China’s second-tier cities may be in for a round of land price corrections in 2019, judging by a recent tepid land auction in Nanjing.
Land auctions are failing at a higher pace in China this year
At an auction of six plots in the city of over eight million people this past week, two of projects sold at their minimum reserve price, while the other four fetched only slight premiums despite recent local government easing measures to encourage such sales.
The capital of eastern China’s Jiangsu province has seen land prices drop 36 percent since they reached a height in 2016, prompting local authorities recently to reduce deposit levels that land tender winners must pay on their purchases from 50 percent to 20 percent.
Auction Premiums Reach 26%
The highest premium paid on a parcel this past week was 25.83 percent — indicating modest levels of competition compared to the 745 percent premium that a plot of commercial land sold commanded in July 2017. During last year the city government introduced measures calling for a maximum selling price, and would call off bidding if competing developers drove prices to what were deemed unacceptable levels.
Country-wide, the average land auction premium over starting bidding prices in the 40 Chinese cities monitored by E-House China at the end of August had fallen to 17.3 percent, the lowest level since June 2015. And at the end of November, failed land auctions in 300 China cities totaled 618 — more than double the number for all of 2017.
Now, with the price of land dropping in Nanjing, residential prices have followed suit. According to the National Bureau of Statistics, Nanjing’s new home prices have dropped by one percent to two percent every month since the beginning of the year — despite the government ending its ban on pre-sales of new homes, which it implemented in 2016. Among the six land-plot sales in Nanjing this past week, four of the plots were in suburban Jiangning district.
Gezhouba JV Takes Gulou District Site
One parcel that sold at its reserve price was a plot between Tianhuan Road and Runlin Road in the Dongshan area of Jiangning district. The 21,682 square metre (233,383 square foot) plot, which has been approved for construction of a 54,205 square metre residential space, sold for RMB 670 million ($97.17 million), or RMB 12,360 per square metre of built area.
Gulou district features some of Nanjing’s most expensive properties (Source: Trip.com)
The price was more than RMB 7,000 per square metre lower than the RMB 19,476 per square metre record price seen for Jiangning district in June 2016.
The priciest of the six parcels was the G50 parcel, located in the more posh Gulou district in downtown Nanjing. After 32 rounds of bidding, the 24,498 square metre plot was purchased by a joint venture of China Gezhouba Real Estate Development and Changzhou Sanhe Property for RMB 1.51 billion, or RMB 22,413 per square metre of built area. The final transaction price was 25.83 percent above the auction reserve price, the highest premium on the day.
Lower home prices can only be a good thing for Chinese economy. Government controls are making this happen. Expect a massive retreat from property investment in the coming 2 to 3 years, and private developers to find other things to do, eg red tourism and other cultural work.