State-owned developer Gemdale Group beat out 16 competitors to pick up a residential site in Shanghai’s Jiading district for RMB 2.01 billion ($315 million), setting a new record per square metre for housing in the suburban area.
Gemdale’s bid was approximately 96 percent higher than the auction minimum, according to an account in the South China Morning Post, and underlines the split in China’s real estate market as developers shy away from oversupplied second and third-tier cities, but still fight for opportunities in the nation’s largest communities.
With GDP growth threatening to dip below the government’s target of 7.0 percent for the year, the Xi administration has been working to revive the real estate sector, only to see investment in the industry continue to slide for nearly two years.
Developer Bets on Rising Shanghai Housing Prices
In picking up the site in northwestern Shanghai near the city of Taicang in Jiangsu province, Gemdale is betting that Shanghai prices will continue to rise.
When the price of the land purchased is divided by the number of square metres that the developer is allowed to build on the site, the cost works out to RMB 18,680 per square metre – a new Jiading record. After factoring in construction, design and other costs, analysts estimate that homes in the project would have to sell for around RMB 30,000 square metre in order for Gemdale to earn a profit.
The average price of new homes sold in Shanghai during August was RMB 30,071 per square metre, although Jiading averaged about RMB 20,000 to 24,000 per square metre, according to data from local real estate agencies.
Shanghai Still Attractive as Sales Struggle in Other Cities
Gemdale’s confidence in the Jiading site, as well as the level of competition in the bidding shows the growing disparity in demand for sites in China’s megalopolises compared to that for land in smaller cities.
During August many local governments failed to sell sites offered at auction in second and third tier cities, indicating slower growth for a property sector that accounts for at least 15 percent of China’s economy. This slowdown in land demand comes despite government moves to rekindle the real estate industry this year to lower downpayment levels and cut interest rates.
Land sales fell 32.1 percent during the first eight months of 2015, according to government statistics, and overall growth in investment in China’s property sector slid to just 3.5 percent compared to the same period last year. The August results marked nearly two years of slowing investment in China’s real estate industry.