China’s land prices in auctions have hit record highs in the first half of 2016. As seen in Table 1, the amount of transactions in floor space in 300 Chinese cities increased only slightly (3 percent year-on-year). However, the price per square meter and the total value from land leasing both inflated by over one-third. Land parcels were sold on average 41 percent higher than their asking prices. Developers paid more than double for 89 pieces of land, a much higher number than the 2 cases in the same period a year ago.1 205 land parcels with a price of over RMB 1 billion (“land king” or “Di Wang”2) were sold in the first half of 2016, in contrast to 110 cases in 2015.3
Table 1. Performance of land market in 300 Chinese cities, January-June 2016
Source: China Index Academy. (2016, July 1). Performance of land market in 300 Chinese cities, January-June 2016. Retrieved from http://land.fang.com/zt/201607/bnb201601_06.html
More stunning is that the prices of some land parcels were even higher than the prices of secondary housing nearby. For instance, Cinda Property bought a piece of land in a Shanghai suburb for RMB 5.80 billion on June 1, 2016. This translates to roughly RMB 48,000 per square meter of floor space. Houses in this region however are around RMB 35,000 per square meter. After taking into account construction costs, taxes and other expenses, housing prices would have to double for the developer to make money.4
There are many factors that account for the surge of “Di Wang” phenomenon. The abundant capital inflows into the real estate sector in the first half of 2016 enabled developers to initiate more real estate investments. The credit expansion in the real estate sector reached RMB 2.93 trillion in the first half of 2016, up from RMB 1.04 trillion in the same period a year ago. The balance of real estate loans jumped to RMB 23.94 trillion, a year-on-year increase of 24.0 percent.5
In addition, in June 2015 the central government encouraged real estate developers to issue corporate bonds on the domestic bond market to lower the cost of borrowing. As a result, the nominal value of real estate bonds in 2015 reached RMB 428.21 billion, up from RMB 225.10 billion in 2014. Some prestigious real estate companies managed to issue company bonds at low interest rates, for instance, bonds of RMB 2.5 billion at an interest rate of 2.95 percent for Poly Real Estate in January 2016; and bonds of RMB 3.5 billion at an interest rate of 2.98 percent for Overseas Chinese Town in March 2016. The interest rates of these bonds are lower than those of bank loans for five years of 4.9 percent.
Scarce land supply is a contributor. Most of the “Di Wang” deals are registered in the first tier and some leading second tier cities, where prime plots are scarce and housing demand is strong. Many developers quit the depressed markets in the low tier regions, where the inventories are high, and focus more on markets in the high tier cities. Meanwhile, land supplies in high tier cities have shown a declining trend. For instance, the total land supplies in the first tier cities in 2015 contracted by 25 percent year on year. Beijing only recorded 7 land transaction deals for residential use in the first half of 2016, lower than the number of 15 in the same period last year.
The recent housing boom has consolidated real estate developers’ expectations of inflation of land and housing prices in the high tier cities. China has recently seen a warm up in the housing sector in high tier cities, largely as a result of strong housing demand, an easy monetary environment, and stimulus in housing policies. In the first half of 2016, real estate investment grew by 6.1 percent compared to the same period in 2015, up from an annual increase of 1.0 percent for 2015; and the total amount of transactions and floor space sold in commercial buildings nationwide amounted to RMB 4.87 trillion and 643 million square meters, respectively, an increase of 42.1 percent and 27.9 percent year on year.6
Local governments appear to have little incentive to restrain the “Di Wang” deals, which can generate increased land revenue and push the appreciation of land nearby. As seen in Table 1, land revenue increased by 34 percent year on year in the first half of 2016. Most local governments have heavily relied on land revenue from regional development in the past decades. In the current economic slowdown, they are desperate for more fiscal income to spur local GDP growth and to enhance the career prospects of local officials.
High land prices will lead to a surge in housing prices, aggravating the already severe housing affordability problem for the majority of the population and causing more social discontent.
The central government’s recent attempt to nudge some Central State-Owned Enterprises (CSOEs) away from the real estate sector by mergers and acquisitions appears to have aggravated the involvement of CSOEs in the real estate sector and made the land market even hotter. Many CSOEs actively bid for large land parcels, at the expense of profitability, to keep the value of their collateral high. In this regard, few peers have the capacities to purchase their assets; or they can get more favorable terms in the negotiation process of future reshuffling and mergers.
Official data shows that over 70 percent of the CSOEs have extended their businesses into the profitable real estate sector. The central government has been trying to move some CSOEs out of the real estate sector in the past decades, but with little success. For instance, in 2004 the State Owned Assets Supervision and Administration Commission (SASAC) directed that most CSOEs should gradually withdraw from the real estate business. In March 2010, SASAC ordered that, while the 16 specialist enterprises should continue to consolidate and enlarge their real estate business, the 78 non-specialist CSOEs must withdraw from the real estate sector, but without a specific timeline or any further directives.
The central government has recently shown a strong determination to accelerate the SOE reform and urge the withdrawal of CSOEs from the real estate sector. In September 2015, the State Council issued the “Guiding Opinion on Further State-owned Enterprises Reform.” The report of the Economic Working Conference in December 2015 stressed the mergers and acquisitions of real estate companies. As a result, in March 2016 China Overseas Property bought the residential property assets held by Citic Ltd. For RMB 31 billion. There are also signals China Merchants Shekou is going to acquire the property assets of China National Cereals.
The 78 non-specialist CSOEs seem reluctant to quit the real estate sector, as real estate is one of the few remaining sectors which offers relatively high returns in the current economic slowdown. During the recent land boom, they actively enlarged their real estate businesses as a strategy to cope with the central government’s call for reorganization and reshufflings. For instance, Cinda Property, a financial organization affiliated with the Ministry of Finance, successfully bid for 7 “Di Wang” parcels in the past year. A state dam construction company, Power Construction Corporation of China, snapped up a piece of land in Shenzhen for RMB 8.3 billion.
The “Di Wang” phenomenon could have negative impacts on real estate development and other industries. High land prices will inevitably lead to a surge in housing prices, aggravating the already severe housing affordability problem for the majority of the population and causing more social discontent. With 38.9 percent of the credit expansion in the first half of 2016 gone to the relatively prosperous and profitable real estate sector7, other types of private enterprises and local businesses have been starved of capital.
The excessive involvement of CSOEs in the real estate sector causes unfairness in the market. With their good relations with governments and banks, CSOEs are believed to enjoy privileges in policy support, land bids, and financing activities. For instance, they have greater access to cheap financial resources (e.g., bank loans and bonds at low interest rates) and simpler procedures of permission approvals, compared to their private peers.
The CSOEs’ real estate business is sometimes beyond supervision. Some departments in the SASAC have lower bureaucratic rankings and limited bureaucratic power to supervise the business of some CSOEs, resulting in a lack of oversight. The local bureaus of land and resources have difficulty investigating CSOEs’ unusual land activities. The Ministry of Land and Resources has limited administrative power to impose penalties on CSOEs for land misuse.
The central government has long been adamant to improve market mechanisms in the real estate sector and let the market play a decisive role in economic activities. However, the “Di Wang” phenomenon appears to have encouraged exactly the opposite. The excessive involvement of local governments and CSOEs in the real estate sector will not help optimize the use of land resources and deliver fair market competition. The slow progress of CSOEs’ withdrawal from the real estate sector reflects the central government’s inadequacy in monitoring the SOE reform, which is constrained by defiance from many CSOEs and resistance from local governments.
1. Land king deals becoming normal in first- and second-tier cities, authorities are tightening control. (2016, July 7). Xinhua Net. Retrieved from http://news.xinhuanet.com/fortune/2016-07/07/c_129123343.htm
2. “Di Wang” is officially defined by the Ministry of Land and Resources on 2013, January 15 as a property project with the land sold either at the highest price per square meter or at the highest total price within a specific area. Generally, a property project with a total price of over RMB 1 billion will be classified as a “Di Wang” project.
3. 205 Di Wang deals in the first half of 2016, credit tightening in second-tier cities are becoming normal. (2016, June 30). Xinhua Net. Retrieved from http://news.xinhuanet.com/fortune/2016-06/30/c_129103063.htm
4. China’ Central Government. (2016, June 2). Prices of Di Wang land parcels are higher than surrounding housing prices in some leading cities. Retrieved from http://www.gov.cn/xinwen/2016-06/02/content_5079009.htm
5. People’s Bank of China. (2016, July 21). Statistical report of the loan targets of financial organizations in the first half of 2016. Retrieved from http://www.pbc.gov.cn/goutongjiaoliu/113456/113469/3105099/index.html
6. National Bureau of Statistics of the PRC. (2016, July 15). Investment and sales of the National Real Estate Market: January-June 2016. Retrieved from http://www.stats.gov.cn/tjsj/zxfb/201607/t20160715_1377678.html
7. People’s Bank of China. (2016, July 21). Statistical report of the loan targets of financial organizations in the first half of 2016. Retrieved from http://www.pbc.gov.cn/goutongjiaoliu/113456/113469/3105099/index.html