Mainland developers see the value of teamwork in tougher market conditions
Builders are increasingly turning to joint ventures to develop land as property cooling measures start to take hold
Chinese builders are teaming up with each other to develop land they paid record premiums for at the market’s peak, as they try to withstand tightening liquidity and a dimmer outlook in the wake of property cooling measures.
At least eight major developers have partnered with their peers to jointly develop parcels of land they snapped up before October, according to the Post’s tally. They purchased plots at record prices in the first nine months of 2016 as cash-flushed developers flocked to compete for land in the mainland’s first and second-tier cities.
China Vanke this week forged a partnership withAnhui-based Wenyi Real Estate to develop a plot in east Hefei, which it had bought on September 23 for 4.88 billion yuan, 230 per cent higher than the starting bid.
The price tag is equivalent to 11,250 yuan per square metre of gross floor area, which means the developer has to sell homes built on it for at least 18,000 yuan to make a profit, analysts said. New homes near the site are currently selling for roughly 12,000 yuan per sq metre on average.
On October 28, Fuzhou-based Rongqiao Group announced a partnership with China Merchant Shekou Industrial Zone Co, a state-owned developer from Shenzhen, to develop a parcel of land in central Hefei. Five months ago, Rongqiao spent 7 billion yuan - a 271 per cent premium - to acquire the land. The price translates to 13,371 yuan per sq metre.
These tie-ups come after Hefei imposed fresh measures to rein in surging home prices in early October. The new curbs have brought new home sales down by 50.9 per cent from September levels, according to Xkhouse, a local property consultancy.
“Before the [cooling measures] it was extremely difficult, if not impossible, to have developers concede their equities after they acquired land in hotspot cities, as that meant conceding fat profits. Even debt-financing opportunities were difficult to find, ‘’ said Zhang Baoguo, chairman of Tong Kong investment Group. “Now under a tighter environment there are maybe more opportunities.”
There is also a new appetite for alliances in Hangzhou. On October 18, Greentown China Holdings conceded 30 per cent of the equity it holds in a project there to C&D Real Estate Corporation, a Fuzhou-based developer. Greentown had bought the parcel in March for 3.74 billion yuan, or 45,368 yuan per sq metre, the highest land price for Hangzhou at that time.
And state-owned Cinda Real Estate in early October reduced its equity in a Hangzhou project to 50 per cent, after conceding 40 per cent equity to China Sunac Holdings and 10 per cent to Hangzhou Binjiang Real Estate Group. Cinda in late May created a buzz by paying 12.3 billion yuan for the site, the highest amount for a single plot at that time.
Wang Min, who runs a local property website in Hefei, said joint ventures are particularly common in Hefei, where national players keen to get a foothold in the market seek to cooperate with local firms, which are rich in local connections but weak on brand and development expertise.
“But the tightening policy means they have more incentives to do so,” said Wang. “China Vanke has been famous for diversifying its risk by avoiding full ownership of projects.”
The combined debt of the 136 developers listed in the mainland surged 23.5 per cent from a year earlier to 4.6 trillion yuan as of June 30, according to Wind Information. Their average debt-to-asset ratio rose to 77.5 per cent.
S&P warned in a recent report that developers could face a “double whammy” of slowing sales and reduced access to funding. The Shanghai Stock Exchange last week announced new rules restricting the use of onshore bond.
“As the cycle turns, developers’ underlying strength and financial discipline will become more apparent compared with better times when all companies rode the wave of the property frenzy,” S&P credit analyst Cindy Huang said.