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

PUBLISHED : Tuesday, 22 November, 2016, 4:59pm
UPDATED : Tuesday, 22 November, 2016, 7:54pm

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.

Property developers undeterred by Beijing’s market-cooling auction restrictions

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.

Various cities have also stepped up scrutiny of whether developers are borrowing money to acquire land. Before the National Day Holiday curbs were put in place, borrowing from financial institutions to grab land was prevalent among developers.

Fierce competition, a squeeze on external financing and lack of local political connections have put smaller developers at a great disadvantage to larger ones that have strong capital as ammunition, low funding costs and close local ties. Take last week’s Beijing land sale as an example. All of the final bidders were big names: China Vanke, Greenland, Poly, Longfor and Beijing Capital Development Holding.

“These companies have low funding costs and massive projects in other cities that generate cash flows, which can help them overcome the difficulties of the Beijing project,” said Ren Li, a manager with Centaline’s Beijing branch.

Small developers don’t have these advantages, which makes the game “unaffordable” for them, Ren said.

These companies have low funding costs and massive projects in other cities that generate cash flows
Ren Li, Centaline Beijing

Li Zhanhong, a vice president of Newopen Group, a Chongqing-based medium-sized developer, said that in the past one to two years the number of developers in China has dropped from more than 80,000 to about 50,000. “A third will die, a third will survive and a third struggle. By 2020 there will be about 3,000 left,” he said.

Large companies are increasingly relying on ways other than public auctions – which they see as costly and competitive – to build up their land banks. Mergers and acquisitions, at both the corporation and project level, have emerged as a popular short cut.

For example, China Evergrande Group last week paid 555 million yuan to buy C C Land Holdings’ project in Xi’an. Last year, it purchased C C Land’s vast projects in Chongqing, Xi’an and Guiyang for 5.5 billion yuan. According to its half-year financial report, Evergrande acquired 80 new projects in the six month period at an average cost of 1,994 yuan per square metre, compared with 5,488 yuan per square metre for newly purchased projects by its peer China Vanke in the same period.

Such opportunities abound because nearly half of China’s developers have to sell assets or shares to avoid financial trouble, according to real estate consultancy Beta Fact.

Large national developers are also keen to team up with strong local players for land acquisitions. China Vanke forged a partnership with Anhui-based Wenyi Real Estate, giving Vanke exposure to a parcel bought by Wenyi. Vanke has tried several times before to buy projects in Hefei, a hot property market, but without success.

Mainland developers see the value of teamwork in tougher market conditions

Zhu Wei, assistant president of Ping An Bank’s real estate financing branch, said M&As have already replaced public auctions as the preferred strategy for large homebuilders to build up land banks.

Smaller developers can participate in real estate funds as a means of investing in big developers’ projects, and gain returns as limited partners, Zhu said.