China governments in hole as land sales plummet

Discussion in 'China' started by Armand2REP, Dec 21, 2011.

  1. Armand2REP

    Armand2REP CHINI EXPERT Veteran Member

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    China governments in hole as land sales plummet
    Property market slowdown is chilling China’s local governments
    By Zhu Yishi

    BEIJING ( Caixin Online ) — The development-ready land market, long a reliable revenue source for local governments across China, has suddenly turned cold. And city halls are shivering.

    Government-sponsored land auctions in cities nationwide have slowed dramatically in recent months, reflecting shrinking consumer demand and what one executive called a “winter mode” strategy among major developers. Nominal land values have fallen, and some auctions have been canceled due to a lack of bidders.

    “The land market is basically deadlocked,” said Chen Xiaotian, president of China Real Estate Information Corp. (CIRC), a market research firm.

    The cool-down follows last year’s decision by the central government to rein in soaring home prices and dampen speculation with measures such as stricter mortgage terms for buyers of second and third homes, as well as restrictions on bank loans for developers.

    The government has also stepped up construction of subsidized housing for low-income families. And under central government instructions, more than 40 first- and second-tier cities introduced specific home purchase limits.

    The market controls have indeed yielded the intended results. According to the China Index Academy, home prices in 100 Chinese cities tracked by private real estate researchers fell an average 0.28% in November from October, the third monthly decline in a row.

    But local governments now face a dilemma. On the one hand, they see a need to control real estate prices, and would never dare disagree with or try to disrupt central government policies. But land sales have plunged, hurting their ability to pay for public services, ranging from police patrols to teacher salaries.


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    For example, in the Shandong Province capital Jinan, not a single developer bid for nine of the 11 plots offered by the city in early November. The two plots that sold went for bottom-line prices.

    A city with a serious land market crash is Guangzhou, where in November some 32 plots failed to sell. In some cases, auctions were suspended by the city government, which blamed poor market conditions.

    These plots were supposed to generate about 18.7 billion yuan ($2.95 billion) for Guangzhou’s city government, representing some 29% of the planned land sale revenues written into the 2011 fiscal budget. Asking prices averaged 5,584 yuan per square meter of floor space.

    Han Shitong, president of Guangzhou Hantong Investment Advisory Co., said developers have been shunning local auctions across the country because city officials have set unreasonably high asking prices.

    “In a good market,” the land on Guangzhou auction blocks “might have sold,” Han said. “In a market this bad, it’s another matter.”

    Big developers are feeling the pinch, too, and some small property companies reportedly started edging toward merger talks or bankruptcy. But local government officials are apparently a lot more jittery, said Top Consult Chairman Li Guoping, whose firm advises developers.

    Land sale revenues for local governments in 25 cities declined 11% between January and November, compared to the same period 2010, to a combined 950 billion yuan, according to the China Index Academy.

    “Sharp declines in land revenues have put enormous financial pressure on local authorities,” said Li. “Right now, local governments are more worried than developers.”

    No thanks

    The research agency Centaline Property said no buyers came forward to bid on 117 plots offered at auctions in 35 major cities in November. That compared with 22 plots that went unsold in October.

    China Vanke sold more property by value than other developers in the first three quarters of 2011, according to CRIC. But in the fourth quarter, Vanke President Yu Liang recently told the media, the company switched to “winter mode” with a cautious land purchase strategy.

    “Land costs a lot of money,” he said. “We can’t buy the wrong land.”

    Another big developer that’s backed by the Shanghai government, Greenland Group, dramatically curtailed land deals in July and halted deals altogether in October, said company Chairman Zhang Yuliang. He blamed “poor sales.”

    Shanghai, traditionally ranked the nation’s No. 1 land-selling city, saw revenues from property auctions decline to about 119 billion yuan during the first 11 months of 2011, off 13% from last year’s pace for the period, said the index academy.

    Beijing’s parallel decline was 14.4% to about 92 billion yuan, while land sales for residential projects alone plunged 51% to 37 billion yuan.

    In Dalian during the same 11 months, auctions netted the government nearly 50 billion yuan — half the 2010 pace — while the Wuxi government saw land revenues fall 34%, the index academy said. The declined in Nanjing was 29%, and in Wuhan 21%.

    Financially sound cities such as Beijing are said to be able to bear the pressure of falling land revenues. But some second- and third-tier cities apparently cannot.

    A source at a state-owned property firm in one provincial capital told Caixin that local agencies don’t have enough money to cover basic health-care costs or pay teachers.

    “City officials are coming to us and asking us to buy land to bolster the land market,” said the source, who declined to be identified because of the issue’s sensitivity. He said his company in November complied with a local officials’ order to buy a 900,000 square-meter site “whether we wanted to or not.”
    Digging out

    Some local governments are trying to dig out of their revenue predicaments with creative strategies aimed at unfreezing land markets.

    Beijing’s land bureau, for example, in November reduced mandatory deposits for developers who want to participate in land auctions. The bureau also extended payment periods for successful land buyers and started offering smaller parcels in hopes of encouraging more buyers.

    But few local governments have room for maneuvering prices in their individual land markets, said Zou Xiaoyun, a deputy chief engineer at the China Land Surveying and Planning Institute, a land price tracker under the central government’s Ministry of Land & Resources.

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    Zou said land development costs, for example, are hard to control. These include costs tied to demolishing structures, clearing land, relocating displaced families and installing infrastructure. And while local governments have the ability to reduce land prices to promote sales, he said, such moves are said not to be in their best interests.

    CRIC’s Chen said local governments have balked at the idea of price cuts because they fear a loss of control over the entire land-housing market. Reducing land prices, they reason, would spark a steady decline for housing values, forcing further land price cuts afterward.

    And overall, officials say, local government efforts to rescue land markets so far have had no substantive effect on the sales deadlock.

    “The main problem now is that housing prices are down, but land prices haven’t slackened,” Chen explained. “Housing and land prices are mismatched.”

    Of course, Chen said, government-owned property developers can be pushed by local officials to buy land, whether or not they want it, especially in second- and third-tier cities. The provincial capital developer source, for example, said if his company has the money “and it’s within our power, we’ll still acquire land. If we don’t buy, the local government will be hard to hold on financially.

    “After buying land, the government will take care of you in other ways (such as) special treatment for future land transactions,” he explained.

    Yet, no amount of arm-twisting is likely to reverse weak land markets in major cities as long as the central government succeeds in cooling house prices. Only when land and housing prices are balanced, Chen said, will the winter end.

    China governments in hole as land sales plummet - Caixin Online - MarketWatch
     
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  3. cir

    cir Senior Member Senior Member

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    Good news。

    People from the outside world don't seem to grasp the fact that an decline in land sales and housing costs is exactly what the government wants to happen。 This is the only way to bring down property prices so that more people, in their hundreds of millions, can buy their own home。

    If the government intends otherwise, all it needs doing is reduce the RRR,lower interest rates or loosen the current strict purchasing policy, which stipulates that one is NOT allowed to buy a second property even if it paid in cash; and even for the 1st time buyer, he or she has to dish out 30-50% of the purchasing price upfront and applies for a mortgage the rate of which is 5-10% above the standard rates, and then only if he or she is lucky enough to get the application approved。

    These days, every drop in property prices is reported as positive。
     
  4. Armand2REP

    Armand2REP CHINI EXPERT Veteran Member

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    It's good news for buyers of luxery apartments, but their aren't many of those left. Affordable housing is still out of the reach of poor and middle class. 90% of units now being made "affordable" are actually dormitories for universities and factories. Developers and local governments are not interested in building profit losing homes. The drop in land sales are bankrupting all but the richest coastal provinces and health and social services are going unfunded in many areas. Nobody wants to buy watching prices fall and it is kicking off the collapse of the Chinese real-estate market. It is turning out to be too late to loosen restrictions once it is obvious you can no longer buy property as a store of wealth.
     
  5. cir

    cir Senior Member Senior Member

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    The next step is to phase-in property taxes so that lumpy receipts from land sales might be replaced by recurring revenues of a stable nature。

    At present only a minority of Chinese pays income taxes。 Any reform should focus on generating grovernment receipts from an improved and more balanced tax system structure。
     
    Last edited: Dec 21, 2011

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