Lag in supply, ample liquidity drive Shanghai’s sizzling land sales

Record land sales in Shanghai last week were driven by scarcity of land supply, an easy borrowing environment, and the aggressive development strategy of some developers, analysts said.

The sale of eight plots in Shanghai last week reaped 22.6 billion yuan for the local government, a weekly record. One parcel in central Shanghai’s Jingan district was sold to Ronshine China for 11 billion yuan, or an average cost of 143,000 yuan per square metre – the most expensive land ever in China.

Cash-rish developers flocking to the market helped create the stunning sales, while the relatively small supply of land in the first half and previous record-breaking land prices generated a mix of hunger and anxiety among developers, analysts said. Extensive land supply coming up could ease some of the sentiment but is unlikely to dent the prices being paid.

“Land supply, especially residential land supply was small in the first half, at just 24 per cent of the annual supply plan,” said Lu Jing, the vice-research director of the China Index Academy’s Shanghai bureau.

“Catching up in the remainder of this year may stabilise developers’ expectations, but their enthusiasm won’t be cooled significantly,” Lu said.

Another six plots go on sale this week, and September’s supply would also be large, according to plans previously released by the Shanghai government.

Tan Wenhong, the head of project and development consultancy at Savills China, said: “With all the competition, once a developer successfully bids for a plot, it is likely to exit the game for a while. Then those who failed to win land will pursue the next site until they finally get one. This is why developers take it in turn to be ‘land kings’.”

A “land king” refers to a mainland Chinese developer paying a record price for a parcel of land, either in total price, per unit price or premium.

The 11 billion yuan Jingan parcel is unique. It is the first residential land within Shanghai’s inner ring road, a traditional downtown area of the city, to be sold since 2004. However, the 140 per cent premium still beat many industry insiders’ forecasts.

“Before the sale a high price was widely expected, but the outcome still surprised me,” Lu said. “Looking forward, the prime-located plots will be favoured, while the popularity of those outside the outer ring road will depend on whether they have clear industrial design.”

Besides the scarcity of land in Shanghai, this wave of land kings has been buoyed by ample liquidity, easy access to funding and low borrowing rates. Companies have been forced to chase rare assets as traditional manufacturing and service businesses struggle under the economic downturn.

By the end of July, M2, a broad measure of money supply, totalled 150 trillion yuan, or 214 per cent of gross domestic product. M1, another measure of money supply that mainly includes current account deposits, grew even faster than M2, showing enterprises have ample cash in hand but are reluctant to invest.

“There is much talk of lack of investable assets. This is why the 10-year treasury yield has been pushed down to a seven-year low of near 2.6 per cent,” said Deng Haiqing, an economist with JZ Securities.

Some developers have used the situation to take an aggressive financial strategy to secure “good assets”.

Ronshine China has issued more than 10 billion yuan of corporate notes at coupons of 5.8 to 7.9 per cent, since the end of last year. The company could then use land it has bought as collateral to gain further financing, even if that land had not been fully paid for.

Mainland developers are usually required to pay half the land price upon auction, and the remainder in six months. Shanghai developers must pay it off in one month. Building work is also required to start 10 months after acquisition, and all properties on it must be sold within 48 months.

Some developers use the time lag to borrow more money. They can also delay projects if the market deteriorates. To curb the tactic, the government of Suzhou this month tightened the rules and developers must pay off the land price in three months.

Shanghai has not further tightened its rules, but analysts said it is likely to happen, especially if home prices rise too fast.

However, after Ronshine’s record purchase, many developers are wary of such strategies.

The chairmen of Cifi Holdings, Country Garden and Sino-Ocean Land have publicly snubbed high leverage and the “land kings”, saying they will always consider the future cost of a home.

Lu said those with sufficient land banks in Shanghai will be able to hold on, but for those owning less land in the city, adding to their supply still appeals despite the surging prices.