China Developers Drop Beijing Land Purchase as Costs Surge

Updated on
  • China Resources, China Merchants won the site at auction
  • Land prices are surging faster than home prices in Beijing

China Resources Land Ltd. and China Merchants Land Ltd. backed out of purchasing a plot in Beijing they won at auction after the final price exceeded their budgets, underscoring rising pressure Chinese developers face from surging land costs.

The developers will not buy the site in Beijing’s suburban Fengtai district they won in the auction with co-bidder Shenzhen Overseas Chinese Town Co. on Nov. 2, said a Hong Kong-based investor relations officer with China Resources who asked not to be named, citing company policy. The final price for the site “substantially exceeded” China Resources’s budget, the officer added, declining to give the agreed per-square-meter maximum the developer was prepared to pay. Shenzhen Overseas was bidding at the auction on behalf of the other two developers.

The investor relations department of China Merchants and the public relations department of Shenzhen Overseas declined to comment.

Country Garden

The move follows a similar decision two weeks ago by Country Garden Holdings Co., which decided not to proceed with purchasing two Beijing sites it won at auction with co-bidding developer China Jinmao Holdings Group Ltd., after the final prices surpassed their agreed ceiling by as much as 18 percent. Surging land costs in China’s biggest cities pose an increasing threat to developers already faced with a stalling housing-market recovery: New-home prices increased in 27 cities in October, 12 fewer than in September, and dropped in 33, compared with 21 last month, the bureau of statistics said on Wednesday.

“Land prices have been surging in the first-tier and some large second-tier cities,” said Wang Yi, a Shanghai-based analyst at Goldman Sachs Group Inc. “If developers focus on buying land in these regions only, the future returns generated will be lower than from the current land bank.”

The plot of land won by China Resources, China Merchants and Shenzhen Overseas was sold for 8.3 billion yuan ($1.3 billion), or 56,000 yuan per square meter, according to a report by the official Xinhua News Agency. Bidding started at 5.6 billion yuan and escalated after 88 bids in 90 minutes, making it the second-most expensive piece of land sold in Beijing based on total price, Xinhua reported on Nov. 3.

A mixed-use development that includes residential, commercial, office and affordable-housing is planned for the site about a 30-minute drive from Beijing’s Financial Street, according to an auction file on the website of the city’s land resources bureau.

Greentown Bid

Prices are continuing to hit all-time highs. Greentown China Holdings Ltd. on Wednesday outbid six competitors to win a Beijing suburban plot with co-bidders China Communications Construction Co. and a unit of Ping An Insurance (Group) Co. The price escalated to 5.7 billion yuan after 66 bids, 50 percent higher than the asking price, setting a record for the mountainous Mentougou area west of Beijing.

Beijing is a “strategic area” for any developer that aims to expand its footprint now, given land resources in the capital city is limited, Hangzhou-based Greentown said Wednesday on its website.

Surging Prices

The cost of land in Beijing and Shanghai has surged to almost 40 percent of the average home price, more than double from 2011, Goldman Sachs analysts led by Wang wrote in an Oct. 5 report.

Wednesday’s data on the 70 cities monitored by the government suggest China’s home-price gains may “have passed their peak,” Nomura Holdings Inc. economists led by Hong Kong-based Zhao Yang wrote in a note.

“If home prices won’t surge fast, but developers keep acquiring more land, there will be risks,” Goldman’s Wang said.

China Resources gained 2.36 percent in Hong Kong trading as of 11:00 a.m. local time to a two-week high, and China Merchants traded 1.2 percent higher. The benchmark Hang Seng Index advanced 1.25 percent. Shenzhen Overseas dipped 0.2 percent in Shenzhen as of 11:00 a.m. local time, compared with a 0.3 percent advance of the benchmark Shanghai Composite Index.

— With assistance by Emma Dong

Before it's here, it's on the Bloomberg Terminal. LEARN MORE