Beijing Land Market Review in the Second Quarter of 2006

2006/07/15

As macroeconomic controls of the "State Council's Six Guidelines" have been introduced, the land market in Beijing has undergone a turning point. Prior to these controls, the land market in Beijing, particularly the residential land market, had grown at a consistently high speed since 2005. However, after these macroeconomic controls were introduced, most developers adopted a prudent wait-and-see attitude as opposed to proactively enlarging their land reserves.

Level I Land Market

Distribution features on the sites

In Beijing's Level I land market, mainly using the tendering, auctions and listing processes, 31 plots of sites completed transactions during the second quarter, with 1 site's transaction being cancelled before auction; 9 went for non-residential projects (including land usage of commercial and financial, office and hotel) and 22 for residential or mixed-use (mainly for residential usage).

In terms of distribution among districts, these transacted sites (according to the planned Gross Floor Area) were mainly found in Haidian, Fengtai, Fangshan, Daxing and Chaoyang. This reflected the diminishing available land supply in the central urban districts, with the main source of supply moving towards suburban districts.

The land supplied in central urban districts (including four urban districts: Dongcheng, Xicheng, Chongwen and Xuanwu) was relatively small in size, with scattered sites that occupy a land area of less than 10,000 sq.m and planned GFA less than 30,000 sq.m.

Residential-type sites attracting the attention of the major developers were mainly found in Haidian, Chaoyang and Fengtai, such as the D1 and D2 plots of Wenquan Town in Haidian and the plot of Wanhengjiayuan (Phase II) in Fengtai, among others.

Transaction analysis

Competition for medium-sized sites was intensive. Transacted sites of medium-size (with GFA around 100,000 sq.m) with relatively good transport links (for example along underground rail links and hub roads) suitable for developing mid- or low-end mass residential housing have experienced the largest competition as their capital requirements are relatively lower. The demand for mass residential housing is huge and the market risks for these kinds of projects are lower. As result, the transaction prices of the two sites in Tongzhou District far exceeded their initial asking prices. This also reflects the difficulties that medium-size developers currently have in the current market environment.

Public construction in hot areas remains popular. Public construction projects located in good areas, for example, the complex of office, apartments and hotel in Datun, Chaoyang District near the Olympia Centre, attracted the attention of many investors. It has been transacted at prices 78 percent higher than the initial asking price.

Large scale sites requiring capital strength:Large or ultra-large sites mainly for residential usage located near the suburban districts, such as the D1 plot of Wenquan Town in Haidian District, the Wanhengjia (Phase II) plot in Fengtai District, were sought by the large developers. These two plots were purchased by Beijing North Star Company and Vanke-COFCO Alliance at prices 69 percent and 32 percent higher than their asking prices. Moreover, both of the overall prices reached over 1 billion yuan (US$125 million). In general, developers who participate in this type of site competition have large scale development experience and good financing channels in the capital market. Because these types of sites require very high capital volumes, the developers therefore start tendering jointly as partners. For example, Vanke and COFCO is an alliance between a professional developer and company with a large amount of capital; whilst the Beijing Capital Land and Super Shine represent an alliance between a Hong Kong listed company and a mainland listed company.

Effects of macroeconomic controls

The effects of macroeconomic controls on the land market in Beijing in the second quarter were very obvious. The "State Council's Six Guidelines" and the following "Fifteen Measures" issued by the nine ministries restrained the expansion of land reserves that had fueled the rapid growth in land prices. This slowdown in particular was demonstrated in the following:

Suspension of the auction for the Nanshatan plot:The Nanshatan plot is located on the North Fourth Ring Road with a planned GFA of 105,000 sq.m and an initial asking price of 320 million yuan (US$40.2 million). The plot was listed by the Beijing Land Reserve and Management Centre at the beginning of May. On May 17, the "State Council's Six Guidelines" were introduced. On the May 25 (the date of the auction), there were 14 bids in total with a 500 million yuan (US$62.5 million) leading bid by Huayuan Property. According to this bid, the implied price had already reached 4,761 yuan/sq.m (US$595.45/sq.m). However, before the auction began, Beijing Land Reserve and Management Centre announced that auction's suspension.

Transaction prices between the two Wenquan Town plots differed widely. On the April 18, the Beijing North Star Company won the D1 plot of Wenquan Town in Haidian District, with an overall price of 1.15 billion yuan (US$144 million), 468.8 million yuan or US$58.6 million over the initial asking price. Its site area for construction is 298,991 sq.m and its planned GFA is 236,459 sq.m. The implied price was 4,863 yuan/sq.m (US$608.20/sq. m). However, on May 30, the day after the new macroeconomic controls were introduced, the Dalian Rightway Real Estate Development Company Limited spent only 820 million yuan (US$102.6 million) to win the D2 plot of Wenquan Town in Haidian District. This plot is adjacent to the D1 plot. Its site area for construction was 294,189 sq.m, and its planned GFA was 256,916 sq.m. The implied price was 3,192 yuan/sq.m (US$399.215/sq.m), 1,671 yuan/sq.m (US$208.99/sq.m) lower than the price for the D1 plot.

The office, apartment and hotel project in Datun Village of Chaoyang District was formally known as the Morgan Centre project. Although the main body of this project has already been completed, because the former developer failed to pay off the amount of the land price in time, the plot was taken back by the government without any compensation, and then reintroduced into the market through tender. The land was finally jointly won by Beijing Capital Land and Super Shine. This process reflected the government's stronger enforcement of disposing of idle land.

The Secondary Land Market

Ever since August 31, 2004, the acquisition of commodity land by negotiation has not been permitted. Transactions in the secondary land market normally remain only for transactions of land that had obtained land certificates before August 31. As such, market scale and dynamism is gradually shrinking. The Beijing land market in the second quarter displayed the following features:

Listed companies obtain sites in the secondary land market by equity acquisition.

In April 2006, the Hong Kong listed company Emperor International Holdings acquired the Kaite Building site in Chaoyang District in Beijing by equity acquisition. With a site area of 8,214 sq.m and a planned GFA of about 75,800 sq.m, the Kaite Building site is intended for retail and office use. The overall transaction price was 406 million yuan (US$50.78 million), with an implied price of 5,354 yuan/sq.m (US$669.61/sq.m).

In May 2006, the Hong Kong listed company Hopson purchased a cultural property development project located on the East Second Ring Road in Beijing by equity acquisition and cooperative agreement. With a site area of 15,834 sq.m, the project is intended for office, hotel and music hall use. Hopson spent about 796 million yuan (US$99.6 million) to obtain all interest in the office and 45 percent interest in the hotel.

Parent company transfers site to listed subsidiary

In April 2006, the A-share listed company, Financial Street Holding Company Limited, purchased the A5 site of Financial Street. With site area of 13,768 sq.m and planned GFA on the ground of 60,000 sq.m, it is intended for office and retail use. The overall transaction price was 688.86 million yuan (US$86.2 million), with an implied price of 11,476 yuan/sq.m (US$1,435.27/sq.m).

Macroeconomic controls effect on secondary land market

The 15 control measurements regarding the tightening of credit policies and strengthening punishment for land lying idle as issued by the nine ministries will cause mid and small developers who have obtained land to face further pressure for lack of capital. It is anticipated that after the wait-and-see period is over, some of the land in the hands of these developers will be put onto the secondary land market.

Foreign Capital Trial for Level I Land Development

The land reserve and Level I development (hereinafter referred to as Level I development) refer to the government reserves of State-owned construction land obtained via acquisition, compensation for and settlement of the inhabitants, demolition of existing structures, leveling, construction of basic infrastructure in respect of a piece of land so as to meet the standards for the purpose of auction in the public trading of land use rights. In Beijing, Level I development is the responsibility of the Beijing Land Resources Bureau, with the Land Reserve and Management Centre responsible for implementation. The Land Reserve and Management Centre may adopt autonomous responsibility or may apply tendering methods to choose real estate development companies with appropriate qualifications to be responsible for Level I development. The land after the Level I development will then be supplied to the market according to the annual land supply plan. Therefore, Level I development is the basic source of land in the Level I land market and the secondary land market.

Since Level I development involves settlement for removal and infrastructural construction, the associated uncertainties are much higher than with the development of commodity housing. Furthermore, the government carries out strict restrictions on Level I development. (The land is implemented by the Land Reserve and Management Centre and the development company is chosen by tender; the management fees of the development companies will not be more than 2 percent of the development cost for land reserve. For land where the development company has been chosen by tender, the tender asking price includes the estimated overall cost and profit from the land reserve development, and such profit shall not be more than 8 percent of the estimated cost.) Therefore, foreign capital rarely participates in Level I development but will instead choose to purchase "developed land" in the level I or secondary market.

However, since the Level I development companies involved in the land development progress at the initial stages know more about the land physically and gaps in the law, they will often have tremendous advantages when participating in development of commodity housing.

With the tightness of land supply, foreign capital has also started to enter the level I development field.

In May 2006, Hong Kong New World Property won the Level I development rights for a plot located in Yuzhuang Village of Gaoliying Town in Shunyi District through equity acquisition. This site occupies a land area of around 1.06 million sq. m with land for construction at 560,000 sq. m. The land is next to the traditional Wenyu River villa zone of Beijing and is part of the "One City, Two Districts" (the Beijing Airport City, and the Yuzhuang Ecology Tourism District and a residential district) of Shunyi District. The estimated investment in this Level I development is 899.86 million yuan (US$112.5 million) and is to be funded by New World. As a result, New World will receive 75 percent of the interest of the level I development for this site.

The Market Remains Quiet in the Short Term

In general, the land market in Beijing in the beginning of the second quarter continued its growth from the beginning of 2006. Transaction sites continued to create new high prices for similar sites in the same area and reached their highest point. Immediately afterwards, with the "State Council's Six Guidelines" and the "Fifteen Measures" of the nine ministries as the turning point, the land market was directly affected by the main parties. The local land supervisory departments have been busy drafting the implementation details of the macroeconomic controls while adjusting their land supply plans. Developers have taken a wait-and-see approach to adapt to the new situation and adjust their land reserve strategies. The land market has gone from hot to cold. As a result, before the local detailed rules and regulations are introduced, it is expected that the land market will continue in its current deadlocked state.



	Article featured in Business Beijing, July 2006 Publication sponsored by Information Office of the Beijing Municipal Government, Beijing Municipal Bureau of Commerce, Development & Reform Commission of Beijing Municipality, China Council for the Promotion of International Trade (Beijing Sub-Council)