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Profit squeeze spurs China builders to buy land outside auctions

Chinese real estate developers plan to acquire more land outside the primary market - purchasing from other companies and through redevelopment - as escalating land costs crimp profit margins.

[HONG KONG] Chinese real estate developers plan to acquire more land outside the primary market - purchasing from other companies and through redevelopment - as escalating land costs crimp profit margins.

China's property market bottomed late last year with prices recovering in the biggest cities such as Beijing, Shanghai and Shenzhen, but costly land prices are spoiling the party for developers who must find new ways to ease the squeeze.

In a game of survival, developers are also forming ventures to jointly bid at government auctions to strengthen their chances of securing prime plots of land. "If you buy in the public market it's expensive, so we prefer mergers and acquisitions," said an executive of Greentown China who spoke on anonymity as he was not authorised to speak to the media. "Business partners and local governments are more willing to talk to us because of our (bigger corporate) background." Prices for residential land continued to accelerate in the fourth quarter, the land ministry said last week, and the trend will likely persist in the first quarter as the housing sector recovers.

Some developers say they will bid for land using more joint ventures going forward as cooperation helps to raise the bargaining power of builders and lowers competition.

Others said they would build up land banks via acquisitions and urban redevelopment, rather than through the primary market.

The bigger, listed developers have been concentrating on larger cities in the past two years to drive sales, as demand and inventory levels in these regions have been healthier.

Residential land in first-tier cities rose 10.9 per cent in the fourth quarter from a year earlier, faster than 2.9 per cent in second-tier cities and 2.5 per cent in third-tier cities.

Sunac China - a Tianjin-based developer whom analysts say is among companies with the most joint ventures - announced last week it would buy 95 per cent of Suzhou Xinyou, who has a land parcel of around 74,000 square meters in the eastern city of Suzhou, for 1.04 billion yuan (US$158.1 million). "We need to look for channels other than the primary market to acquire land; redevelopment projects are a major part of them," an official from state-backed China Resources Land told Reuters.

The company will step up land investment despite high land prices to maintain market share, so it will team up with more partners and look beyond the primary land market, the official said.

The rising cost of land has prompted developers to form partnerships, with as many as six companies working on one development.

Property data provider CRIC said that among the top 10 land sales by value, 75 per cent of the total amount was bought through partnership in 2015, compared with 73 per cent in 2014. "Land prices will go up faster than property prices as monetary easing and falling funding costs will encourage some developers to expand their balance sheet and compete in this segment of the market, squeezing future margins for all developers," CLSA analyst Nicole Wong said.

Net profit margins for Chinese developers listed in Hong Kong peaked in the first half of 2011 at about 14 per cent and have gradually eased to around 8 per cent in the first half of 2015, according to realtor and researcher Centaline Group.

Ms Wong noted that poor margins will show up on income statements in 2018 as it usually takes two years after buying land to finish building and start selling the apartments. "Getting land through urban redevelopment is one solution but it takes many years and much trouble, only big developers and state-backed enterprises can afford to do it," Ms Wong said. Urban renewal projects usually involve companies working closely with provincial governments.