Major Chinese cities see more land auctions being scrapped, as broke developers hobbled by ‘three red lines’ stay away

The average auction scrapping rate is 17 per cent for 20 cities that have finished their first round of land sales, rising from 6.5 per cent last year

Developers are hesitant as they are unsure about the housing market in the short term and because they do not have much to spend, analyst says

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A view of Shanghai during its recent lockdown. About 60 per cent of China’s top 100 developers have not bought a single piece of land in the first five months of this year, according to one of China’s largest real estate brokers. Photo: Bloomberg

Published: 7:30am, 14 Jun 2022Updated: 10:07am, 14 Jun 2022

The proportion of plots of land withdrawn in the first round of auctions held over five months between February and June this year in 20 major Chinese cities has increased, with cash-strapped developers reluctant to splash the cash.

The average auction scrapping rate was 17 per cent – up from 6.5 per cent for the same batch last year – in the cities, which have finished their first round of land sales, according to 58 Anjuke Real Estate Research Institute, a Shanghai-based property research firm. Land in 22 major cities in China now only goes on sale three times a year according to a centralised scheme introduced by Beijing early last year.

“Developers hesitated to make land purchases like before because, first, they are not sure about the housing market in the short term. Second, most are struggling to repay debt and really do not have much to spend,” said Yan Yuejin, director of the Shanghai-based E-house China Research and Development Institute.

China’s “three red lines” – measures in place since August 2020 to control the systemic risk posed by weak property developers – have sent the industry into a slump not seen since the 2015 stock market crash. As a result, more firms are joining China Evergrande Group and Kaisa Group Holdings on a list of developers failing to repay debt. Sunac, China’s fourth-largest developer by sales, for instance, failed to repay US$29.5 million in interest on a US-dollar bond and was in default after a 30-day grace period that expired on May 12. It is also in negotiations with its onshore creditors to extend the deadlines for yuan-denominated bond payments.

“Many developers are still facing a lot of stress in terms of financing, and from a long-term structural perspective, the high-growth period for housing is probably already over. So demand won’t be strong as before,” Chen Dong, Pictet Wealth Management’s head of Asia macroeconomics research, said in a recent webinar.

The developers were also only willing to pay slightly higher than reserve prices, with the premium rate at 5 per cent, falling short of the 24 per cent recorded for the first batch last year, 58 Anjuke said.