Developers Team with Financial Partners to Bid Up Shanghai Land

Shanghai home prices hit a new high in May, and developers reacted by bringing in extra financial muscle to win the first land sales of June in China’s commercial capital.

China Resources Land teamed up with state-owned investment conglomerate Huafa Group to persevere through a two-hour bidding war and secure a plot in Shanghai’s Zhabei district, north of downtown, for RMB 8.8 billion ($1.42 billion).

At the same auction, China Merchants Property united with Ping An Life Insurance to fight off 18 other developers in acquiring a residential site in northern Shanghai’s Baoshan district, formerly an industrial area, for RMB 3.01 billion ($485 million).

The equity partnerships between financiers and developers illustrate the new level of monetary muscle needed to bring a major development project to market in China’s first tier cities, as the country’s home-builders struggle with uncertain sales and seemingly ever-higher land costs in major cities.

New Land Price Exceeds Current Housing Costs

The average cost of new housing in Shanghai reached a record RMB 31,832 per square metre in May, according to figures from Shanghai Deovolente Realty Co, but the price paid by China Resources Land and Huafa for their site exceeded this current city-wide figure.

When calculated on the basis of accommodation cost, the SOE-duo paid RMB 38,061 for their parcel in Zhabei, more than the RMB 37,000 per square metre that Hong Kong developer Sun Hung Kai paid for a prime parcel of land in Xujiahui in 2013.

The Zhabei parcel set a new high water mark for land prices in Shanghai in 2015, as developers seem to be regaining their appetite following a long slowdown in home sales, and new property investment.

The existing record for land prices in Shanghai is still the RMB 85,810 per square metre that Hong Kong’s Nan Fung paid for a small site in the core district of Huangpu last year.

In Baoshan, China Merchants and Ping An paid RMB 23,277 for their parcel in the outlying district, but only after beating out Hong Kong’s Wharf and mainland giant Vanke, as well as 15 other developers.

Land Demand Already Climbing in Major Cities

The rebound in housing prices during 2015, and the renewed developer optimism, don’t seem to be confined to Shanghai.

Although the average price of a new home was only up by 0.45 percent in May compared to June, according to a survey by the China Index Academy, growth in the country’s largest cities was considerably stronger.

The 10 largest urban areas saw prices head north by nearly one percent compared to April, and in Shenzhen rates for new homes were up by 2.21 percent compared to last month.

The rise in housing prices was quickly reflected in bids by developers this week, with a plot in Guangzhou going for RMB 4.42 billion – 15.8 percent over the auction minimum and a new record for 2015.

Even second-tier cities, the whipping boys of the market in the last year, seem to be enjoying a June reprieve. In Suzhou, just up the river from Shanghai, 25 plots of land were put on sale on June 1st, with 14 being sold successfully, at an average premium of 48 percent over the auction minimum. Even Hangzhou, which was once the epicentre of the housing meltdown, saw more builder confidence with developer HKR enduring a 41 bid process to win a site at 33 percent over the auction minimum.

Asset Light Land Bids

For those developers looking to win sites in China’s top cities, however, it appears that partnerships, either with other developers or with financiers is increasingly the norm.

In January this year China Resources Land led another consortium, this time with other property developers, to win a 418,693 square metre site in Beijing’s Fengtai district. The multi-developer deal paid a record RMB 8.63 billion ($1.39 billion) to acquire the downtown plot. With higher land costs requiring bigger financial commitments, and slower sales pinching cashflows, developers are increasingly turning to these consortium deals to spread their risks.

Other developers, such as Greenland Group, Dalian Wanda and China Vanke, have emphasised their asset light strategies and are also turning to new funding channels to support their continued expansion.

Soon after Vanke announced a new chain of malls last year, it quickly entered into a partnership with US private equity giant Carlyle to fund nine of those new shopping centres. Greenland Group and Wanda are putting together their own online finance platforms to raise the cash needed for their next round of expansion.

With the gap between land prices and housing prices continuing to close, and demand for new homes still looking shaky, developers are likely to continue to need high levels of financial support to take on new projects. For those developers that can’t secure that financing the consequences will be a transition into niche projects, or a gradual fade from the market.