Despite cooling market, developers spending more on real estate

Land grab

Tighter restrictions on home buying in many big Chinese cities have taken some of the heat out of the domestic real estate market, yet developers are snatching up land at a greater pace. This is largely a result of local governments putting up more land for auction in 2017. Land reserves also serve as a gauge for a developer's strength. Still, at least one expert cautioned that there are risks to acquiring land too quickly. A significant drop in home prices, for example, could leave developers holding land that is too expensive for the market to bear.

The real estate market may have lost some of its heat as China's local governments have ratcheted up restrictions on home buying, but that hasn't stopped developers from snapping up land at premium prices.

Through Wednesday, at least 21 domestic real estate companies, including Longfor Properties Co and China Poly Group Corp, had each spent more than 10 billion yuan ($1.45 billion) on land in 2017, according to a report by the 21st Century Business Herald on Sunday.

Of those companies, Country -Garden, based in South China's Guangdong Province, has spent the most in 2017, the report said. Through Wednesday, the company forked out roughly 58.2 billion yuan on 109 plots.

Country Garden plans to spend 150 billion yuan on land in 2017, according to a report by The Beijing News on Saturday. "If there's suitable land, we will buy it," a company representative told the newspaper.

Even conservative companies have joined in. Sino-Ocean Group Holding, known for its cautious approach to land acquisitions, spent 15 billion yuan in April 2017 for two plots in Wuhan, capital of Central China's Hubei Province, The Beijing News report said. It was the company's biggest expenditure in nearly five years.

As of Wednesday, the 25 real estate developers that have spent the most on land in 2017 outlaid 559.9 billion yuan on land in 2017, more than double the amount they spent in 2016, according to the 21st Century Business Herald, citing Centaline Group's research center.

Seizing supply

In part, real estate developers are buying more land because there is more for sale, according to media reports.

In April, the Ministry of Housing and Urban-Rural Development and the Ministry of Land and Resources jointly issued a notice that ordered local governments to increase the supply of land in markets where inventories of unsold homes were expected to last six to 12 months. For markets with less than six months of inventory, the ministries also demanded that local governments speed up the process of putting land up for auction.

Several cities, including Beijing and Guangzhou, capital of South China's Guangdong Province, have issued plans to release more land to the market.

For example, the Hangzhou city government plans to sell about 207 hectares of land in 2017, up from 186 hectares in 2016, the Xinhua News Agency reported on March 5.

Earlier in May, the local government of Wujiang, East China's Jiangsu Province, sold 11 plots of land for 4.62 billion yuan. On Thursday, the city government of Qingdao, East China's Shandong Province, sold seven plots of land at the minimum price.

Despite the growing supply, real estate developers have been willing to pay a premium for certain pieces of land. On Wednesday, developers spent five hours bidding on a plot in Nanchang, capital of East China's Jiangxi Province, which sold for 1.18 billion yuan - a 62 percent premium over the auction's floor price, according to the 21st Century Business Herald report.

Replenishing reserves

For domestic developers, land reserves are a prerequisite for expansion, which is another factor driving land sales, The Beijing News reported.

Zhang Haimin, president of real estate developer Yango Group Co, said that one can judge a developer's strength based on the size of its land reserves, according to The Beijing News.

Xiao Xiao, former executive director of China Overseas Land and Investment, noted that real estate developers put profits ahead of the size of their land reserves, but nonetheless, they can't ensure profit growth without an ample supply of land, the newspaper reported.

An anonymous securities broker said that as the real estate market grows increasingly saturated, the size of land reserves will to a great extent determine a developer's future sales, according to the 21st Century Business Herald report. In other words, companies use their land reserves to stand out from their competitors.

"Also, as the domestic real estate industry enters a period of consolidation, land reserves have become an important gauge of a developer's competitiveness, potentially giving it bargaining power in a future merger or -reorganization negotiations," the securities broker told the 21st Century Business Herald.

In the past, companies have found themselves in financial trouble because they didn't have sufficient land reserves and couldn't acquire more in a short period of time.

"When developers have sufficient cash reserves, their rule of thumb is to have land reserves for three years of development," Yan Yuejin, research director at the Shanghai-based E-house China R&D Institute, was quoted by the 21st Century Business Herald as saying.

Generally speaking, real estate developers try to sell homes when times are good and buy land when times are bad, the report noted. Consequently, developers are currently stocking up on land while the market cools.

Risks of a downturn

There are risks to stocking up on land. If homes prices fall, pricey real estate projects could become a drag on the market, Zhang Dawei, analyst at Centaline Property, was quoted by the 21st Century Business Herald as saying.

Zhang noted that the majority of recent land sales have taken place in cities where local governments have been tightening home purchasing restrictions. If local governments continue to clamp down on the market, it could put pressure on home sales.

In cities like Beijing and Nanjing, capital of East China's Jiangsu Province, local governments have launched a series of measures since March to cool down their real estate markets.

Yan noted that many domestic real estate companies have borrowed money to fund their land acquisitions, leaving them with high debt ratios.

"A high debt ratio doesn't necessarily mean greater risk. But as the payment peak comes in 2017 and 2018, real estate companies could face a cash shortage if their properties don't sell well," he said.