China’s land sales revenue is expected to slow down and that will add fiscal pressure on local governments with high reliance on land sales and heavy debt loads.
Moody’s Investors Service said in a report on October 11 that the growth of the country’s land sales revenue will slow down this year and is expected to decline in 2022.
In the past one year, Chinese authorities have been tightening financing rules for real estate developers in a bid to lower financial risks in the sector. Many developers are forced to shift the focus from expanding business scale to maintain stable cash flows. Toe achieve that, many of them have slashed spending on land acquisitions.
Data from local governments showed a sharp cooling in land markets recently, with significantly more failed auctions.
According to Moody’s report, among the cities that have held the second round of land auctions this year, more than half of the land parcels offered saw auction cancelled, delayed or failed due to a lack of market interest. Among the land successfully sold, about third-quarters changed hands at reserves prices without any premium.
The situation was even seen in tier-one cities, where housing markets are thought to be more resilient that lower-tier cities. For instance, of the 42 land parcels offered in the recent land auction in the city of Beijing, 27 land parcels failed to attract any bids. In South China’s Guangzhou city, among the 48 land parcels offered in the recent auctions, 25 land parcels saw failed auctions and among the 23 lands sold, only 5 changed hands with price premium.
Sluggish land transactions and increasing failed auctions point to weak demand from property developers and their increasingly cautious attitude in land acquisitions, Moody’s said.
The rating agency expects the growth of China’s land sales revenue to slow to below 10 per cent this year, compared to above 10 per cent in the first half of the year.
According to data from the Ministry of Finance, China’s land sales revenue reached 570.3 billion yuan in August, sliding 17.5 per cent from the same period last year, falling for the first time this year. The ministry will release September data later this month.
According to Moody’s, the downtrend will extend into next year. If the government does not adjust real estate policies, the country’s total land sales revenue could drop by more than 20 per cent in 2022 and even if policies are adjusted to prevent sharp contraction in local government revenue, next year’s land sales revenue will still be lower than 2021-level.
Land sales is a main revenue source for local governments. According to statistics by GF Securities, the revenue accounted for 30 – 40 per cent of their total fiscal revenue and more than 40 per cent of the land sales revenue are used for local infrastructure projects.
Moody’s report showed that provinces that have been highly reliant on selling land and have high debt loads will see increasing fiscal pressure, such as southwest China’s Guizhou Province and Tianjing city.
Recently, some local governments have introduced measures to support the hosing market. The city of Harbin, capital of Northeast China’s Heilongjiang province, on Sunday announced a package of measures to encourage home sales and support property developers.
The city lowers the requirements for developers to apply for pre-sale permits, encourages quicker return of pre-sale funding to developers, provides house purchase subsidies to qualified talents and relaxes rules for home buyers to purchase second-hand homes with loans from the Provident Fund.
Data from the local government showed that Harbin’s total fiscal revenue reached 64.5 billion yuan in 2020 and its land sales revenue reached 28.2 billion yuan, accounting for 43.7 per cent of the total.
“We believe Harbin’s move sent a strong policy signal and it’s the first city to ‘rescue’ the housing market with a whole package,” said Ding Zuyu, CEO of E-House China R&D Institute.
Since August this year, seven cities including Yueyang, Kunming, Tangshan, Shenyang, Jiangyin, Zhuzhou and Zhangjiakou have announced various measures to limit home price drops, according to public information.
Ding said that the focus of some cities’ housing market regulation has shifted from “curbing price growth” to “limiting price drops” and they are taking measures to boost home sales and curb the downtrend in the housing market.
However, he noted that the relaxation in parts of the country will not change the policy stance that “housing is for living, not for speculating” and cities are encouraged to implement housing policies according to local situation.
Also, the supporting measures are unlikely to reverse the nationwide cooling trend in the housing markets, he added.