On 27th January 2014, a 96,429-sqm land plot in Shanghai was sold to Franshion, the real estate arm of Sinochem Group, for RMB10.1 billion. Based on the plot ratio of 2.2, the accommodation value of this plot reached RMB 47,609 per sqm, 111.6% higher than the reserve price. Designated for residential use, the plot is located in the Daning area of Zhabei District, where the current transaction price of new homes is only around RMB 45,000 per sqm. What is more interesting is that prior to the auction, the developers were reminded that the government is determined to tame housing price growth. Ironically, the auction resulted in the most expensive residential-use land transaction in Shanghai in terms of accommodation value. Meanwhile, Guangzhou and Hangzhou also witnessed several transactions of “land king” proportion at the end of January. What is really driving this optimism among the developers after the government announced a new round of tightening measures last November?

We have been repeatedly saying that the market fundamentals in the tier I cities still look much healthier in the short to medium term than in the tier II and III cities even after strong growth in home prices in the past 12 months. We believe, as we expect do the developers, that the new measures will only have a very limited impact on tier I cites’ residential markets. Compared to most tier II and III cities, the tier I cities see thousands of highly qualified immigrants each year seeking greater job opportunities and higher potential for career growth. This provides a steady pool of potential first-time buyers in addition to household formation drivers among local residents. At the same time, new supply is trending downwards gradually in the tier I cities as the cities develop and land available for future development decreases. In view of these facts, it is no surprise to us that China’s top developers have been very aggressive in land acquisitions in the tier I cities in spite of the high land costs. We expect the large developers to remain upbeat on land banking in the tier I cities in 2014, while remaining cautious in the tier II and III cities where the concerns over oversupply and affordability are warranted in the short to medium term. That being said, industry consolidation is expected to accelerate in 2014 as there will be opportunities for the top developers to take over some distressed developments in the tier II and III cities.

Note: 4 Tier I cities include Beijing, Shanghai, Guangzhou and Shenzhen. 16 Tier II cities include Changsha, Chengdu, Chongqing, Dalian, Hangzhou, Nanjing, Ningbo, Qingdao, Shenyang, Suzhou, Tianjin, Wuhan, Wuxi, Xiamen, Xian and Zhengzhou.
Source: CREIS, Jones Lang LaSalle Analysis

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