Housing market rebound lights flame under land auctions
Denise Zhong, who works in a local hospital, breathed a sigh of relief recently after signing an agreement with Poly Real Estate to buy an apartment off the plan. When the unit is completed and she moves in, it will be another step up on the property ladder.
Zhong, a single Shanghai native in her 30s, was living in a small, run-of-the-mill apartment in an old neighborhood in Minhang District. Her home-to-be is a 91-square-meter, three-bedroom, two-bathroom unit in suburban Pujiang Town.
Units in the new housing development cost an average 61,516 yuan (US$8,995) per square meter. Poly Real Estate sold 299 units there in August, ranking the company No. 2 in last month's top 10 sales list.
"With this contract signed, I'm now less than two years away from the first decent roof over my head," Zhong said. "I feel lucky to have gotten the unit, though only top-floor units were left when I made my choice. At least, I don't have to worry about whether home prices will go up when the developer releases a second group of units to the public a few months later."
Because Shanghai’s home-purchase restrictions are still in force, Zhong sold her one-bedroom apartment for about 2.5 million yuan in late June so she could qualify to buy another property. She rented a property nearby to await the completion of her new apartment.
Zhong, like many would-be buyers, pondered the direction of home prices amid the COVID-19 pandemic that crippled economic activity and affected daily lives. Would they go down?
The height of coronavirus may have deterred buyers, but pent-up demand burst when lockdowns ended. Indeed, sales of new, non-subsidized housing in May rebounded to a 44-month high.
Property developers didn’t lose their optimism toward a strong market rebound. They were looked months ahead. Government land auctions, often viewed as a real estate bellwether, started gathering pace.
In the first quarter of this year, 50 land parcels totaling almost 5 million square meters in gross floor area came onto the market, a surge of 88 percent from a year earlier, according to CRIC, a real estate data provider and a subsidiary of E-House China.
In April, the city rolled out a series of investment incentives to counter the negative impact of the coronavirus outbreak. They included an acceleration in government land auctions and some relief for property developers.
A day after that announcement, Shanghai’s land watchdog adjusted certain requirements for bidders interested in two residential parcels in Songjiang District. They were allowed, for example, to pay their eligibility deposits just a day before bidding, rather than 20 days in advance.
At the same time, winning bidders wouldn't be required to hold back 15 percent of total building area. For several years now, in almost all cases related to residential plots, developers were allowed to sell only 85 percent of total space on the open market. The remainder had to be devoted to rental-only units.
James Macdonald, head of Savills China research, said the incentives may have been designed to help fill government coffers adversely affected by COVID-19.
"As such, they may have changed requirements to make land plots more attractive to potential buyers and achieve higher pricing," he said.
In the first eight months of this year, according to an incomplete study, at least 16 residential plots fetched more than a record 20 percent above floor prices at auctions.
Among others, Dalian Wanda Group in June acquired a housing land parcel in the Lingang area of suburban Shanghai for 1.24 billion yuan, or an average gross floor area of 17,637 yuan per square meter. That represented a record premium of 53 percent.
Last month, seven residential land parcels sold across the city at premiums of 30 percent or higher. One plot in the Zhuanqiao area of Minhang sold for more than 46 percent above its starting price, according to Shanghai Centaline Property Consultants Co.
"The city's land bidding market has gained momentum quickly this year, with signs of heating up more obvious since June," said Lu Wenxi, a senior researcher with Centaline. "Abundant new supply of residential plots, particularly in central parts of Shanghai, and robust house sales contributed to the vibrant market."
Shanghai's new housing market ended on a strong note in August, which is traditionally a low season because of scorching weather. New home sales jumped almost 19 percent from July to 976,000 square meters — a level more normally seen in the high season, Centaline data showed.
However, the current strength of the land market might not last too long.
Authorities in Beijing, particularly the People's Bank of China and the Ministry of Housing and Urban-Rural Development, are reportedly considering tighter funding rules on homebuilders as some signs of overheating begin to appear in larger cities, Fitch Ratings said in its latest note.
Authorities overseeing the onshore bond markets have imposed discounts of between 10 percent and 30 percent on the homebuilders' refinancing quota since mid-August. The central bank, according to some local media, may regulate ceilings on homebuilders’ debt based on three leverage thresholds — the ratio of total liabilities to total assets below 70 percent, net debt less than shareholders' equity and available cash higher than short-term debt. Ticking the boxes of all three would allow 15 percent annual growth in debt.
"As homebuilders look to preserve liquidity, we are likely to see weaker momentum in land sales, which have recorded double-digit, year-on-year growth for four straight months," Fitch said. "Homebuilders will need to accelerate new project launches to mitigate the impact, if these new rules are implemented.”