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Closed book on closed land deals?
2004-08-04
China Business Weekly
Poorly financed real estate developers across China are dreading the ban on the current, closed contract-based land transactions, to take effect on August 31, even though some analysts suggest it will be impossible to implement the prohibition.
"Each week, we encounter several smaller developers or land traders who want to sell their land to us before the deadline," said Pan Shiyi, co-chairman of SOHO China Co Ltd, a leading real estate developer in Beijing.
Ren Zhiqiang, chairman of Huayuan Group, also a major developer in the capital, is in a similar situation.
Many real estate developers are eager to sell their land because the Ministry of Land and Resources (MLR) issued, in May, the No 71 Circular banning closed land deals involving government-controlled properties.
The circular reiterated an order issued by the ministry in March 2002. That order required all land for business purposes, after July 1, 2002, be transferred publicly, either through auction or public bidding.
While implemented, officially, that order has been overlooked. The current circular makes clear there will be no exceptions.
All historically unsolved problems impeding the implementation of public land transactions -- often used by many local governments to ignore the order -- must be resolved before August 31.
All non-agricultural land in China belongs to the State, but developers and property owners can purchase and hold the land-use rights to property for 70 years.
Before 2002, land was transferred privately in most Chinese cities. After negotiating deals with landlords and paying the agreed-upon transaction prices, real estate developers pay land-transaction fees to the local governments to obtain the right to develop the properties.
Some real estate developers have obtained their land-use rights for incredibly low prices, due to their government connections. Others, particularly newcomers, have, as a result, had a difficult time purchasing land.
Real estate developers with deep government connections are often permitted to make their payments, including the transaction fees, in installments.
That land transaction system has resulted in widespread land speculation, and many local government departments, which own large amounts of land, have benefited.
In Beijing, for example, land is often sold and/or traded three times before construction of the development begins.
New deal
In March 2002, MLR released the No 11 Circular that required -- effective July 1 that year -- all land be transferred publicly.
All public land transactions -- through bidding or public auctions -- had to be completed through local land transaction centres affiliated with the local governments or other organizations appointed by the centres.
"The MLR circular was aimed at ending closed land deals and creating a fair, transparent land-transaction system," said Yan Jinmin, a professor of land management research at Beijing-based Renmin University of China.
Philip Wu, director of housing with international property consultant DTZ Debenham Tie Leung's Beijing office, said the current system has created various problems.
"Most foreign investors and domestic, out-of-town developers who wish to invest in the country's booming property sector have not poured their money into the market due to the lack of a transparent land-transaction system," Wu told China Business Weekly.
Major real estate developers are welcoming the circular's release, even though some have benefited from such land deals.
"A public land-transaction system will help ensure real estate developers avoid policy risks. Previously, even if you purchased a plot of land, you might face the risk of the government changing its land-use policies, which could affect your construction plans," Pan told China Business Weekly.
He has not tried to reserve land since 2002 because he has been expecting the implementation of the public land-transaction system.
Most small, poorly financed real estate developers who use guanxi, or close links to government departments and banks, to maintain their businesses, will be washed out of the market because they do not have access to the capital required to buy land through auctions, Pan added.
Besides establishing a transparent land market, the expected benefits of the new land-transfer system include easier collection of land-transaction fees and tighter government control over land supplies, in accordance with market prices.
When property prices are low, there might be less land available. When prices are high, there might be a greater supply of land.
The benefits of the new deal are not only limited to the real estate development sector.
"When land is publicly traded, it is more difficult to snatch arable land from farmers. The system, therefore, will better protect the precious land resources," Yan said.
Between 1998 and 2003, 6.7 million hectares of China's arable land disappeared. The nation had 130 million hectares in 1998. Why? That land was used for real estate and industrial developments.
Ren said the public land-transaction system will effectively curb corruption, as the current urban land-transaction system is a hotbed of bribery.
Even Tian Fengshan, China's former minister of land and resources, who pushed for the public land-transaction reform, was deposed last year due to his alleged role in several illegal land deals.
Authorities continue to investigate Tian's alleged involvement in those deals. He has not yet been charged.
Pan and Ren predict land prices will rise in the short term, as the new land-transaction system will reduce the number of land suppliers and, hence, land supplies over the short term. This will lead to rising housing price.
Over the long term, China's land supply will again be stable, as the government's land reserves will increase and more land will be available through public auctions or bidding, said Zhao Liyi, chief analyst with Beijing-based Soufun.com Academy.
Soufun.com is China's largest property portal. The academy is its research department.
Bumpy road
Despite the apparent benefits of the public land-transaction system, implementation of the circular has been delayed repeatedly by many local governments.
Beijing's municipal government, in mid-2002, allowed closed transactions of land to continue in four occasions: urban renovation, green-area construction and major projects,lands with historically unsolved problems involving ownership and debt, as well as some particular cases stipulated by the municipal government.
After the No 11 Circular was released, Beijing's land authorities approved closed land deals involving more than 10,000 hectares of land, or almost the amount of land sold through such transactions in the previous 10 years, indicates a report by Caijing Magazine.
During the same period, Beijing held a mere five land auctions and public-bidding events.
"The reason for the delay is the public land-transaction system will reduce local government departments and government-backed real estate companies' opportunities for high profits. The concentrated approval over land deals is to reduce the expected losses caused by the upcoming public land-transaction system," Yan told China Business Weekly.
"Everybody understands the public land-transaction system is inevitable."
MLR's statistics indicate in 2003, 33 per cent of land in China changed hands through auctions or public bids. Although low, it was 18 percentage points higher compared with the previous year.
Beijing's municipal government released an order at the start of this year. It requires all land for business uses to be sold through auctions or public biddings.
The municipality also banned the above-mentioned four exceptions it had allowed in 2002.
The municipality's order is strengthened by MLR's No 71 Circular, which stipulates current landholders must pay their land-transaction fees to the government before August 31 if they want to receive development rights.
The government reserves the right to recall the land -- or deny development rights -- from landholders who fail to pay the fees by the deadline.
Market reshuffle
"Most land speculators do not have the money to pay for transaction fees, nor do they have the will to become real developers. As a result, they have to sell their land to better-financed developers like us," said Zhang Xin, co-chief executive of SOHO China.
She is also Pan's wife.
The situation has given companies such as SOHO China and Huayuan -- which have more capital reserves -- great advantages when negotiating land transactions.
"I really worry about whether we can use all the land we have bought recently," said Zhang.
She refused to say exactly how much land her company has purchased in recent months.
It is not easy, however, for land speculators or small developers to sell their land before the deadline.
Due to the amount of capital and lengthy ratification procedures involved, a land transaction in China can take months to complete.
On the other hand, there are huge amounts of land available for sale.
In Beijing, municipal government officials revealed in June that 1,091 parcels of land, for a combined 16,362 hectares, must either be sold or the transactions ratified before August 31. That was roughly equivalent to the amount of land sold in Beijing in the past 10 years.
Approximately 6,000 hectares of land must be sold, or the transactions ratified in Shanghai, by August 31.
Other cities with booming real estate markets -- such as Guangzhou, Shenzhen and Hangzhou -- have better conditions, as they have adopted public land transaction system. Shenzhen adopted land auction in early 1990s. Guangzhou and Hangzhou massively promoted the system after MLR's order in 2002.
It will be impossible to sell all the land available and pay the land-transaction fees to the government before the August deadline, Yan said.
Meanwhile, the ongoing macroeconomic adjustment, aimed at cooling down the overheating economy, have caused most developers to tighten the purse strings.
The People's Bank of China (PBOC), the nation's central bank, released tighter regulations on real estate financing last June.
Under the new policy, mortgage rates for luxury apartments, office buildings and villas have been increased and limited to finished housing.
Commercial banks are permitted to lend money to real estate developers who provide at least 30 per cent of the capital for the project.
In late April, PBOC's policy was strengthened by a circular released by the China Banking Regulatory Commission. That circular required banks to be highly cautious of lending to various sectors -- including real estate and steel.
An estimated 70 per cent of the capital for real estate development in China is raised through bank loans, so the tighter credit has cut off the cash flow to many real estate developers.
"As a result, most developers are unwilling to invest heavily in land purchases," said Gao Shibin, a senior analyst with the Beijing branch of Jones Lang LaSalle, the world's leading real estate consultant.
In the most recent public bidding, for a parcel of land in Beijing's central business district (CBD), only three developers submitted bids -- and only one topped the reserve price.
There is widespread concern about whether the August 31 deadline can be implemented, because many land speculators, with close government connections, cannot sell their land before the deadline, and that might place pressure on local governments.
It is unrealistic for local land authorities to finish the approval process of all legally transacted land before August 31, said a leading real estate developer in Beijing.
The developer spoke on condition of anonymity.
Suggested Yan: "It is possible some exceptions might be allowed in some cities ... with different pretexts."
The problem is local governments might use the pretexts for the delay as excuses for ignoring the latest efforts to implement the public land-transaction system, Yan said.
But an official with MLR said delays in implementing public land-transaction system will not be tolerated this time.
"The State Council's officials are determined to push ahead with the public land-transaction system, and local governments ignoring it will be seriously punished," said the official, on condition of anonymity.
Wu suggested the new system will eventually be implemented, because it is the only way to ensure market transparency and attract foreign investors.
If the August 31 deadline is delayed again, the government's authority over land management will be lost, Pan said.
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