Sunday, July 26, 2009

Ratio of Land Price to Price of Final Housing

Ministry of Land and Resources: Land is only 23% of the Price of Housing

The China Securities Journal (CSJ) and Shanghai’s Oriental Morning Post (OMP) are reporting today (July 27, 2009) on a report by the Ministry of Land and Resources – though the only report I could find on the Ministry website was dated July 3 on “Re-evaluating the link between housing and land prices.” The translation of the OMP article is below.

CSJ article:

OMP e-article:

MoLaR July 3 report:

Basically the report from MoLaR is trying to dispel the myth that rising land prices, as in the price developers pay to local governments for land-use rights, is causing the rise (this year, for the past few months) in real estate and housing prices.

OMP reporter Liu Xiuhao

Since MoLaR announced the fact that “on average 23.2% of real estate prices come from the price of land”, people from multiple circles have raised objections. Two days ago, MoLaR publicly released the data from a national survey of 620 projects to answer the doubts.

The OMP discovered that, of the 620 projects that were investigated, one of Shanghai’s “land kings”, who emerged at the end of 2006, loomed large among them. These parcels of apartments that were once thought to be minimally profitable have, two years later, achieved land price to apartment price average ratio of 28.86%.

Last weekend, the newest residential land king was born in the far suburbs of Qingpu where the floor price reached an unbelievable 14,500 yuan/square meter. People looking back on the old days will discover that, after Shanghai housing prices rose, “land kings” successfully make hefty profits for real estate developers.

Shanghai Index is Slightly Lower than Other Core Cities

MoLaR commented: “the question of what proportion land prices make up of housing prices has been a universally hot topic for a long time. We have always been of the opinion that revealing the actual data and situation is a transparent way to provide understanding of relevant information to society. It is the best method of answering doubts and clearing up debate.”

Over the weekend, MoLaR publicly released a detailed catalog of its national investigation into housing and land price ratios. Among the 620 cases studied, the highest priced housing was 45,000 yuan/square meter and the lowest priced was 1,130 yuan/square meter; land-housing price ratios ranged from a low of 5.3% to a high of 58.6%.

The subject of this investigation was mainly commercial real estate development projects that obtained land and sold housing (including those that have already sold out) since 2006. The housing price investigated was the average sales price at the time the apartment complexes went on sale, and the land price was the price of the land for the apartment complex at the time of the land transaction.

Dividing the results by region in which the real estate project is located, the eastern region [of China] had 316 cases, with a land to housing price average ratio of 27%; the middle region had 158 cases, with a land to housing price average ratio of 21%; and the western region had 146 cases, with a land to housing price average ratio of 18%.

This time, Shanghai had 6 apartment complexes located in Baoshan, Fengxian, Yangpu, and Qingpu. Of them, the lowest land to housing price ratio was 15.19% and the highest was 31.95%, while the average was 26.7%. Compared to the national average, Shanghai has a slightly higher percentage for land price but compared to other core cities like Shenzhen, Hangzhou, and Nanjing, Shanghai still has a slightly lower ratio—making it one of most money-making cities for apartment complex development.

Housing Prices Sour, “Land Kings” of That Year Make Large Profits

Actually, one of the six apartment complexes under investigation was a “land king” born that year. On November 26, 2006, after 176 rounds of fierce contest, central state enterprise China Resources [Huarun] Group’s subsidiary China Resources [Huarun] Land broke free from the stubborn circle of five magnates and raised the final bidding paddle with a price of 1.541 billion yuan for area C2 of New Jiangwan City—becoming a land king.

At the time, a large number of industry representatives were anxious over the future of profits for developers. An estimate at the time was that only with a price of 15,000 yuan/square meter would a modest profit be had, while the price of housing in this area at the time was under 10,000 yuan/square meter.

One year later, housing prices soared. The housing price in the area of New Jiangwan is already twice what it was that year. The apartment complex that was once thought to have only minimal profit now sells for 23,139 yuan/square meter, and the ratio of land to housing price is only 28.86%. A land price thought once to be “astronomical” has already been surpassed by multiple others in the suburbs.

From this public issue of the project information it can be seen that the highest proportion of land price to housing price is found in the Noble Diamond Mansions [Shengshi Baodi] on South Changjiang Road, while the lowest proportion of land price to housing price is found in the Industrial Comprehensive Development Area project of Fengxian district.

Market Supply and Demand are the Ultimate Factors in Determining Land Prices
In issuing the investigation catalogue alongside “Several Issues Concerning the Interpretation of Land Prices” MoLaR made clear that market supply and demand are the factors in determining land prices.

The practice of the land market in China shows that the determining factor on high or low land prices is the ultimate influence the relations of market supply and demand. Land needs are directly influenced by the future predictions of housing price by development companies. In the tendering, auctioning, and listing for state-owned land sales, the different quoted prices from development companies are based on their predictions of future housing prices and expected profits, such that the development company quotes a price based on predicted housing price minus construction prices and profit. Universally good predictions yields fierce bidding and “the highest price wins”, whereas low prices frequently lead to no bidders or no tenders. In addition to factors from predictions, the “astronomical land price” phenomenon, where certain apartment complexes have much higher prices than other apartments in the surrounding area, has appeared over the past few years in certain cities. This is related to multiple factors including the inherent position of the land, the entry of funds from other industries and enterprise financing from listing, and the movement of capital. Of these, the rule that “the better the area, the easier to sell the apartment” is the most important reason that leads to fierce competition between development companies.

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