China’s biggest developers accelerate land acquisitions as market cools
The premiums being paid for parcels of land have fallen dramatically, with new regulations effectively barring smaller developers from bidding
Some of China’s leading developers are quickly snapping up plots of land at knock-down prices after new cooling measures effectively blocked their smaller competitors from bidding.
Under new policies introduced in October in several mainland cities, developers are barred from bidding for land using borrowed money. They now have to rely entirely on their own cash to buy land, which gives cash-rich property giants a distinct advantage over most small players.
The result has been a dramatic fall in the premiums being paid for plots of land in large cities, with less developers able to join the bidding wars. The new regulation is particularly strict in Shanghai.
In 2017’s first public land auction in Shanghai last Thursday, Country Garden acquired an 89,200 square metre plot in Baoshan, on the outskirts of the city, for 16,400 yuan per sq m, a mere 3.17 per cent premium over the starting price.
In the same auction - which only attracted four bidders - Shimao Property paid a 57.3 per cent premium for a parcel of land in the same area.
These figures are a far cry from just seven months ago, when Cinda Real Estate shocked the market by paying a 303 per cent premium for a plot, also in Baoshan. Public records show that during June and August, several developers bid for parcels of land there, and none of them paid less than a 100 per cent premium.
Six bidders took part in an auction on December 21. According to footage aired on Shanghai Dragon Television, the auctioneer kept reminding certain developers that their bidding prices had exceeded their previously submitted cash stock. In the event of making a winning bid, they would have to explain where the additional funds would come from.
The auction lasted little more than 10 minutes, with Greenland Holdings securing the land parcel for a 31.5 per cent premium.
“The auctioneer’s repeated warnings had a considerable impact on bidders’ psyche,” said Li Jin, a director with consultancy CRIC, who participated in the auction.
Greenland and Country Garden are ranked the nation’s fourth and third largest in terms of sales, respectively.
Lu Jing, an analyst with China Index Academy’s Shanghai branch, said there were other factors that may have affected the premiums. For example, the plot sold to Country Garden was a mix of residential and commercial use, and these types of developments tend to be less appealing than purely residential projects. Also, both plots carried stringent conditions for developers: Country Garden cannot sell the commercial part of the plot it bought for at least 20 years, and for the residential part, it has to allocate 5 per cent of the area for affordable homes, and 15 per cent for rental homes.
But it is the new restrictions on leveraged bidding that are likely to account for the remarkable drop in premiums.
The Shanghai authorities had banned developers from acquiring land with borrowed money even before October, but banks, securities firms and funds kept lending to them under various covers, and there was little scrutiny of transactions.
The unfettered financing frenzy this enabled was a major reason for the surging land prices. But under the new policy, the checks are rigorous and the punishments for non-compliance harsh, said Lu.
China Vanke, the mainland’s second largest developer, has also been taking advantage of the less intense bidding competition. In December alone it acquired a record 34 parcels in cities including Dongguan, Hefei, Tianjin and Jinan. It bought 17 plots in November and 18 in October, according to a filing to the stock exchange. This compared with 11 in July, when the land market was sizzling.
A closer look at the 34 new projects showed most transactions were worth less than 1 billion yuan, and 15 were joint ventures. Analysts said this showed Vanke’s consistently prudent approach, in which it partners with other developers to diversify risk, even if that might compromise returns.
It bought six parcels last month near Guangzhou’s south railway station, for less than 9,000 yuan per sq m. The parcels were “transferred” to Vanke, instead of being directly acquired at public auction, as Vanke had been involved in the early development of the site since 2011.
In stark contrast, Future Land, a Shanghai-based developer, had to pay a 274 per cent premium for a plot of land in nearby Foshan, on the same day, through public auction.
Zhu Luoji, an online commentator, said in theory developers should deploy “counter-cyclical” tactics to replenish their land banks in the downturn. But the reality is that policy tightening, funding stress and an uncertain market outlook are putting small developers on the sidelines, while cash-flush big players rush in to fill the vacuum.