Local Government Unable to Repay Developer for Land As Purchases Dry Up

The biggest risk in the Chinese economy is not the real estate market, it is the local government fueled local economy. China's GDP growth is led by infrastructure investment and much of that investment occurs at the local level. Funding is in part provided by land sales to developers. Developers buy the land because the infrastructure development will make the land valuable. When home prices were rising, there was no end to demand for land and local governments were flush with cash to invest in projects—but governments assumed the cash flow would consistently rise. They increased their investments, took on debt and today have higher operating expenses. Hangzhou had more than 60% of its annual revenue coming from land sales last year, highest in the nation, but many cities are at well over 40% of revenue (above 80% land finance reliance ratio reported in Chinese media). The risk is that falling land sales will dent tax revenue and lead to a rapid slowdown in investment, a rapid rebalancing away from the investment led model.

The first crack in local government finances may have occurred. In China, a developer can return land to the government and receive back their money, less a non-refundable deposit. According to the article below, in an unnamed eastern third-tier city, a developer has been told that he can return the land, but temporarily cannot receive any cash back.

Centaline said nationally, May land sales were the lowest in the past year. The price of land zoned for residential construction fell 39% in May and the land premium was only 16.5%, down from 37.2% in April. CRIC Research said that land purchases by 15 representative developers spent 65% less to buy land in May, yoy. Several major developers bought no land in May.

Local governments have furiously sold land in recent years. One example given in the article is a developer in Nanjing, he was told his 200,000 sqm commercial project would be the only project in this area. Now two years later, there are commercial projects all around him and the investment is basically dead.

楼市下行压力传导到土地市场 土地流拍频现

"We have to apply for a refund, but the Government has to say yes, you can retreat to, but no money back." Developer Li (pseudonym) recently quite depressed, as the company's real estate sales continued to slump, he tried to hand, a few acres of land has not been returned to the development of the local government.

Since April, Li and third tier cities in the eastern part of the estate has been basically no longer marketable.

"Our company's debt ratio is not high, not to the apocalyptic time, but the house no longer marketable, really uncomfortable." Li "First Financial ( microblogging ) Daily "reporters, said," Since I can not return the land, then stood before it. "

And Li, as more and more developers are losing interest in buying land.

"Late last year the hot land market phenomenon difficult to continue, each line has the cool urban land, and has begun to produce differentiated." Central Plains real estate chief analyst Zhang Dawei told reporters, poor sales of housing prices, tighter capital chain, Although the plot is still craving for first-tier cities, but land acquisition has become more cautious and rational.

Liupai frequent

Downward pressure on the land transfer to the property market.

Centaline Research Department statistics show: May tier cities land total turnover of 266.6271 million this past year, turnover is the lowest point.

Among them, only seven of residential land transactions, land turnover amounted to 7.68 billion, also created the lowest point in the past year. Floor residential plots average transaction price of 7592 yuan / square meter, compared with April's 12,363 yuan / square meter, the average transaction price decline. The average premium rate of 16.5%, down from 37.2% in April.

A national developer of Guangzhou designed to take charge of Miss Wu told the newspaper, although recently the Division examine some plots, but has basically not involved in the bidding. "There must be carefully indeed."

Data CRIC Research Center show that in May, 15 typical housing prices get to an area of ​​2.746 million square meters, down 66%, to get to the amount of 8.8 billion yuan, down 65%.

Among them, China Resources Land , Lake real estate , Greentown China , Shimao , Agile, offshore real estate and other leading enterprises have no land accounted for a full month.

In fact, the May local governments are pushing to accelerate the speed, but due to the current downturn in the overall market, developers get the will be greatly affected, unsold and the opening price situation but continues to expand.

Guangzhou, Shenyang, Chengdu, Kunming, Hangzhou, Nanjing, Foshan, Changsha and other cities were "spared."

Shenyang last month launched a total of 18 land, eventually only eight transactions, and the remaining 10 land all unsold. As a comparison of May 2013, Shenyang launched seven land all transactions.

A developer of a number of projects in Shenyang have told this reporter: "Shenyang few years ago to sell a lot of land, the current local property market has an oversupply, coupled with the increased population and import less monetary tightening, the property market, both cities downturn. "

"At present, people are concerned about how to melt inventory, how can the mind to buy land." Li "First Financial Daily" reporters, said, "Now the situation is still far from clear, selling properties to buy land than emergency."

China Easy Home CEO Dingzu Yu believes that housing prices basically bearish on the current land market, land market into winter is a foregone conclusion.

President of Real Estate Economic Research Institute of the rich Long Bin told the "First Financial Daily", then the land market will be colder. In case the market does not accept the local government's land supply will slow down the rhythm.

April 28, Guangzhou launched a rubber in the Old Town Village, Haizhu District, eastern residential plots, as a rare old city of Guangzhou residential land has caused widespread concern, but the Guangzhou Land and Housing Bureau recently announced that the plot suddenly aborted transfer.

Land revenue decline

At the same strategy consulting, research director Zhang Hongwei seems that since 2014, the real estate market supply and demand into the downturn, the land premium is also showing a declining trend growth, the situation in some cities even Liupai land, which will directly affect the compensation to local debt capacity, and may even lead to periodic land financial crisis.

Zhang Hongwei, said the reporter, the pattern in the current tax system, local land revenue needs to be turned over to the central part of the remaining land revenue belongs to local government funds, in addition to essential uses, disposable income of the local government authority to sell the remaining larger. From this perspective, land finance triggered a push to sell land boom around.

Central Group founder, director Shih Wing Ching, told reporters that most of the local government debt hopes in the land, once the real estate prices, "by the new-old" no longer work. "The new debt financing than so much money, old debts will be a problem."

A real estate private equity fund managers and reporters shared a real case: He's a friend in Nanjing took a 200,000 square meters of commercial projects, is now basically "dead" in there. In the time he took to the local government told him that they planned this area only a commercial project. Results After two years, the surrounding commercial real estate "everywhere."

The above project developers in Shenyang have said: "Now a lot of ideas on local government borrowing aspect is the 'tube borrow matter also,' the land of poor sales in the background, some of the previous years, the local government vigorously infrastructure and even the payment of interest have difficulty. "

Double dilemma facing land revenue decline and high local debt, some local governments have been unable to calm.

A number of cities including Nanning, Wuhu, Xuancheng, Tongling, Wuxi, Ningbo, including the launch of a direct or indirect "bailout" policy.

Zhang Zhiwei, chief China economist at Nomura Securities, told the media that some local government policy of propping up the market, the greater the likelihood the central acquiescence, because the local government financial pressure is obvious. In the past, the central government's relatively loose monetary policy, local governments can find the money through other means, but now the local government a stronger dependence on the land.

With policy advice recently released "2013 45 finance the purchase of urban land dependence," The report shows that the higher the degree of financial dependence of land (over 80%) of 13 cities, followed by Hangzhou, Foshan, Nanjing, Changsha, Sanya, Hefei , Fuzhou, Kunming, Jinan, Xuzhou, Ningbo, Wenzhou, Chengdu. Among them, Hangzhou, Foshan, Nanjing, Changsha four cities of more than 100% to 156.4% in Hangzhou ranked first.

Or continue to sell off for

According to our reporter combing, facing the property, city both cold reality of local government there is a clear difference in the push to strategy.

Land Hangzhou, Shanghai and other cities almost "default"; risk Chengdu, Shenyang and other cities are still risking unsold strong push to; while Changzhou, Lianyungang city is represented by a sharp decline in the total amount for the land.

A senior industry believes that the government "reluctant sellers" of land, gambling is the length of time warming fiscal reserves and the market in which the key is not to rely on government land revenue in the short term can operate normally. Prior to Hangzhou, Shanghai abundant revenue from land sales, finance some reserves, the government dare to take a risk the market gets warmer, it is normal.

Zhang Hongwei said that this year the Ministry of Land suspend released national housing land supply plan, announced by the local self-change, which would increase local government initiative in the land supply. Especially on land supply and rhythm, the local government may for the program by reducing the slowdown in land rhythm, reduce market barriers and other measures to prevent land unsold, thereby reversing land market impasse, get more land premium premium income.