Just after the National Holiday in early October, K. Wah group acquired a residential-use plot in Shanghai’s Pudong District for an accommodation value of RMB 40,106 per sqm, the highest accommodation value for a Shanghai land sale in the past three years. When reading this news, however, I was not so surprised, as Shanghai’s land sales market has been gaining momentum since March 2012. With commodity housing sales volume picking up, developers have been more active acquiring land to replenish their land banks in Tier I cities. As a result, the land premium rates (the final purchase price divided by the reserve price) have gone up quickly as bidding competition intensifies among developers.

In the past three months, 17 residential-use land plots in Shanghai sold with land premiums that exceeded 100%. For example, on 18 September, Shanghai Zhuo Han Real Estate Development acquired a residential parcel in Fengxian District at an average accommodation value of RMB 15,443 per sqm, 181% higher than the reserve price. On 27 September, Poly acquired a residential site in the Shanghai International Medical Zone area of Pudong District at an average accommodation value of RMB 14,086 per sqm, 156% higher than the reserve price.

The red-hot land market in Shanghai represents a strong rebound following the downturn of late 2011 and early 2012, when most residential land plots were transacted at the reserve price. During that period, the overall residential market in Shanghai was suppressed by the government’s diligent enforcement of their tightening measures. Though improving market sentiment is an important reason for developers’ increasing interest in land acquisition, there are other reasons as well. Many developers have seen their projects in lower tier cities underperform due to a combination of restrictive policies, poor affordability and competition from large supply. As a result, more developers perceive Tier I cities to have a lower risk profile than lower tier cities and have concentrated their development activities back to Tier I cities such as Shanghai. This trend in turn has fuelled land price appreciation through intense competition in the land auctions in Tier I cities. Rising land prices are likely to increase price pressures in the housing market in the next one or two years.

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