December 07,2009

Ignoring the Dubai Crisis and Bubble Concerns, Chinese SOEs Continue Playing "Land King"

By CSC staff, Shanghai

Although the debt crisis triggered by Dubai's real estate development has prompted domestic concerns over asset bubbles and the quality of credit,

China "Land King" state-owned enterprises (SOEs) continue to run rampant in the real estate markets.

 

On December 3, CSCEC International, a wholly owned subsidiary of China State Construction Engineering Corp., an SOE, bought three parcels located in the southern area of the Beijing Olympic Games Center for a total of 4.8 billion yuan, at a premium of 157%, 175% and 162%, respectively. CSCEC has just listed this year and raised 50.1 billion yuan.

 

Only one day later, Sino Ocean, runner-up to CSCEC International in that auction, bought a piece of land in Beijing Yizhuang for 4.83 billion yuan, with the floor price of 18,000 yuan/square meter, the highest among real estate projects on sale in the surrounding area.

 

At the China International Housing & Architecture Fair recently held in Beijing, Zhang Guilin, chairman of Beijing Uni-Construction Company, another SOE, noted the resemblance of these splurges to gambling.

 

Another 19 real estate companies also showed interest in the land bought by Sino Ocean, among them Gemdale Group, a private real estate company. It didn't bother to bid, though, as prices were too high and a huge challenge for a private company. In the current environment, SOEs are able to take significantly greater risks than private enterprises.

 

It is said that developers are buying lands at such high prices to push up housing price expectations around the "Land King." On the one hand, they plan on greater profits from projects on sale while reducing the risk of later development.


Obviously they are optimistic about market prospects. Wang Jun, president of Beijing Eagle Property Group, says although "Land Kings" do bring side effects to the industry development, the risk is not as great as people imagine. The rapid expansion of the urban population and the land supply of governments will inevitably lead to the tension of "bread" supply and more expensive "flour."

On whether to continue the existing state preferential policies for the property market, Qi Ji, vice minister of Housing and Urban-Rural Development, said recently in Nanjing that it depends on this year's Central Economic Work Conference, held from this month from the 5th to the 7th.

 

Home buyers fearing the cancellation of preferential policies are stuck. But for buying companies, strong property market sales are enough to offset negative effects brought by uncertain policies, and SOEs are still rushing to buy lands at high prices, betting on the future of the property market.

 

The latest China Realty Research Center report shows that Beijing's commodity housing market in November stopped its decline and rebounded sharply, with dropping inventories. The total volume of commercial housing in Beijing broke the warning line of 100,000 units for the first time, down to 99,760 sets. Worries about the cancellation of preferential policies gave birth to the rebound.

 

The real estate industry had been guessing whether preferential policies would continue or not. But documents from the meeting of the Political Bureau of the Central Committee of the CPC held in late November only touched on making efforts to increase affordable housing and not on the property market as a whole. During a November 28 Shanghai visit, Premier Wen Jiabao emphasized the construction of low-income housing, and also proposed a curb on speculative buying.

 

This series of signals at the central level seems to indicate a tightening of property market policies. However, Zhu Zhongyi, secretary-general of the Chinese Real Estate Association, says the meeting referred to promotion of urbanization in the twelfth five-year plan. "This sentence is sufficient. Because of urbanization, China's real estate market will continue to be very promising."

 

Due to the significance of investment for the current economic situation, high housing prices have a great bargaining power in terms of policy choices despite lack of acceptance by the market. Zhang Shuguang, chairman of Unirule Institute of Economics, says, "Real estate policy next year is a choice among contradictions and big changes may not take place. Tightening policies will cause the real estate bubble to burst, resulting in economic problems, while excessive stimulus will bring a bigger bubble and greater risks."

 

The dilemma is more obvious for local governments. Zhang Shuguang says that half of local government income is real estate-related, and local real estate policies will not see big changes. Preferential policies may be fine-tuned instead of cancelled.

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