china property

Mainland property firms consolidate, as prime land prices soar and policy controls continue to bite

Domestic real estate M&As accelerated in the first half of 2017 prompted by land bidding prices soaring to US$44.6 billion in total, a 78.5pc rise

PUBLISHED : Wednesday, 13 September, 2017, 3:03pm
UPDATED : Wednesday, 13 September, 2017, 9:52pm

Mainland China’s real estate market is consolidating fast, as bigger developers acquire smaller rivals in at effort to build up their land banks and grow market share, as it continues to get tougher to acquire prime government plots, amid tighter policy controls, according to a new report from PwC.

In the first half of 2017, domestic real estate merger and acquisition (M&A) activity in the sector remained vibrant, as successful bidding prices soared to US$44.6 billion, up 78.5 per cent year on year, said the accounting major. By volume, there were 207 deals recorded, a 24.7-per cent rise.

“We have seen consolidation become a notable way for real estate companies to expand, increase scale and add to their land reserves quickly,” said Franklin Zhai, PwC China’s real estate deals partner.

The Chinese authorities are keeping a firm grip on land sales in an effort to curb housing inflation in major cities with a spate of measures including raising the bar for developers to acquire land with stringent capital requirements, controlling land supply and offering more land parcels that are designated for rental use only.

We have seen consolidation become a notable way for real estate companies to expand, increase scale and add to their land reserves quickly
Franklin Zhai, PwC China’s real estate deals partner

The latest figures show new land coming onto the market in Beijing, for example, has been cut this year to 3,900 hectares from 4,100 hectares in 2016, while residential quotas have been slashed to 610 hectares from 1,200 hectares last year.

Further south in Shanghai, China’s most-populous city, the government has offered more “rental only” land parcels, even in prime locations.

Zhai expects the pace of market consolidation to continue rising as restrictions further tighten and economies of scale in real estate becomes an even greater advantage.

First-tier cities accounted for the biggest share of deals with companies in Shanghai, Beijing and Shenzhen combined taking 40 per cent of all deals by value. In volume, the three cities boasted a 35 per cent contribution.

The rising M&A activity mirror figures that show the largest players are taking a tougher grip of the market.

During the first half of the year, the top 100 developers accounted for 58.1 per cent of market share in terms of new sales value, while a year ago at that stage they contributed 44 per cent. In 2015, the number was 40 per cent and 45 per cent for the whole of 2016.

By investor type, the deals have predominantly been driven by companies, as private equity and individual investors remained in the background due to the high capital thresholds now required.

Zhai said the market will continue to be dominated by the biggest real estate groups in future, and fast growing medium-sized real estate companies that already have sufficient land and capital reserves.