Chinese land auctions collapse as developer debt problems worsen
Several key second-tier cities have seen mixed interest in land auctions since mid-year, a study by China’s leading brokerage found, adding to the evidence that financial pressure on real estate developers such as Evergrande Group in China is growing after regulators stepped up restrictions on their fundraising activities.
Land premiums, the extra price local governments get over the reserve price they set before the auction, has collapsed, according to data compiled by Citic Securities Co. Ltd. (600030.SH) spectacle. This radical change reflects the growing reluctance of cash-strapped developers to pay a high price for land amid slowing sales of new apartments and brakes on their ability to increase their borrowing, especially “three red lines” policy imposed by the People’s Bank of China and the Ministry of Housing last year.
Local governments in nine cities, including Xiamen, Tianjin and Chengdu, have held the second round of residential land auctions for 2021 during the period June 10 to September 17, Citic Securities said in a report released on Monday. They sold a total of 362 plots of land at an average price that equates to 6,600 yuan ($ 1,021) per square meter based on the floor space of the apartments in their construction plans. That’s only 4.85% higher than the combined reserve price, according to the report. Almost 80% of the plots were sold at the asking price. Six of the cities, which held land auctions in the second half of August or September, only got a 2% premium.
The figures contrast sharply with the performance of the second quarter, when 22 Chinese cities, including the nine highlighted by Citic Securities, held their first auctions of the year. The average premium obtained during these auctions was 15.1% (link in Chinese), according to a report by Guosheng Securities Co. Ltd.
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Caixin’s coverage of the Evergrande debt crisis
The government this year started an overhaul of the way local governments sell land use rights as part of its campaign to control residential property prices. He selected 22 cities to test a change in the auction system for residential land, stating that they could not make more than three sales per year and requiring them to publish an auction schedule in advance. Previously, most local governments put plots up for sale on an ad hoc basis throughout the year, usually with little notice. This created uncertainty for developers as they never knew when the next auction might take place or which properties might go up for sale, which contributed to the increase in land premiums.
The lackluster auctions underline the waning appetite of developers to increase their land reserves as the government restricted their access to debt, stifling the main source of funds for purchases. A source familiar with the matter told Caixin that some local governments had even abandoned plans to hold auctions due to weak demand.
“There are two prerequisites to attracting real estate developers to buying land,” Citic Securities analysts wrote in their report. âFirst, the funding environment is normal, so they don’t need to use their working capital to pay off large debts and shrink their balance sheets. Second, house prices have not fallen significantly. At this moment, the two premises have been shaken.
âThe land market has turned cold,â they wrote.
Public information shows that in Tianjin, for example, out of 61 plots of land available at the last auction, only 40 were sold, sales of 19 were suspended and two remained unsold. Of the 40 that found a buyer, 31 were negotiated at the reserve price. Of the 75 plots auctioned in Chengdu, 17 were suspended, six failed and 52 were sold, with an average premium of 2.2%.
The three red lines The policy limited the ability of developers to take out more loans by tying increases to meeting three debt ratios. The policy severely restricted access to funds for many developers and fueled the liquidity crunch that engulfed the Hong Kong-listed company. Evergrande. The developer has all but disappeared from the auction market due to financial problems that rocked the national and global markets.
that of Evergrande land purchases amounted to less than 3.7 billion yuan in the first half of 2021, compared to 63.3 billion yuan in the same period of 2020, according to data released in July by real estate research firm China Index Academy Ltd. Other companies with deeper pockets and healthier balance sheets, however, continue to spring up. China Vanke Co. Ltd. (000002.SZ) spent 96.2 billion yuan for the purchase of land in the first half of this year.
Banks have also limited their lending to real estate developers, in part due to the three red line policy and due to other regulatory limits on lending to the real estate industry. The rise in bad debts also makes them more cautious. In the first half of this year, at least 10 of China’s large and medium-sized listed banks reported an increase in their non-performing loan ratios for the real estate sector, in part due to their exposure to indebted developers facing liquidity problems.
In August, bond financing in the real estate sector fell 32.1% year-on-year and 12.5% ââmonth-on-month, according to data from the China Index Academy. Overseas bond funding fell 93.5% yoy and 91.4% mo, fiat funding fell 43.6% yoy and 14.7% mo, while funds raised through the sale of asset-backed securities fell 50.2% year on year and 70.6% month on month.
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