Property developers turn cautious on stricter regulations, tighter credit lines

Against the backdrop of tightening financing and home-buying measures, property developers are turning cautious on land purchases, resulting in unusual declines in both prices and number of transactions in the land market, experts said.

As per existing trends, property developers tend to purchase more land in a low market, but the past quarter lost steam on downtrend in both deal volumes and prices.

Up to 550 million square meters of commercial land was traded in 336 cities across China between July and September, down 11 percent quarter-on-quarter and 10 percent year-on-year, according to statistics from Shanghai-based E-House (China) Enterprise Holdings Ltd.

Land traded in first-tier cities totaled 8.44 million sq m in the third quarter, surging 35 percent year-on-year and 13 percent quarter-on-quarter. But the number of transactions declined 13 percent in second-tier cities, and 11 percent in third-and fourth-tier cities.

The land plots were traded at an average price of 2,494 yuan ($352.6) per sq m, down 12 percent from the previous quarter. Among them, the average land price in third-and fourth-tier cities fell 14 percent from the previous quarter to 1,655 yuan per sq m.

The price fall in first - and second-tier cities was mainly due to the lack of prime land supply, but transactions declined in third-and fourth-tier cities due to the depressed home market, according to E-House.

The land market performance was in line with market forecast, and was due to the tight credit lines and weak sales of homes, said Yao Yao, head of research at JLL China.

"Feeling the mounting pressure in financing, property developers are getting more cautious in their land purchases," said Yao.

According to him, new regulations announced at the request of the China Banking and Insurance Regulatory Commission have put a lot of pressure on real estate enterprises, leading to a consistent decline in funding for developers in the past four months.

"Developers' prudent attitude toward land is because of slower sales as well as policy tightening relating to conventional financing channels since the second quarter," said Xie Chen, head of research with CBRE China.

Agreed Yao, who believed sustained restrictions on residential property have brought about low capital return, and lowered market expectations.

It is understandable that developers tend to buy land at a low cost and sell the home projects when the market peaks. In reality, developers may not have enough capital to buy land when the market is low, and real estate companies can also make false judgment on the right timing for buying land, said Zhang Dawei, chief analyst at Centaline Property Agency Ltd.

Although the central bank's moves to reform interest rate in August and to cut reserve requirement ratio in September can lower real lending rates and increase liquidity, the real estate sector is still confronting stiff credit lines, and potential homebuyers are reluctant to commit to buying decisions, wrote Ma Qianli, research director with Shanghai-based CRIC (China Real Estate Information Corp) China, in a report.

Supply of new residential properties shrank 28 percent year-on-year in terms of gross floor area in first-tier cities in the July-September quarter, and monthly supply declined about 12 percent compared to the previous quarter, according to the CRIC report.

The 22 major second-tier cities witnessed their home supply edge down 1 percent from a year ago in the third quarter, and that in third - and fourth-tier cities retreated 15 percent compared to that of the previous year.

"Obviously, as the fiscal year is approaching a closure, developers are shifting their focus to sales and capital return," said Lu Wenxi, a researcher with Centaline Shanghai.

In order to reach their fiscal target, developers should shift attention to home sales in the fourth quarter, when the land market could turn quieter, experts said.

Capital-rich enterprises will still be in a better position in land acquisitions, said Xie.

The central government's resolution that homes are for living, not speculative investments, and that the property sector should not be treated as a short-term economic stimulus tool, appear to be a sign of real estate financing entering an era of multi-dimensional regulation, said Yao.

"Thus, it is possible to see slower real estate investment and development, tighter credit lines for developers and fewer land transactions in the future."