SOEs to lose momentum in bidding for large housing projects

A view of commercial and residential buildings in Beijing in this February 8, 2014 file photo. Photo: Reuters 

A quick rise in home prices in China’s larger cities in the first half of 2016 has seen the return to the sector of “land kings”, a nickname used for developers who are willing to pay sky-high prices in scramble for land plots. And the recent market boom had also turned a lot of State-owned Enterprises (SOEs) into land kings.  
 
But observers predict that Chinese SOEs may slow down their pace to accumulate land in the second half, amid the withdrawal of policy incentives and diminishing demand. 
 
Data from the National Bureau of Statistics (NBS) shows that the key indicators of China’s housing market continue to point to a softening demand. From January to June, total national investment in property development recorded an annual nominal growth of 6.1%, down 0.9 percentage point from the January to May period.  
 
There are more specific signals for the market to turn around in the second half. On July 14, the well-established private property developer Future Holdings acquired a land piece in Shanghai with an offer of 3.7 billion yuan with floor area valued at 67,409 yuan per square meter. With a premium of 77.4%, the deal made Future Holdings a land king between Shanghai’s inner and middle ring road. However, the floor price of the project was originally expected to hit 100,000 yuan per square meter, and the actual value of the deal is against the expectations of related market players. 
 
The second half of 2016 would bring more land into the market, according to a senior researcher with a well-known think tank who didn’t want to be named. Supply would be increased in key cities like Beijing and Shanghai, while major tier-one and tier-two cities are all considering making more land available for sale. “The government has been worried recently. With the release of each plot, they are concerned that ‘land kings’ might emerge,” he said. 
 
A changing land market 
 
It is not hard to notice that state-backed developers are adopting different attitudes toward land purchase these days. The need for SOEs to diversify their investment portfolio into property or boost their company assets to enhance negotiation power in the upcoming mergers and reshuffling under the SOE reform has been met following the buying spree of the first half of 2016. Now, central state-owned enterprises (CSOEs) are turning to joint ventures with private developers. 
 
Second, some private companies with a financial background and higher growth potential are proactively replenishing land banks, with the Future Holdings deal being a good example. Except for top-level private developers, those ranked between 20th and 50th are also grasping the opportunity to expand by gaining more land. 

 
A general view of Shanghai's financial district of Pudong is seen from the top of the Shanghai Tower, which is undergoing construction, in this August 2, 2013 file photo. Photo: Reuters 

And, it is obvious the trend of land price hikes is beginning to taper off with the end of monetary policy easing and resumption of some purchase restrictions. In June 2016, average premium in tier-one cities rose to 107%, and for those plots with the price exceeding 30,000 yuan per square meter, the average premium reached up to 174%. For the land plots between Shanghai’s inner and middle ring roads, the 77% premium of the Future Holdings deal already seems a good bargain.  
 
Another notable trend is that in a bid to further reduce the risk of investment in real estate development, banks and other financial institutions have shortened the original 2-year commercial real estate loans to half a year. In a similar vein, it is suggested that land-transfer fees be paid in full instead of in instalments. Observers believe the measures could make developers with short-term capital turnover challenges more prudent in buying more land. 
 
Governmental intervention around the corner
 
The Chinese Academy of Social Sciences released its 2016 Interim Report on Chinese Housing on July 6, predicting that China’s housing market would go through some adjustments between the second half of 2016 and the first half of 2017. 
 
A host of factors prompted the market boom in the first half, while sales volumes in hot cities including Shanghai, Shenzhen, Nanjing and Suzhou have now begun to fall after the sharp rise. There is also news about policy tightening at the local level. “The Ministry of Land and Resources together with other related governmental departments have rolled out countermeasures to avoid emergence of new ‘land kings’ in major Chinese cities. And it has been made clear that the government’s priority is to curb exorbitant land prices in the second half,” Zhang Hongwei, research director of Tospur Research and Consulting, said. 
 
According to Zhang, policymakers in China have so far not been able to come up with any good practices or successful cases of “destocking” excess properties in lower-tier cities. Even though there are effective policies, China’s government is also known for its inconsistency in pushing through reforms. 
 
Industry insiders believe among the three major drivers behind the recovery which include policy incentive, strong demand and low financing cost, the first two have lost effectiveness. The basic conditions for increase in land prices is actually not there anymore. Besides, observers point out land auctions in premier markets would moderate since the government has announced to increase supply in tier-one and major tier-two cities. For example, from May, local governments in over-heated markets including Nanjing and Hefei have all vowed to supply more land parcels.   

(The article is based on several Chinese reports about the topic.) 

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