Developers At Risk: 3rd and 4th Tier Tighten Housing Regs as Land Prices Soar

An article discusses which developer may be at risk from tightening real estate restrictions in 3rd and 4th tier cities as land prices soar.

Inventory by developer (x-xis) and by tier (y-axis).

Caijing: 三四线市场调控升级，保利、富力等房企的机与危

Since 2017, stringent regulation of the property market in the first- and second-tier markets and destocking in the third- and fourth-tier markets have led to a significant tilt in the balance of the property market. The high-temperature third- and fourth-tier markets have become the battlefield for many housing companies to compete. After entering 2018, the horns of some third- and fourth-tier housing enterprises have been blowing louder and louder, but more and more voices are about to peak in the third- and fourth-tier markets.

A few days ago, the People's Daily stressed that the principle of “not housing and housing is not fried” applies not only to first- and second-tier cities but also to third- and fourth-tier cities. The CCTV commentary also stated that in the face of the overheated real estate market in the 3rd and 4th cities, proper policy control is necessary and timely.

According to Centaline Real Estate Research Institute statistics, as of the end of May this year, the real estate control policies introduced throughout the country as many as 159 times. The controlling cities are also gradually shifting from third-tier cities to second-tier cities in 2017.

For those enterprises that have been reformulated in the third- and fourth-tier markets, such as real estate companies such as Poly Real Estate (600048), R&F Properties (02777.hk), and China Evergrande (03333.hk), how should they respond to the overriding trend? For Country Garden (02007.hk), which has chosen to continue to sink to the fourth and fifth-tier markets after the third- and fourth-tier markets, is the future facing a crisis or an opportunity?

Third and fourth line market regulation upgrade

Poly, Country Garden and other housing enterprises how to deal with?

According to the data from the China Index Academy, in 2017, the floor space of 50 representative housing enterprises in the third and fourth tier cities increased by 145% year-on-year, far exceeding the first-line growth rate by 63% and the second-line growth rate by 46.7%.

The enthusiasm of housing enterprises for the third- and fourth-tier markets is unprecedentedly high. According to the data, Poly Real Estate has taken the example. In 2017, Poly's expansion area and amount in 3rd and 4th tier cities accounted for 37% and 18% respectively. In 2015, this figure was only 15% and 7% respectively. Newtown Holdings (601155) and Greentown China (03900.hk) are also increasingly investing in third and fourth-tier cities. In 2017, the proportion of third- and fourth-tier cities in the newly added land was 62% and 42%, respectively.

Judging from the layout rules of housing enterprises, the high temperature in this third- and fourth-tier market is inseparable from the destocking policy effect. A housing company executive said, "This wave of three-and-four-tiered property market behind the hot market, in fact, is the policy to encourage and support, until the policy support to withdraw, third and fourth tier cities will appear to lack of demand." But with the price The rapid rise of the three or four-wire market caused an abnormal increase in the attention of the regulators, and the pace of regulation and control was escalated.

A few days ago, the People's Daily published a commentary saying that "housekeeping is not fried" is also aimed at third- and fourth-tier cities. At present, the rapid rise in house prices in some third- and fourth-tier cities has factors that speculate on real estate speculation. This must be regulated in a targeted manner.

Prior to this, according to statistics from Centaline Real Estate Research Institute, as of the end of May this year, the real estate control policies introduced throughout the country amounted to 159 times. The controlling cities are also gradually shifting from third-tier cities to second-tier cities in 2017.

Industry experts stated that it is expected that in the second half of the year, real estate regulation will shift from the former first-tier cities to the third- and fourth-tier cities in the midst of madness.

With the continuous strengthening of regulation and control, the land bank advantages of the third- and fourth-tier cities will be transformed into their development concerns. However, in the third-and fourth-line land boom, some companies are still constantly adding to the layout of the third and fourth-tier markets.

Taking the Country Garden of the third and fourth line market in heavy warehouses as an example, a few days ago, Country Garden issued three documents in a row to increase the turnover rate. In terms of business layout, Country Garden has stated that it will continue to plunge into all levels of cities and towns and strive for a broader market. This means that in addition to the three or four lines, some of the five or six line township market will also become a new battlefield Country Garden. According to the data from Crayon, in the first quarter of this year, more than half of the sales of Country Garden's sales came from the third- and fourth-tier markets.

In addition to Country Garden, according to data from the middle finger, statistics show that cities including third- and fourth-tier cities including China Evergrande and Huaxia Happiness (600340) accounted for more than 50% of the total, and the number of companies and the amount of land they acquired were tilted toward third and fourth-tier cities.

Ding Zuyi, CEO of E-House China, warned that as the regulation is further expanded and upgraded, the property prices in some second-, third-, and fourth-tier cities where house prices are rising too fast and serious overdrafts are expected to face greater adjustment risks. Housing companies need to be cautious and consider many factors such as the market, monetary policy, etc., and beware of higher investment risks brought by high prices.

Along with housing inventory, land prices are rising as well:

Agile, R & F and other gamble market crisis

With the concentration of real estate companies in the third and fourth tier cities, the land market for the third and fourth tiers has begun to appear "a lot of porridge", and land prices have also continued to rise.

According to the data from the E-House Research Center, the top 5 cities with land transaction premium rates in May were Jingzhou, Nanchang, Dongguan, Huizhou, and Hefei. The land transaction premium rates were 123%, 89%, 83%, and 72%, respectively. And 68%, and the above are basically weak second-tier cities and third-tier cities.

From the recent land transaction premium rates in these hot cities, we can also see its “crazy” level. According to the statistics of the blue whale property, on June 6th, commercial and residential plot No. 006 P (2018) in Jingzhou city was won by Agile (03383.hk) for 480 million yuan, with a premium rate of 86.77%; on May 11th, Nanchang Maotai, with a total price of about 540 million yuan and a floor price of 5,552 yuan/m2, won a residential plot with a ceiling of 12,500 yuan/ping; on May 28th, a commercial and residential plot in Dongguan Xiegang attracted Twenty-two housing companies participated in the auction. Eventually, Zhongxi won a residential land of 90% of its own area with the price of 348 million yuan and the floor price of 8816 yuan/m2.

In this round of land championships, many well-known housing enterprises have also pressed huge sums of money to gamble on the third and fourth tier markets. For instance, R&F Properties (02777.hk) has won over 100% of the premium rate in the public markets of Putian, Binzhou, Meishan, Nanping and Tangshan. Among them, the Meishan site in Sichuan was bid by R & F for a total of 360 million yuan after 43 bids. The floor price was 3,408 yuan per square meter, and the premium rate was 113%, setting a new high in downtown Meishan.

Greentown China (03900.hk), which has always been on a steady track, also won a land king project recently. On April 16th, Greentown won a commercial and residential site in Dinghai District, Zhoushan with a price of 1.357 billion yuan. The floor price of 12,330 yuan/square meter hits a record high on the Zhoushan land market.

Regarding the above phenomenon, Zhang Hongwei, director of the co-operation agency, believes this is an irrational and unreasonable investment strategy. He said, "First, not all third and fourth-tier cities have long-term strategic investment value. In the short term, the layout of third- and fourth-tier cities is to In the short term, replenishment has stronger tactical significance than strategic significance, and the focus of long-term strategic investment in the future is still to return to the core first and second-tier cities.Secondly, most third-tier and fourth-tier cities have limited market capacity, limited market capacity, and limited flexibility in price increase, even if there are The current "land king" is frequent and it is difficult for the third and fourth tier cities to digest the cost pressure brought about by the land prices as quickly as the core first and second tier cities."

In fact, as early as 2014, a number of housing enterprises had shown irrational investment trends in third and fourth-tier cities. At that time, due to the downturn in the third- and fourth-tier markets, problems such as high inventory levels of housing companies and difficulties in deregulating became apparent. There have been many difficulties such as tight funding and price cuts. Many housing companies have thus disappeared from the real estate stage. After that, Guangya Real Estate, a South China real estate company, fell in this crisis.

It is undeniable that in the past few years, the three-and-four-line market has created a myth of the performance of a number of housing enterprises, driving the overall national housing company sales area as a whole rose. However, market development always has its own cycle pattern. In the midst of the rising tide of policy dividends, how can housing enterprises seize opportunities while avoiding the “thunder” in the development process?