Chinese property update

by Steve Zhou, CFA, Senior Analyst, JK Capital Management Ltd., a La Française group-member company

According to various local media news, 22 cities in China (including 4 tier-1 cities as well as 18 key tier-2 cities such as Nanjing, Suzhou, Hangzhou, and Xiamen) are expected to split their annual residential land sales in no more than three batches each year through open market auction. These 22 cities are expected to issue the details of implementation of this policy soon and give a clear plan about how the full year land supply will be organised. Prior to this policy, the land supply was done through scattered auctions throughout the year.

We believe this policy will change how developers manage their cashflow, as land purchases will be more concentrated within certain timeframes as opposed to being scattered. Developers will need to have enough cash available to take advantage of these

land banking opportunities each time they occur. The impact will be less for developers that have the most diversified land banks. In general, major developers have 40% of their

land bank exposed to these 22 cities.

The policy will likely bring about a more stable property development sector on the land banking front, as the land banking process will now be more transparent. Large land premiums are unlikely to be as frequent as previously seen. This also fits the central government’s goal to see the land prices stabilise and in turn home prices and market expectations stabilise as well. Nevertheless, good projects in good cities are unlikely to see less land premium as competition for them will remain fierce. Developers with strong balance sheet, superior land market assessment capability and strong management ability will benefit from this policy.

On the business side, Chinese property developers reported stellar contracted sales for February 2021, with the top-100 developers’ contracted sales growing by 156% YoY in February 2020, and 64% higher compared to February 2019 (which is a more meaningful measure as February 2020 was impacted by the Covid crisis). For January and February 2021, which eliminates the Chinese New Year effect that either falls in January or in February and therefore distorts monthly year-on-year comparisons, the growth number for the top-100 developers was 102% YoY (2020), and 56% higher compared to January and February 2019.

Source: Sohu.com, Sina.com, 163.com

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