Developers’ caution in buying land could threaten local government finances

Developers exercise extra caution as costs rise, dampening local government revenue hopes

PUBLISHED : Tuesday, 01 April, 2014, 3:36pm
UPDATED : Wednesday, 02 April, 2014, 2:50am

"Caution" is a word commonly used by mainland developers when talking about their land acquisition plans this year.

That bodes ill for some local governments that are under pressure to refinance.

Sentiment has soured quickly in the mainland's property market this year, pushing developers to play safe and make speeding up turnover a priority.

"Volatility and polarisation have become industry themes now," Longfor Properties chairman and founder Wu Yajun said at an earnings news conference last month. "We will exercise extra caution when buying land in the future, as it is critical to buy the right land in the right city."

Destocking and cost control have become the key words this year. This is the strategy not only for Longfor but also many other mainland developers.

The whole industry is now suffering from lower profitability, as the cost of land and construction has soared much faster than property selling prices.

Many provinces are reliant on land sales for a large portion of their revenues. While this revenue source has proven to be quite lucrative, it has also been highly volatile
Moody's Investors Service

Even China Overseas Land & Investment, the country's biggest listed developer by market capitalisation, is turning cautious, although it was still aggressively snapping up land parcels until recently - spending 13 billion yuan (HK$16.2 billion) on four plots in February.

"Land purchases must match property sales this year so that we can keep our finances healthy," company chairman Hao Jianmin said after announcing a conservative target of HK$140 billion for contracted sales, compared with last year's actual sales of HK$138.5 billion.

"The competition for land in Guangzhou was much weaker than last year," Hao said. "I think [some developers] probably have not so much money left."

Sean Li, Agile Property's head of operations, told the other side of the story.

"To be frank, the land price in Guangzhou is a bit too expensive now," Li said.

He said his company pulled out of a recent land auction in the city after bids surpassed the Guangdong-based developer's preset ceiling.

The company has adopted a strategy of "shorter cycle, lower cost and quicker turnover".

Mainland developers spent 100 billion yuan on land acquisitions in the first two months of this year, up 8.9 per cent from a year earlier, according to National Bureau of Statistics data.

The growth rate was much slower than the increase of 33.9 per cent for the whole of last year to 992 billion yuan.

With the housing market now cooling and sufficient land reserves on hand after aggressive replenishment last year, developers need to pause and rethink, CRIC, a real estate consultancy and a unit of E-House (China), said in a report last week.

That will put to the test this year the resolve of cities in enforcing the property market cooling measures they have in place.

Some analysts expect cities that are now suffering sluggishness in the housing market to switch to stimulus measures, as too much of their local economy hinges on a buoyant real estate industry.

The most urgent priority is to repay debts. An analysis by global rating agency Moody's Investors Service of self-reported indebtedness of the nation's 31 provinces showed that 30 per cent or more of local government debts in Beijing and the provinces of Zhejiang, Jiangsu and Sichuan will come due this year.

"Many provinces are reliant on land sales for a large portion of their revenues," Moody's said. "While this revenue source has proven to be quite lucrative, it has also been highly volatile."

The National Audit Office said local government debts totalled 17.9 trillion yuan at the end of June last year, and 11 provinces depended on revenues from land sales for 37 per cent of the repayments.