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Luxury residential homes seen in Beijing's Chaoyang district. Photo: AFP

Developers in Beijing suburbs forced to go upmarket with new homes

Price management by local governments is hurting the less well off people it is intended to protect, say analysts

Beijing’s escalating home prices are spreading outwards from the city centre to its outer suburbs amid a scarcity of new, unbuilt parcels of land, forcing the neighbourhoods to go up market.

The latest example is a new project by Greenland Holding Corp in Daxing(大興) district outside the Southern Fifth Ring Road, which defines the southern perimeter of the city designed as a series of concentric squares.

Apartment units measuring 3,490 square metres (37,566 square feet) were on offer at a price range of between 73,356 yuan per sq m to 80,280 yuan per sq m (HK$8,425 per square foot), almost double the prices of existing homes in the neighbourhood. At 80,280 yuan per sq m, the priciest apartment also sets the record for the entire district.

Even so, that selling price is barely enough to give the developer a decent profit margin. Greenland bought the plot in February 2016 for a record 47,000 yuan per sq m, setting the bar for land parcels in the district. Property analysts said the parcel will need to be developed into a home at a sale price of at least 94,000 yuan per sq m to generate an industry standard profit margin of 20 per cent.

Developers compromise on prices because local governments routinely use “pre-sale permits” to micromanage new home prices, according to analysts familiar with the regulations.

Flats sold beyond the governments’ price tolerance, which itself is vague and changes all the time, cannot be guaranteed permits.

Similar situations have occurred in other districts outside fifth ring road, where after purchasing plots at high prices, developers have to rewrite their development plan, marketing strategy and targeted consumers to “go upmarket”.

A new project by Thaihot Group in Daxing is now being sold at an average price of 53,421 yuan per sq m , while a project in Changping(昌平) by China Vanke is being sold at 62,550 yuan per sq m, according to Centaline Property. The two sites made up 25.6 per cent of all land transactions by value in Beijing last week.

Beijing mayor Cai Qi said earlier this month that the city plans to slash total construction areas from the current 2,921 sq km to 2,800 sq km by 2020, which means Beijing’s land inventory, instead of increasing, will decline by 30 sq km a year over the next four years.

“Going upmarket is not a developer’s choice, but it’s the only option,” said Guo Yi, marketing head at Yahao Real Estate, a Beijing consultancy that specialises in high-end and luxury properties. “They have to upgrade their design, decoration and amenities to appeal to a high-end market, otherwise there is no profits.”

The tricky part is if developers aim too high, then prices risk being blocked by local governments. A project between northwestern fifth and sixth ring road by Beijing Capital Group is being sold at about 78,000 yuan per sq m, but the developer has been waiting a long time to secure a pre-sale permit.

“Big developers can delay their sale if they believe their intended pricing won’t be approved, as long as they don’t have inventory and cash flow pressure. The result is less supply,” said Gao.

Ironically, the cap on maximum prices has helped wealthy people, not the poor, analysts said. New development sites within the fifth ring road are practically non existent and are increasingly scarce between the fifth and sixth ring road.

The trickle of supply ensures steady price appreciation, and without government intervention the selling price would be higher. Wealthy buyers can further circumvent the purchase eligibility and other restrictions, acquiring multiple homes under their companies’ names, according to Gao. For people who have less money, they end up in far more remote regions or in rented homes.

This article appeared in the South China Morning Post print edition as: Land scarcity forces Beijing developers to go upmarket