China’s top developers plan to invest more in land this year: Reuters survey

Posted by at 22 February, at 14 : 36 PM Print

 

In a recent survey by Reuters it has been revealed that most of the Chinese real estate developers are planning to increase their land investment. Reuters surveyed Chinese real estate developers to find out their investment plans in 2017. The reason for Chinese interest in land investment has been pointed towards the decreasing prices, implementation of tight investment rules by the government, and the general interest in expanding their investment avenues.

The 10 Chinese real estate developers that Reuters contacted through phone and messaging services are among the top 20 Chinese developers. These developers, who mainly sell apartments, draw almost $300 Billion sales every year.

Eight among the ten interviewed real estate developers said that they are planning to escalate their budgets by 10-50 percent. The remaining two said, they will maintain the budget that they had in 2016. The company representatives who responded to the survey wanted to remain anonymous because quarterly results. Most of these Chinese developers are purchasing land in Beijing, Shanghai, Guangzhou and Shenzhen, which fall under tier 1 cities. They are also taking in the tier 2 cities like Suzhou, Wuhan and Hefei. Interestingly, most of these developers as well as other developers are cont considering doing business in small cities in Tier 3 and Tier 4 groups. Because of this interest in Tier 1 and Tier 2 and lack of interest in Tier 3 and Tier 4, there is going to be a huge price gap between the various Chinese cities.

When property prices in major cities went significantly high, it alarmed Beijing officials as it indicated “boom and bust.” Thus, at local level, they took measures to trim down property prices.

“Due to the tight measures taken by the officials, this year property sales is not going to high as last year, however, it’s also a favorable to purchase more land as we were able to sell most of our inventory in 2016,” said a company representative associated with a developer in Shenzhen. Residential property price in Shenzhen is among the most expensive in all over China. “We have to continue with the growth, thus so we have to continue with buying. Investment in land is our primary plan for this year,” he added.

When the big investors increase their market share, it helps them to increase the scale of economy, which keeps them in a good spot so that they can control the costs of materials, marketing as well as labor. Real estate companies are hurrying up to acquire land in the wake of fierce competition. This is for sure to ruin small investors. According to Citi’s estimation, before 2020, the top 20 developers in China will be controlling about 45 percent of new residential property sales, which is 26 percent increment from sales in 2016.

Amid the expectations of decrease in real estate investment in 2017 in the entire China, interest in buying more land is very contrast. According to the Chinese Academy of Social Sciences estimation, investment in property in China, in 2017, will increase by 5.4 percent.

The growing competition for land acquirement in big Chinese cities will create a grave challenge for the authorities wanting to control the property price from going out of hand. This is also going to put pressure on profit margins for the companies for there are measures to keep property prices in control.

The real estate developer, who is planning to invest 50 percent more in 2017 said the company is trying to make up for the failure to purchase enough land in the last two years.

The two real estate developers, out of 10 surveyed by Reuters, said since the land price is already record high, they will be keeping investment levels as in 2016.

Shopping spree

Around 15 percent of China’s economic growth is contributed by the property market. However, due to record prices in the higher tier cities and low tier cities struggling to sell their residential units, the Chinese property market is quite unbalanced.

China’s No.2 homebuilder China Vanke, which has 88 percent sales growth in last one year, said the company purchased two pieces of land in Beijing last month.

“Property sales will see pressure for sure, in the cities where authorities have implemented tight control. Nonetheless, we also see this pressure as good opportunities to purchase more land,” said Liang Jie, representative of Vanke. “The premium properties have tapered even though the absolute land prices haven’t declined considerably,” he said last week, in the analysts’ conference.

While giving the reasons for why the low tier cities are not in the cards, a finance officer associated with a big developer said, “Price is low, demand is low.” Interestingly, Country Garden and Evergrande, the two top developers, are strengthening their hold in Tier 3 and Tier 4 cities like they have done in the past.

With an ambitious plan to double their property sales, Country Garden has set aggressive sales target close to 600 billion yuan for 2017. As told by the Chief Financial Officer Bijun Wu at Country Garden, in third and fourth tired cities there is no cap price caps, and when the land price and construction costs low are kept low, there will be less pressure.

When the property prices in China continue to grow big, the aggressive buying tactics could be right. In a report released earlier, Oscar Choi, a Citi analyst, said, “When Evergrande aggressive acquired land during two years, between 2013-2015, through auction and M&A, it became very successful.” Nonetheless, some developers are still over concerned. ” If the local governments continue to supply land in low scale, land prices will increase for sure; however, the developers who invested significantly will be facing liquidity problems when monetary policy is tightened,” said Zhao Yang, Nomura’s chief China economist.

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