China’s stricter rules for land auctions spell trouble for smaller developers

The increasingly draconian land acquisition rules being applied in mainland China’s largest cities are pushing most small developers out of business and driving larger ones to acquire land via alternative channels, say industry experts.

After many Chinese developers turned their back on the oversupplied lower-tier cities they pinned their hopes on first and second-tier cities but found that the going got surprisingly tough. Last week’s land sales in Beijing was a case in point – competition was so intense that of the four parcels put up for sale, only one found a winning bidder.

Developers were so desperate to acquire land in the nation’s capital that they promised to hold all of the land indefinitely for rent only, in violation of their basic “build fast, sell fast” business model. In the end, several bidders promised to devote 100 per cent of the development on three sites for rental properties, so none emerged as final winners. They now have entered the third phase of bidding that competes on their building standards and wait 10 days for the verdict to be given.

Even the local city government was caught off guard as its expected some portion of the land would be sold because it stipulated a price ceiling for the homes on these sites before the auction started. Now that ceiling is irrelevant as no homes built on the land would be available for sale.

Beijing may have the most draconian land sale rules, but it is not alone. Shenzhen, Guangzhou, Nanjing, Zhengzhou and Fuzhou have all in the past month imposed a maximum price bidders can offer in land auctions. The ceiling was so easily hit in Nanjing that the local government asked bidders to take part in a lottery to decide who would get the land.