Regulator Booms Calm Fears of a Real Estate Bust

Land Plans

As the State Council released the latest credit rules, the Ministry of Land and Resources publicized its 2010 plan for nationwide land development. The ministry said the government would open up for development an additional 180,000 hectares – double the amount made available in 2009.

The ministry's aim was to curb prices by containing speculative demand, as well as balance overall supply and demand. And as expected, the new policies cooled the nation's land auction process, which had been red-hot for weeks before.

But the ministry's action did not necessarily bring relief to local government regulators responsible for keeping a lid on land auctions in their areas. Beijing and Shanghai officials, for example, were forced to intervene at auctions in specific ways.

A Beijing land auction April 26 in the Doudian Town area of the city's Fangshan District had to be halted abruptly after bidding reached 4,718 yuan per square meter. A municipal official later told Caixin the auction was stopped because the local government's ceiling price for the area was 4,700 yuan per square meter.

The next day, the Shanghai Planning Bureau announced that a land auction schedule for April 28 had been "postponed until May 7 due to a technical breakdown."

While fighting higher prices, Beijing and Shanghai regulators also have been trying to prevent the rise of "land kings" – development companies that control large tracts. Moreover, they are being forced to react to public opinion and other pressures.

Local Needs

Other local governments around the country have been delaying or even canceling auctions out of concern that prices could get too hot. Yet they're aware that indiscriminately postponing land auctions for residential and commercial development runs contrary to the central government's land supply plan.

Moreover, previous experience shows that keeping a lid on auction activity can prevent price signals from having a positive effect on the market. And if auction decisions are made outside the public arena, a lack of transparency can increase the possibility of corruption.

Cash-rich developers who feel pressured by the regulatory environment may move from an expansionary to conservative stance, said Xue Jianxiong, an analyst at China Real Estate Information Corp. Some may even put a moratorium on new projects.

A slowdown by big developers could significantly cool the market. But a possible downside is that investors with government connections could use market calm to buy land at low costs.

Moreover, the latest market controls did nothing to reduce local government reliance on revenues from land sales.
The regulations "have yet to solve the fundamental problem: Local governments rely on land sales to repay debts," said Zhao Hangsheng, a professor at Zhejiang University's Institute of Real Estate Research Institute.

And the need for revenues to pay debt is significant, said Shen Minggao, Citigroup chief economist for Greater China.

At the end of 2009, Shen said, total debt held by the nation's local government financing platforms stood at about 7 trillion yuan, equivalent to 21 percent of China's GDP and 210 percent of local fiscal revenues. Servicing this debt, assuming a 5.31 interest rate, would cost about 370 billion yuan a year, or 11.4 percent of local government revenues in 2009.

Many local governments may find it difficult to pay that kind of interest with basic fiscal revenues alone, Shen said.

Besides, local governments use land as loan collateral and allocate land auction revenues as cash flow for loan payments. Local government land-transfer revenues totaled 1.6 trillion yuan last year – a new high, equal to 50 percent of local government fiscal revenues.

If the real estate industry continues growing vigorously, most local governments expect no troubles with paying the interest and principle on their platform loans. If the property bubble bursts, however, local governments may struggle to repay.

Other concerns revolve around questionable developer activities, such as land hoarding.

According to Ronnie Chan, chairman of Hong Kong property developer Hang Lung Group, "a lot of bad behavior" in the current real estate market could be prevented if the government would strictly implement all policies and regulations.

"There are some basic things that if the country would pay attention to, I think would be helpful to the healthy development of the market," Chan told Caixin.

Chan said land hoarding, for example, could be prevented if the government follows its own rules for reclaiming tracts left vacant by developers for long periods. These rules have been on the books but lightly followed for a decade.

"If developers had to build once they bought, prices could not possibly rise so insanely," Chan said.

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