Afraid of heights? Stay away from China land auctions.
Two record land purchases in China this week underscored the growing optimism among real estate developers, and the challenge facing the Xi government as it seeks to maintain economic growth while keeping a grip on its popular mandate.
On Wednesday, Tianjin-based real estate developer Sunac successfully bid RMB 2.1 billion for a 28,100 square meter site in northeast Beijing, and also made a commitment to build a 278,000 square meter hospital at another site as part of a land acquisition deal which will cost the company RMB 4.3 billion.
With a planned floor area of 59,152 sq m for the project the cost per sq m of built space works out to RMB 73,000, the most expensive in China to date, according to figures from Centaline Property Agency.
Earlier in the week a joint venture between Sunac and Shanghai-based developer Greentown had joined with a Zhejiang property firm to invest RMB 507.4 million for 49 percent of a 468,020 square meter mixed-use project in Shanghai’s Putuo district.
Another record was set on Thursday, when Hong Kong real estate developer Sun Hung Kai bought a plot of land in the Xujiahui area of Shanghai for RMB 21.77 billion. The site is zoned for mixed commercial use and with a planned gross floor area of 584,203.6 square metres, the price paid by the developer for the land works out to RMB 37,264 per square metre.
In a sign of how aggressive developers have been in competing for land, and the degree of confidence investors seem to have in the property market’s inexorable rise, the price paid by Sun Hung Kai was more than 24 percent higher than the land auctions starting price.
According to a report by Esther Fung in the Wall Street Journal, Sun Hung Kai outbid its Hong Kong rival Wharf for the site in Shanghai’s Xuhui district. The developer apparently plans to build offices, restaurants and a hotel on the site.
Sun Hung Kai already has a number of successful commercial real estate developments in Shanghai, including the International Financial Centre (IFC) in Pudong’s Lujiazui area and the International Commercial Centre (ICC) along Huaihai Road.
Record Land Prices to Bring Record Apartment Costs
For the Beijing site, Sunac plans to build luxury apartments, and according to Zhang Dawei, a property researcher who spoke with financial newspaper Caijing about the project, homes in the new development can be expected to sell for at least RMB 100,000 per square metre.
Second hand homes in the area now sell for about RMB 50,000 per square metre, but prices have been rising rapidly this year. The Wall Street Journal spoke with Johnson Hu, an analyst at CIMB Securities, who noted, We are already seeing housing prices in Beijing up more than 20% in August from a year earlier.”
What Do China’s Property Developers Know About Government Policy?
While China has a stated goal of maintaining affordable housing for the masses, clearly 2013 and the advent of the Xi government have brought a shift to investor sentiment.
Following the latest Sunac deal, land sales in Beijing have amounted to RMB 109.9 billion so far this year, higher than the 64.79 billion achieved for all of 2012. It would be comforting for China’s policy makers to think that this is a trend that is only visible in the major urban centers. However, the numbers from market watcher China Real Estate Index System show that land prices are rising across the country this year.
If land sales continue their current trend, they could easily surpass the record revenues of RMB 163.9 billlion achieved in 2010, which would also meaning continuing housing price increases for consumers.
While the new government has not shown concern regarding the possible impact of rising housing costs so far, if the social unrest which triggered the housing restrictions in 2010 and 2011 return then it will be interesting to see if the government changes course again.
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