They’re buying again

Brighter days: a property rebound

In an auction room in Beijing on June 30th, it was as if the financial crisis had never happened.

The sale of residential site No. 15 Guangqu Road, which covers nearly 156,000 square metres in the heart of the capital’s Central Business District, raised $594 million.

Franshion Properties, outbidding some of the country’s largest developers, paid 147% above the reserve price.

Meanwhile, in Guangdong, Agile Property Holdings bought a 100,000 square metre residential-commercial site in the city of Foshan for Rmb1.2 billion ($175 million). The final offer was 160% above the opening bid, and the highest price paid per square metre in the city for two years.

After nearly a year of sluggish land sales, China’s property developers are replenishing their land banks again. Market observers say this indicates a renewed confidence in the industry’s prospects.

The looser credit environment encouraged by the surge in bank lending this year has helped too.

The country’s largest property developer, Vanke, has amassed nearly $1.3 billion for land acquisitions.

Similarly, SOHO China has built up a war chest of $1.9 billion to replenish its own land bank – primarily for new projects planned in Shanghai and Beijing in the second half of the year, says chairman Pan Shiyi.

But the property market has hardly come through the economic crisis completely unscathed.

Developers have been sitting on a stock of unsold homes that was forecast to take at least a year to shift. Aggressive price cutting has helped to clear some of the backlog. Residential prices in major cities were down by an average of close to 14% over the past year, and by even more in second-tier markets, says property agency DTZ.

So does the current buying spree suggest that China’s property market has bottomed-out?

Some analysts seem to think so. They also believe that the downturn has seen the stronger players emerge in a more prominent position.

“This round of land purchases is different from the frenzy some years back,” said Wang Chen, senior manager in DTZ Beijing. “It is the large-scale developers who are now buying the land for development. Earlier, there were many small developers and speculators who used to purchase land for speculation purposes.”

Property data also paints a rosier picture. Residential property sales were up 50% in June alone. Construction starts were up 12% from a year earlier, marking the first increase after 11 straight months of decline. Prices are rising at a 10% annualised pace, fast enough for the more bullish commentators to call a recovery.

The housing sector is critically important to China’s economy. Construction drives demand for steel, home appliances, and other goods and services.

It is crucial to local governments too, who generate revenues by selling off land to developers. According to ChinaStakes.com, local authorities rely on land sales for about 35% of their funding.

This has led to a situation where state-owned enterprises – under local government control – are ordered to bid on available plots.

In Hangzhou, for instance, 15 pieces of land sold in the first quarter were bought by state-owned enterprises that were linked to the local government.

The upshot: while much of that new bank lending you’ve been reading about has stimulated the economy, at least some of it has also helped repair (badly mauled) local government finances.

Fuzzy accounting, perhaps. But a revenue-raising fix that is likely to make cash-strapped Californian politicians a bit jealous.

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