Property

Lost the plot

Property firms regret past overpaying for land

Construction has stalled

Ronnie Chan, chairman of Hong Kong’s Hang Lung Properties, is turning out to be something of an oracle.

The property mogul pointed out last year that many Chinese developers would soon go bust. It didn’t take long for him to be vindicated as Hangzhou Glory filed for bankruptcy protection, and others soon followed suit (see WiC146).

But it has taken a little longer for Chan’s other prediction to come true. He also said back in 2009 that a period of record-breaking land sales – which saw the winning bidders christened as ‘land kings’ – wouldn’t last either.

“They [the land kings] will regret paying these high prices and history will prove they were not acting in a rational manner,” Chan prognosticated.

And true enough, with the correction in China’s property market now weighing on home prices, some of the land kings are feeling the consequence of their past excess.

One example: just last week, the Beijing Land and Resources Bureau announced that it had confiscated a plot previously acquired by Beijing Agile in December 2009 (Beijing Agile is not associated with Agile, a developer listed in Hong Kong). It had previously agreed a price of Rmb710 million ($112 million) for the plot but the Oriental Post reported that the developer had failed to pay the agreed amount as specified by contract.

As a result, its deposit has been lost and the company will be barred from bidding for any further land in Beijing for the next year.

“The decision to buy was made at the wrong time, at the wrong price and in the wrong place,” another property developer told the newspaper, adding that a more experienced company would have tried to sell off the land or tie up with a bigger developer.

World Expo Hongye did just that. The Beijing-based firm won a plot with a bid of Rmb1.8 billion in 2010, for one of the most expensive parcels of land sold in the country’s capital. But the size of the bid meant that the price of apartments on the plot would need to exceed Rmb30,000 per square metre just to cover the land cost.

That looked a tall order in a city in which the average apartment sells for Rmb12,326 a square metre. But it became an impossible task when home prices started to fall. World Expo Hongye initially tried to wait out the downturn, leaving the land untouched for more than two years. But it has now been forced to sell the entire project to Poly Real Estate Group, China’s second-largest listed developer.

“The current market is unable to sustain the high land prices. It’s like the cost of flour is even more expensive than the bread. In this kind of situation, small to medium-sized developers will have to cut their losses and focus on survival,” a Shanghai property director told the Oriental Post.

Even larger developers like Sino-Ocean have been hit with similar problems. It has been promoting Tianzhao, a new development in Yizhuang, a suburb of Beijing, since the end of last year. The company bought the land in 2009 for Rmb19,959 per square metre. But the new flats are fetching Rmb25,205 per square metre, and analysts say it is unlikely that Sino-Ocean will break-even on the project.

“Not only did the ‘land kings’ sink a lot of money into the land, there’s also the construction cost. All the investment puts enormous strain on cashflow. So those who are squeezed either have to give up the land, or sell it cheap,” Chen Xue, a property analyst, told 21CN Business Herald.

Meanwhile the Ministry of Land and Resources says that 480,000 hectares of land – or about four times the area of Hong Kong – has been bought by property firms in China but left undeveloped.

To put that statistic in further perspective: that means that the stock of undeveloped plots is more than four times what it averaged for the last three years, the Economic Observer reports.

We should probably expect more of them to lose their deposits…


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.