Developers Bid Adieu to First-Tier Markets

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(Caixin Online) Legislators returning home in March from annual conferences in Beijing hardly had time to unpack before reports from the capital threw light on a critical issue they'd left unfinished: skyrocketing real estate prices.

This year's legislative sessions of the National People's Congress and the Chinese People's Political Consultative Conference failed to produce the kinds of government curbs for real estate sought by many consumers concerned about affordable housing and economists who've warned about runaway property bubbles.

Meanwhile, many developers reacted to the legislative inaction by finding more reason to tap real estate markets in smaller cities and turn away from China's sprawling first-tier cities – Beijing, Shanghai, Guangzhou and Shenzhen – where soaring prices have crimped business opportunities for all but the industry's dominant "land kings."

Developer interest in second-, third- and fourth-tier cities also rose a notch shortly after the legislative sessions ended when, on March 15, three state-owned developers broke land auction records with the highest bids ever in Beijing, offering a combined 12 billion yuan for three building sites.

The record bids further stoked price fears. Pan Shiyi, chairman of leading developer SOHO China, called the auctions "bizarre."

Another market twist came three days later, when the State-owned Assets and Supervision Commission (SASAC) said it had been "forced" to issue "emergency orders" to 78 state-owned enterprises (SOEs), telling them to abandon the property business. SASAC Director Li Rongrong gave the companies, for which real estate is not a focus, 15 business days to begin an orderly exit.

SASAC's step, record land auctions in Beijing, and the lack of action by national legislators are just a few of the developments pointing to trends that may strengthen the strongest real estate developers by giving them better access to resources in first-tier cities and challenge their smaller rivals.

Some say SASAC's move may have been designed to further restrict the supply of land available for development, thus intensifying a scarcity of urban development land and squeezing out all but the largest developers.

New Tiers

Even before the latest events, though, many developers were amassing property reserves in second- and third-tier cities, which include provincial capitals and regional hubs in areas such as the Yangtze River Delta, Pearl River Delta and Bohai Rim. Fourth-tier cities have attracted attention, too.

Developers are expanding land holdings as well as deploying sales teams in these new growth areas.

For example, Longfor Properties Beijing's marketing director, Wei Jian, recently relocated to Changzhou in Jiangsu Province, a third-tier city where housing demand is growing. Wei's company in January won an auction for two villa sites in Changzhou totaling 385,000 square meters by bidding 2.29 billion yuan, or 5,939 yuan per square meter.

"People in southern Jiangsu are wealthy, and urban construction is good," Wei told Caixin. "The local government is welcoming us to build there. Not only is there a branding effect, but (construction) also can stimulate local consumption."