Land Sales Fall 25% as China’s Developers Go on a Diet

Land sales for property development fell by more than 25 percent last year in China, as the country’s real estate industry struggles to cope with falling housing prices and rising land costs.

According to China’s Ministry of Land and Resources, as reported in the Financial Times, the country’s local governments sold 151,000 hectares of project sites last year, down more than a quarter in terms of area from the amount sold in 2013, when the property market was booming.

The Ministry’s figures roughly correlate with earlier data released by China’s National Bureau of Statistics and could indicate tough times in 2015 for China’s local governments, which rely on land sales for much of their revenues.

Caught Between a Real Estate Slump and a Credit Crunch

The decline in land sales appears to be part of an overall slowdown in real estate investment as China’s government attempts to deflate perceived asset bubbles and shift the economy towards less dependence on investment for growth.

According to numbers from the Bureau of Statistics, China’s real estate investment reached RMB 9.5 trillion in 2014, growing 10.5 percent from the previous year’s total, but growing at a rate just over half of 2013’s pace of 19.8 percent. Perhaps more importantly the rate of growth in investment declined steadily throughout the year.

In terms of area, the Bureau’s figures estimated that land sales were down by 14 percent to 33 million square metres in 2014, however, the amount paid for these sites rose by one percent to RMB 1 trillion.

The decline in land sales came as many local governments withheld new plots from the market due to a lack of developer demand.

While sites put up for sale in prime locations of the country’s major cities last year still brought record prices in some cases in Beijing and Shanghai, the drop in the volume of land sold is said to reflect poor demand for land in China’s second and third-tier cities, as well as in peripheral areas of the first-tier cities of Beijing, Shanghai, Guangzhou and Shenzhen.

Developers’ poor land appetite came as China’s real estate industry suffered nine straight months of declining home prices, after the government attempted to put the brakes on an overheated market in late 2013.

The price of financing for land purchases by developers has also increased as domestic banks have become more reluctant to lend to projects in what is often seen as a risky sector, and international bond markets have been spooked by growing levels of developer leverage and potential political risk such as in the case of Kaisa Group.

Land Sales Slide Likely to Continue

With housing prices still falling last month and China’s real estate developers carrying a record amount of unsold inventory, the slowdown in land sales can be expected to continue at least through the first half of this year.

While China’s government has lately been taking steps to inject more liquidity into its banking system much of this new cash is being used to counter the recent rise capital outflows as more Chinese investors head overseas, and less foreign investment finds its way into China.

Considering the large role that real estate sales play in China’s economy, and the importance of land sales to keeping local governments afloat, many analysts expect the country’s leadership to take further measures to prop up the housing market, which could lead to greater confidence among developers and consumers later in the year.