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Analaysis: China land sale controls threaten developers’ profits, may trigger deals
June 29, 2017 / 10:56 AM / 5 months ago

Analaysis: China land sale controls threaten developers’ profits, may trigger deals

HONG KONG (Reuters) - Real estate developers say a slew of new regulations governing many land auctions in China is threatening the business model most of them use, and is likely to speed up the consolidation of the industry through more joint ventures and takeovers.

A labourer works at a construction site in front of newly built residential buildings in Yongkang, Zhejiang province, August 6, 2014. REUTERS/William Hong/Files

The measures, which are widely seen in the industry as representing the most stringent tightening in controls ever, have been introduced by authorities running major cities as they seek to stop home prices from surging further out of control.

It means that an increasing number of land sales by the authorities carry major restrictions, including effectively creating price caps for the initial sales of homes that are built, and a requirement to build homes to rent rather than sell.

That can make the developments much less lucrative and higher risk for the developers, which in turn can force them to do more joint ventures to share the exposure and for the strongest to buy cheaper unrestricted land banks built up by the weakest. It is also prompting many developers to eye land auctions in secondary cities where prices have not climbed as much and the controls aren’t as onerous.

“The largest impact of these measures is on our cashflow. So far the land we acquired with restrictions only accounts for a small part of our portfolio, but if the policy continues for another three years then the impact will be large,” said an executive at a Shanghai-based developer who asked not to be identified in this article.


It is all a major deterrent to prevent a new wave of “land kings” from forming and then driving up home prices. The term is used to describe developers willing to pay whatever it takes, and often using a lot of debt, to secure land banks.

In recent years, most of the major Chinese developers have bought land at auction and then quickly developed it into apartments that they sell to homebuyers – usually at a big profit thanks to rising home prices. The cashflow generated is quickly put to use to buy the next piece of land and the cycle continues.

The problem is that the Chinese authorities have been increasingly concerned that prices are getting too high for many ordinary Chinese to ever have a chance to buy a home. They are also worried that a dangerous price bubble may be forming.

Both problems could create social instability – a major fear of the ruling Communist Party. So, up and down the country city governments have been intervening to impose requirements on any sales of land that they control.

“The measures are a test to developers’ earnings model; their selling prices are capped, and they need to ensure profit and cashflow through rental income, which is in contrast to their traditional ‘sell for cash’ model,” said a senior official at state-owned Beijing Capital Land (2868.HK), who declined to be named as he was not authorised to speak to the media.

“So now we see only the big players are strong enough to participate in these auctions, and many are joint-ventures.”

In the past two years, the number and value of corporate deals for property done by developers has increased. There were $9.16 billion worth of acquisitions in China in the first five months of this year, little changed from $9.23 billion in the same period in 2016, though up from $5.3 billion in the first five months in 2015, according to Thomson Reuters data.

“Consolidation will happen quicker this year. Smaller developers don’t have the liquidity to offset policy,” said Cindy Huang, a Hong Kong-based director of corporate ratings at S&P Global Ratings.


An executive at Future Land Development (1030.HK), another Shanghai-based developer, said he sees more deal opportunities this year as smaller companies seek financial support amid credit tightening. Future Land is planning to have 25-50 percent of its land come from corporate dealmaking this year, compared with 25 pct last year, he said.

To be sure, some developers say it is possible that the restrictions won’t last, particularly if there is any sign that prices are starting to slide, which would hurt economic growth. China has had a recent history of stop-start policies as it seeks to balance growth with attempts to impose control on the finance and property sectors.

Examples of the measures include the decisions by the cities of Nanjing, Chengdu, and Jiaxing to allot land parcels by lottery once the premium offered by more than one bidder hits the upper limit set in the auction. Meanwhile, Beijing, Qingdao and Baoding have required bidders to compete to set the lowest selling price for apartments they plan to build on particular sites.

Some cities, including Beijing and Hangzhou, also ask developers to compete to have the highest proportion of property set aside for rental purposes and guarantee that they will not launch pre-sales until construction of all apartments has been completed.

Selling a small part of a development before the whole thing is completed is a tactic used by many real estate companies to generate early cash collection while also trying to create a higher initial benchmark price as demand overwhelms supply.

The move into secondary cities may be starting to show up in government data, which showed that while annual growth in the nation’s real estate investment slowed in May, the first drop in three months, investment in central China picked up slightly.

Central China’s real estate market – in cities like Xian - has been less robust than the big coastal markets.

Shanghai-based Shimao Property (0813.HK) and Guangzhou-based KWG Property (1813.HK) both said they are interested in smaller cities in close proximity to major cities.

Acquisitive Tianjin-based developer Sunac China (1918.HK) has spent close to $3 billion so far this year in acquiring and investing in projects of smaller peers. According to statements from Sunac, its last three corporate acquisitions - Runde Qiancheng in Dalian, Huacheng Fuli in Chongqing and Xingyao in Tianjin - all recorded losses in the past two years.

“Many of the top 100 developers have started entering Xian; local companies who have land resources are all in joint-venture talks with the national players,” said Jiang Guang, the general manager in Xian city for real estate broker Centaline. Developers with liquidity problems “may sell their projects or introduce equity investment,” Jiang said.

Additional reporting by Patturaja Murugaboopathy; Editing by Martin Howell

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