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Cash-rich mainland Chinese property developers are paying top dollar for selected building sites in second-tier cites, in an effort to build up their land banks at a time when Shanghai and other leading cities close the taps on new supply.
But analysts warn leveraged bets by developers using borrowed money could backfire if growth in home prices slows or flattens, as more cities unveil measures to cool the market.
Xiamen, the port city in Fujian Province of South China, surprised the market after it sold a land parcel at a record 5.4 billion yuan (HK$6.44 billion) on Friday.
The land, located in the city’s Tongan District, had attracted about 30 developers to join the bidding, including big names such as China Vanke and China Overseas Land and Investment.
State-backed Poly Real Estate won the tender at an average land price of 25,838 yuan per square meter, higher than the price of a nearby project, selling at 25,000 yuan per square meter, also developed by Poly.
Similarly, developers paid above the norm for land in Suzhou this month. The city, which is near Shanghai, sold 13 sites over two days, raising 25 billion yuan. Real estate portal SouFun estimated the average premium on the land sales at 195 per cent.
“Land supply in first-tier cities has been very limited this year, so cash-rich developers, supported by strong sales turnover, have turned to second-tier cities to replenish their land banks,” said Zhang Hongwei, research director at real estate consultancy Tospur.
Meanwhile, competition for building sites in first-tier cities has become extreme owing to a dearth of supply. Beijing, Shanghai and Shenzhen collectively auctioned off 20 land parcels in the first quarter, the lowest activity on record, according to property agency Centaline’s data.
In April, the Shanghai municipality failed to bring up any sites, either residential or commercial, for sale.
Meanwhile, the housing market recovery has spread to some second tier cities where the economy is perking up, tracking the rebound seen in first-tier cities.
Investment bank Mizuho estimates land prices in 29 second-tier cities increased 77 per cent on year in the March-ended quarter.
Raymond Cheng, property analyst at CIMB Securities, said developers need to be more rational when it comes to second-tier cities.
“The risk is high, as some cities have already started to take measures to crack down on home prices, and the home price growth, in our expectation, will be no more than 10 per cent in next 12 months,” Cheng said.
In a related development, the Suzhou municipal government last month announced new rules that limit the rate at which developers can increase prices. Developers will not be allowed to raise prices within three months of applying for pre-sale approval. In the 12-month period from the time of application, price gains will be capped at 12 per cent. Officials in Nanjing are reported to be considering similar price controls.
The two cities have seen home prices jump more than 15 per cent respectively in the past year.
Franco Leung, a senior property analyst at Moody’s, said he was concerned that profit margins of developers would come under further pressure, negatively impacting their liquidity and credit profile.
“The gross margin [of developers] would remain low and hurt balance sheet performance,” Leung said.
(SOUTH CHINA MORNING POST)
