Country Garden Backs Out of Beijing Land Deal as Costs Rise

Updated on
  • Country Garden won auction for the land with Jinmao Holdings
  • The land costs exceeded Country Garden's agreed limit

Chinese developer Country Garden Holdings Co. decided not to buy two plots of land it won at a Beijing auction after the final prices exceeded its budget, in a sign that homebuilders are under pressure from surging land costs.

Country Garden will not buy the two sites in Beijing’s suburban Fengtai district it won in the auction with co-bidding developer China Jinmao Holdings Group Ltd. on Oct. 21, it said in an e-mailed reply to Bloomberg queries. The final price for one site was 28,900 yuan ($4,562) per square meter and the price was 29,700 yuan for the other, exceeding Country Garden’s agreed ceiling of 26,000 yuan and 25,000 yuan, respectively, according to the company. Jinmao was bidding at the auction.

Chinese developers are becoming more cautious in buying land in first-tier cities such as Beijing, which have led a nationwide recovery in sales this year, as escalating land costs are threatening to erode their profit margins. Average land prices for residential use in Beijing soared 45 percent in the third quarter, compared with the previous three months, according to a report by SouFun Holdings Ltd., echoing surging prices for commercial and office use. Land prices have also jumped in Shanghai, China’s financial hub, pushing the municipal government to halt six land auctions last month.

“Land prices have been soaring in the first-tier cities like Beijing, accounting for 70 to 80 percent of the estimated housing prices,” said David Hong, Hong Kong-based director of China Real Estate Information Corp. “It would be hard for private homebuilders like Country Garden, as they are not armed with cheap enough cash.”

Land Deposit

City authorities usually collect deposits before land auctions, although it wasn’t immediately clear who would be responsible for what share of those. The combined deposit for the two Beijing plots of land was 630 million yuan, a search on the website of Beijing’s land and resources bureau showed. Country Garden and Jinmao formed a joint venture to bid, according to Country Garden. Jinmao didn’t reply to two calls to its Beijing office seeking comment.

Country Garden, which is based in the southern Chinese city of Foshan, is negotiating with Jinmao to either transfer its stake to the state-backed developer or to return the land to the Beijing municipal government, Country Garden said. An agreement hasn’t yet been reached, it said.

Country Garden’s gross margin, a measure of a company’s profitability, declined to 23.2 percent in the first half of 2015 from 26.1 percent in 2014, according to an Oct. 22 note by Chen Geng, an analyst at Phillip Securities in Shanghai.

Shares of Country Garden rose 0.3 percent to HK$2.98 as of 2:59 p.m. in Hong Kong, while Jinmao advanced 0.9 percent to HK$2.24. The Hang Seng China Enterprises Index was up 3.4 percent.

— With assistance by Emma Dong

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