China quietly pivots from land sale limits to stem housing slump

CHINA is quietly moving away from rules restricting land sales by local governments, its latest effort to revive the housing market and boost income for debt-laden cities.

Authorities introduced the rules in February 2021, limiting key cities to just three land auctions a year in a so-called centralised process that sought to curtail speculative bidding by developers during China’s property boom days.

Two years later, those constraints are redundant as private real estate firms stay away in droves to repair finances that have been battered by the industry’s unprecedented downturn. Instead of fending off bidders for land, local governments are stepping up auctions to lure new buyers and shore up their coffers ahead of a record 3.65 trillion yuan (S$710.7 billion) in bonds maturing this year, and central authorities aren’t standing in their way.

In fact, the Ministry of Natural Resources has issued a notice to at least two cities allowing them to arrange multiple land sales events this year, people familiar with the matter said. The southern city of Guangzhou said this week that the arrangement is to give potential buyers enough time to make investment decisions.

The Ministry of Natural Resources confirmed in a response to Bloomberg that it issued the notice to guide local governments on land supply matters. The move was made with the intention to improve the ‘centralised’ land supply system rather than cancel it.

“The new policy marks a stealth tweak to the ‘centralised’ land supply scheme earlier,” said Yan Yuejin, research director at E-house China Research & Development Institute. The ministry also told cities to give at least three months’ notice of plots to be sold, in order to achieve better results, Yan added.

A NEWSLETTER FOR YOU

Tuesday, 12 pm

Property Insights

Get an exclusive analysis of real estate and property news in Singapore and beyond.

Sign Up

The shift came after 18 of the 22 major cities subject to the centralised bidding process exceeded the three-auction limit last year, with some ramping up events in the fourth quarter during an intensifying housing slump, according to Bloomberg calculations.

In October, the capital of central Jiangxi province sought the central government’s nod to remove itself from the list of cities subject to the three-auction limit. Beijing and Hangzhou rushed out plans for their fifth land sales in the last week of December.

The property downturn has slashed government revenue from land sales, which in the past made up about 30 per cent of local authorities’ income. The cash that local governments received from land sales dropped 23 per cent to 6.69 trillion yuan last year, the lowest annual take since 2018, forcing some to tighten their belts. Guangxi province blamed a 40 per cent land sales slump for its lower-than-targeted expenditure last year, according to its annual fiscal paper.

The worst isn’t over yet. To lure more bidders, local authorities have allowed land buyers to defer payments for as long as a year, compounding the impact of last year’s record 48 per cent drop in land transaction value, said China Index Holdings analyst Zhang Kai.

“The real fiscal pressure facing local administrations will show up this year,” Zhang said. “Adding more rounds of land sales can help a little, but the market can only warm up once a housing recovery becomes evident.”

Municipalities may rely on state entities to buy land in the near future, as cash-strapped private developers continue to rein in spending. Land purchases by private builders plunged about 80 per cent last year, according to China Index Holdings. In January, only three of the top 100 developers replenished land, China Real Estate Information (CRIC) data show.

Local government financing vehicles, which play a crucial role in funding China’s roads, bridges and subways, snapped up more than half of residential land sold last year, according to Guangfa Securities.

Yet the support from LGFVs isn’t sustainable, warned CRIC analyst Xie Yangchun. Such entities have only begun to develop 38 per cent of land plots purchased in 2021, the least among all kinds of buyers, CRIC data show. Some active LGFV bidders have seen their debt ratios swell to levels higher than leveraged developers.

The coming years will be particularly challenging for local governments’ finances. Bonds worth almost 15 trillion yuan — more than 40 per cent of their outstanding debt — are due in the next five years.

Provinces also face a rising interest burden. Local governments paid 1.1 trillion yuan in bond interest in 2022, a 21 per cent jump from a year earlier and the most in comparable data going back to 2019, according to calculations based on Ministry of Finance figures.

“There’s no quick substitute for local governments’ long-standing reliance on land sales,” Zhang at China Index Holdings said. BLOOMBERG