China’s “land kings” have recently been living up to their nickname by bidding and paying sky-high prices for land in the country’s top cities. In recent months, prices for land have hit record highs, according to CREIS, a data platform hosted by Fang.com. Interestingly, government developers have re-emerged as some of the most active buyers. The first half of 2016 saw an increase of 23.5 percent in state-sector fixed asset investment from a year ago compared to just 2.8 percent growth from the private sector during the same period, according to the National Bureau of Statistics.
In the northern Chinese city of Tianjin, the latest “land king deal” went to a state-owned enterprise (SOE), marking the second-most expensive land purchase in the city’s history at over 10 billion RMB (USD conversion). SOEs in Tianjin were also responsible for eight of the ten largest land deals in 2015 and nine of the ten the year before. Sean Linkletter, from JLL’s Research team in Tianjin explains why SOEs continue outbid the competition.
Pricing out the competition
Target land prices are often set by district governments, since land sales across China are typically managed at the district level. “If the prices are too high, the private or quasi-private sector may shy away, leaving open opportunities for SOE developers. For these developers, there is a completely different incentive structure in place. It is a top-down system where returns are not the only objective, but are taken into consideration along with other factors”, says Linkletter.
Government developers, by virtue of them being a function of the government, maintain some important advantages over the private market, particularly when it comes to financial resources, with most benefitting from much lower capital costs than their private competitors. “Local government finance vehicles may be able to get financing at just 2-3 percent,” explains Linkletter. “Most private developers, even the best-known of them, might only achieve 5-6 percent. This lower cost of capital makes more development projects financially viable, even at higher land prices.”
“Most of all, SOEs are willing to take risks where the private market is not. For example, when the residential market was uncertain in Tianjin a few years ago, and price growth was weak, SOEs stepped up to the plate. Due to lower capital costs and different incentive structures than the private sector, they were able to swoop in and buy up land plots at the target prices listed by the local government,” says Linkletter. Most of the projects have been extremely successful since the strong rebound in the local residential market; prices of these projects have risen 20 percent year-to-date in 2016.