Land auction enthusiasm still missing
By Jia Hepeng (China Business Weekly)
Updated: 2004-06-21 14:57

China's land auction and public bidding system still faces many hurdles as it attempts to fulfil its foundation purposes.

"Given the fair opportunities the land auction and bidding system brings to all parties, the system will certainly develop," said Gao Shibin, a senior analyst with the Beijing branch of Jones Lang LaSalle, the world's leading real estate consultant.

"The current problem is that many government officials, real estate developers and land owners are still accustomed to traditional private land deals."

Jones Lang LaSalle chaired the public bidding process for a plot of land in Beijing's central business district (CBD), going by the name of CBD-01, earlier this month. It was the first time that Beijing's municipal government had hired an international agent to chair a land bidding process.

Earlier this month, SOHO China Co Ltd -- a leading developer in Beijing -- purchased the land-use right for CBD-01 for 714 million yuan (US$86.23 million) during the bidding process.

All non-agricultural land in China belongs to the State, but developers and property owners can own and trade 70-year land-use rights.

The bottom price set by Beijing's CBD Administrative Commission for CBD-01 was 641 million yuan (US$77.23 million).

According to Pan Shiyi, chairman of SOHO China, the 300,000-square-metre site will be used to build a 110,000-square-metre commercial and office complex.

"It is a major victory for us in the CBD," Pan told media earlier this month.

But to the government and the development of public land trading system -- including public bidding and auctioning system -- things are not so rosy.

Some 30 developers showed interest in the plot of land, but on June 1, the final date to offer a bid , only three developers tendered and only SOHO China surpassed the reserve price.

The situation was caused both by the recent tightening of credit and the general attitude towards the public transfer of land sales, Gao told China Business Weekly.

Since the middle of last year, China's monetary authorities have been releasing a series of regulations tensing lending policies to real estate developers.

The People's Bank of China (PBOC), the nation's central bank, released tighter mortgage regulations last June. Under the new policy, mortgage rates for luxury apartments, office buildings and villas have been increased and limited only to finished housing.

Meanwhile, commercial banks are permitted to lend money to real state developers only when they provide at least 30 per cent of the capital needed for a project.

In late April, the PBOC's policy was strengthened by a circular that was released by the China Banking Regulatory Commission, requiring banks to be highly cautious of lending to sectors like real estate development and steelmaking.

An estimated 70 per cent of the capital for real estate development in China comes from bank loans.

The tightening credit means most real estate developers are struggling for capital and few of them are willing to invest heavily, such as projects like CBD-01, Gao said.

On the other hand, the public land transfer system in China also needs to be further refined, said Zhao Liyi, a senior researcher with Soufun.com Academy -- a leading property research agency.

Before 2002, land was transferred privately in most Chinese cities. In 2002, the Ministry of Land and Resources (MLR) released a circular that required all land to be transferred publicly, either through auction or public bidding, before August that year.

The circular was delayed by many local governments.

In 2003, 33 per cent of land in China changed hands through auction and public bidding. Although still low, it was 18 percentage higher than the year earlier.

The Beijing municipal government released an order at the start of this year, requiring all land to be transferred through auction or public bidding.

Many real estate developers have obtained huge land reserves to avoid possible risks caused by auctions or public bidding, such as rising prices, Zhao told China Business Weekly.

Real estate developers have spent up big on securing land, so that they are not in a position to spend money during a public bidding, Zhao said.

In a survey conducted in April, Beijing's land authorities found that there were 1,091 reserved plots, covering 16,362 hectares, in the capital city.

As long as the reserve is so big, the auction and public bidding system will not play a major role, said Pan.

Aware of the situation, the MLR said recently that by the end of August, all land reserves that have been built on without government permission will be reclaimed by local government and resold through auction or public bidding.

"With the reduction of real estate developers' land reserves and rising amounts of land reserves in government hands, the land auction and public bidding system will be pushed forward smoothly," Gao said.

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