China’s land market is cooling, with lower price premium and more failed land auctions

China’s land markets have cooled significantly since August after several cities adjusted land auction rules to rein in land price grwoth and as homebuilders’ financing tumbled amid deleveraging efforts to meet regulatory requirements.

As of September 17, nine cities have completed their second round of land auctions this year and a total of 362 land parcels sold, of which 284 land parcels were changed hands at the reserve price, accounting for 78.5 per cent of the total, according to a latest research note from Citic Securities. The average transaction price for the land was 6,600 yuan per square meter, with average price premium at 4.85 per cent, showed the data.

Notably, more cooling signs were seen in the six cities that conducted their second round of land auctions after mid-August. Average land price premium in the cities’ land auctions was lower than 2 per cent and the amount of land parcels that changed hands at the reserve price amounted to 83 per cent of the total. The six cities are Fuzhou, Qingdao, Jinan, Tianjin, Chengdu and Shenyang.

Citic Securities noted that the data didn’t include the land sales that were suspended before the auctions started. An industry insider told Yuan Talks that some local governments suspended a number of land deals before land auction as the land parcels failed to attract enough market interest even after being listed for a long time and were likely to see failed auctions.

“The overall market is turing cold,” according to Citic Securities. If the suspended deals were included, the proportion of failed auctions in the six cities would be up to 32 per cent, it said.

For instance, among the 61 land parcels offered for the latest round of land auction in Tianjin city, 19 land parcels’ sales were suspended and 2 land parcels saw failed auctions, according to public information. Among the 40 land parcels that successfully changed hands, 31 land parcels were sold at the reserve price. The average land price premium was 2.2 per cent.

A recent report from China Real Estate Information Corporation (CRIC) showed that land price premiums in the second round of land auctions fell significantly and in particularly, price premiums in cities including Jinan and Tianjin dropped by more than 10 percentage points compared to their first round of auctions this year.

The proportion of failed auctions jumped and the figures for the city of Shenyang, Changchun, Fuzhou, Jinan and Tianjin all topped 30 per cent, according to CRIC.

The market cooling came after several cities adjusted rules for land auctions to rein in land price growth. China’s Ministry of Natural Resources held a closed-door meeting on August 10, asking 22 major cities to improve rules for the second round of land auctions this year, including measures caping price premium at 15 per cent, several industry insiders told Yuan Talks.

From property developers’ perspective, more restrictions on their financing have dampened the interest in acquiring land and most of the companies that haven’t met the requirements under the so-called “three red line” system which aims to cap developers’ borrowing and leverage, have nearly halted adding land reserves, according to the CRIC report.

Real estate sector’s financing has been declining rapidly amid tighten regulatory scrutiny on lending to the sector and meanwhile, slowing home sales dampen homebuilders’ interest in building up land reserves, according to Citic.

According to the latest data from China Index Academy, one of the country’s largest independent real estate research firms, Chinese real estate companies’ total financing tumbled by 50.3 per cent year over year in August to 117.28 billion yuan, down 42.2 per cent from the previous month. That marks the sixth consecutive year-on-year decline.

That marked the first time this year that property developers’ total financing through all channels has declined on both year-on-year and month-on-month basis.

The data showed that property companies’ bond financing slipped 32.1 per cent in August from a year earlier, down 12.5 per cent from a month earlier. In particular, their offshore bond financing tumbled 93.5 per cent year over year and slid 91.4 per cent month over month.

Developers’ trust financing fell 43.6 per cent year over year, down 14.7 per cent from the prior month. Their financing through asset-backed-securities fell 50.2 per cent last month from a year earlier, down 70.6 per cent from a month ago.