Facing the tightened control on real estate development loans and stricter restrictions on land supplies, property developers now strategize to save themselves.
The newest case took place between two leading Beijing real estate developers SOHO China Co Ltd and Beijing Huayuan Group, led by legendary property tycoons Pan Shiyi and Ren Zhiqiang.
Last Monday, SOHO China bought an ongoing development from Huayuan with a staggering pricetag of 1 billion yuan (US$120.7 million).
The 170,000-square-metre development, called Shangdu International, is an office and residential complex located in Beijing's central business district (CBD), the most promising area for real estate development in the city.
The first phase of Shangdu International will remain being sold by Huayuan, while the second and third development phases of the project will be renamed SOHO Shangdu.
"This is the first ready development we have bought, and we will buy the second and the third," Pan told reporters last Monday at the signing ceremony, at which he paid an earnest deposit of 200 million yuan (US$24 million).
The deal took place after the central bank tightened real estate loans last year and Beijing municipal government introduced harsh rules forbidding private land deals, which means all deals must be done through public bidding.
The People's Bank of China (PBOC), the nation's central bank, released tighter mortgage regulations last June.
Interest rates on loans for luxury apartments, office buildings and villas were increased and mortgages were limited to finished housing.
Purchasers of unfinished homes cannot qualify for a mortgage.
Also, commercial banks are permitted to lend money only to real estate developers with good credit histories, and only when the developers provide at least 30 per cent of the capital.
PBOC officials said the policy was designed to control the increasing number of bad loans, but the policy might also cut off the capital flow to most of China's developers.
An estimated 70 per cent of the capital for real estate developments comes from bank loans.
The policy was strengthened by a circular issued by the State Council last August.
"Now many real estate developers face being merged or acquired due to their lack of sufficient funds," said Philip Wu, housing director of DTZ Debenham Tie Leung's Beijing office. "We are offering consultation to some real estate developers trying to merge others," Wu told China Business Weekly.
On the other hand, Beijing municipal government released a new rule early this year, implemented on January 9, which stipulated that State-owned land for commercial usage in Beijing must be sold through auctions or public tenders.
All urban land in China belongs to the State.
The new rule means land transactions through contracts with individual government departments or through private deals, which most developers prefer and largely practise, are now banned.
All land price must be paid when the deal is reached, while in the past, developers often paid the costs until their developments were sold.
While expected to eliminate irregularities in the land-approval process, the new rule also reduces the land supplies in the city. Land prices are rising and those who hold the use right of the land now wait for a better buyer.
Lu Yun, a senior real estate reporter with China Business Times, said insufficient land reserves have long harassed SOHO China, although the company has done a pretty good job in developing and selling their developments.
SOHO and Jianwai SOHO, two 700,000 square metres office and residential complexes developed by SOHO China in CBD, are best sold developments in Beijing. But the company's attempts to list in Hong Kong and New York in 2002 were stranded by investors' disbelief on its continued performance due to its lack of land reserves.
Pan said in that situation, the best choice for him is to buy more land for continued development.
On the other hand, Ren of Huayuan said with the money, he can better develop other land reserved by his company.
In 2001, Ren sold all Huayuan developments to Hong Kong-based China Resources Group and obtained 1 billion yuan (US$120 million) in cash. With the money and his experience, Ren reserved huge amount of land in Beijing.
"We wait for the cash from Pan to cook our new developments," Ren joked at the signing ceremony.
However, some questionedthe 1-billion-yuan price, saying it might be too high for a single development of merely 170,000 square metres.
"It is because all the debts and ownership relations of Shangdu International are cleared, so that we can immediately launch constructions after the deal. These kinds of developments in Beijing are quite rare," Pan said.
"In addition, the available land in CBD is very limited, which makes us ready to accept Ren's offer," Pan added.
