Why China gov’t developers gobble up land

September 2, 2016 / By

Despite soaring land prices in China, government developers have re-emerged as some of the most active buyers in the land market. In the first half of 2016, state-sector fixed asset investment increased 23.5% from a year ago compared to just 2.8% growth from the private sector during the same period, according to the National Statistics Bureau. The northern Chinese city of Tianjin serves as an example of where this is happening: the latest “land king deal” went to a state-owned enterprise (SOE) and marked the second-most expensive land purchase in the city’s history at over 10 billion RMB. Also in Tianjin, SOEs captured nine of the ten largest land deals in 2014, and eight of the ten in 2015. What could be the reasons why SOEs are the winning bidders?

1 – Not just about returns

Land sales across China are typically managed at the district level, which means that district governments may set target land prices. If the prices are too high, the private or quasi-private sector may shy away, leaving open opportunities for SOE developers. For these developers, there is a completely different incentive structure in place. It is a top-down system where returns are not the only objective, but are taken into consideration along with other factors.

2 – Rich in financial resources

Additionally, government developers also maintain some important advantages over the private market. For one, being a function of government, they are in a much stronger position to negotiate for a highly desired land plot. They are also rich in financial resources and have much lower capital costs than their private competitors. Local government finance vehicles may be able to get financing at just 2-3%. Most private developers, even the best-known of them, might only achieve 5-6%. This lower cost of capital makes more development projects financially viable, even at higher land prices.

3 – Taking risks that the private sector won’t

Most of all, SOEs are willing to take risks where the private market is not. For example, when the residential market was uncertain in Tianjin a few years ago, and price growth was weak, SOEs stepped up to the plate. Due to lower capital costs and different incentive structures than the private sector, they were able to swoop in and buy up land plots at the target prices listed by the local government. Most of the projects have been extremely successful since the strong rebound in the local residential market; prices at these projects have risen 20% year-to-date in 2016.

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