland stand a better chance to win," said private real estate data and research provider CRIC. "Hence, land lots sold in most first-tier cities will go to big developers, solidifying the trend that the bigger players will become even stronger in the medium to long term."

That view was echoed by Lifan Real Estate, a small developer from Chongqing.

"We think first-tier cities are under serious short supply and demand is huge. If you can grab land, you'll earn big money," Lifan general manager Chen Sheng said. "We looked at some projects in Beijing, but they are not good for us. With one billion yuan, we can only buy a small parcel.

"Land cost [in mature markets such as the Bohai Rim and the Yangtze and Pearl River Deltas] is very high and there are not so many real opportunities [for us]."

Average land prices in first-tier cities on the mainland rose 69 per cent year on year in the first 11 months of this year to 5,404 yuan per square metre, compared with a rise of 3 per cent in third- and fourth-tier cities to 1,490 yuan per square metre, according to CRIC data.

Share

Login

SCMP.com Account

or