Fearing a real estate bubble, China overhauls the way it sells land

By Chong Koh Ping 

To tame a sparkling real estate market, China turns to one of its root causes: the way land is sold in major cities.

Since its inception in the 1990s, when employers were still providing housing for many people, the Chinese real estate market has grown tremendously, with booming home ownership rates and a dramatic drop in affordability. . A 2018 study found that Chinese home prices were on average 9.3 times annual earnings, exceeding 8.4 times those in San Francisco.

As the multi-year boom continues despite the coronavirus pandemic, authorities are now sounding the alarm and pushing major cities to coordinate land auctions. Investors and analysts believe this should discourage frantic tendering and that by putting weaker companies at a disadvantage, it could help accelerate industry consolidation.

Key cities are expected to coordinate residential land auctions and hold them at specific times each year, state media said citing China’s Natural Resources Ministry in late February.

This would mark a big change from the current setup, in which local governments release packages independently and without a set schedule. Uncertainty prompts real estate developers to bid aggressively for land.

Big promoters like China Evergrande Group and Sunac China Holdings Ltd. finance their purchases by borrowing heavily from banks and bond investors, then bring in more liquidity to keep the cycle going by selling many homes before they are completed.

Theoretically, synchronized land auctions would mean that dozens of plots would be up for grabs at a time, meaning only large financially strong developers could compete for multiple sites.

Iris Pang, economist at ING Bank in Hong Kong, said the new system was a “very effective” way to prevent debt developers from bidding on land, as potential buyers have to pay large down payments to participate in any sale. at auction.

Qingdao, a coastal city in eastern Shandong Province, has already announced that it will hold this year’s land auction in three lots. Local media said the new policy would cover 22 cities, including Beijing, Shanghai and Shenzhen.

Chinese authorities have already tried a series of cooling measures, including the introduction of limits on mortgage financing, speculative buying, the issuance of bonds by developers and on who can buy new homes. More recently, they have capped bank lending to the sector and introduced a “three red lines” system which essentially forces weaker players to reduce their debt.

Hayden Briscoe, head of fixed income for Asia-Pacific at UBS Asset Management, said the new policy was “the last piece of the puzzle”. As large developers are more confident of getting better quality land, they are likely to speculate less, he said.

As a sign that Beijing’s top executives are taking risks seriously, one of the country’s top financial regulators recently denounced risky behavior. “A lot of people buy houses not to live, but to invest or speculate, which is very dangerous,” Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, said in a March 2 speech.

This echoes years of government messages, but Mr. Guo pointed it out by warning that he sees a real estate bubble forming; a collapse could result in “a great loss of personal assets” and defaults that would spill over into the banking system and the economy.

Christopher Yip, senior director of corporate ratings at S&P Global Ratings, said that while previous brakes could be easily reversed, the new initiatives were “longer term, and it’s not just about controlling symptoms.” . Weaker developers will have to bid very selectively or look for other ways to acquire land, for example by participating in urban renewal projects, he said.

Shares of Chinese property developers listed in Hong Kong and the mainland have climbed relative to expectations, the change will lower costs and improve margins, especially for bigger players. A Wind index of 133 real estate companies traded in Shanghai or Shenzhen gained 9.1% in the past month, compared to a 12.5% ​​drop in the larger CSI 300 index.

Over time, investors believe some companies may be forced to close their doors or merge with bigger rivals, accelerating an upheaval already underway.

“There will be short-term difficulties,” said Mr. Briscoe of UBS. But the leverage in the sector will decrease and the market leaders will get bigger. “They are going to grow on a large scale, but more slowly.”

Write to Chong Koh Ping at [email protected]


(END) Dow Jones Newswires

March 16, 2021 08:14 ET (12:14 GMT)

Copyright (c) 2021 Dow Jones & Company, Inc.

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