Land sale brings market potential into question

HK builder pays record price for prime Shanghai plot

Editor's Note:

On July 9, Lai Fung Holdings Ltd, a Hong Kong-based developer, purchased a land plot in Shanghai's Huangpu district for 577 million yuan ($93 million), breaking city records with a premium price of more than 85,000 yuan per square meter after factoring in the area reserved for affordable homes, according to media reports. The Global Times interviewed three experts to get their views on Shanghai's newest "land king."

Liu Yuan, senior research director at Centaline Group in Shanghai

The developer in question likely sees two advantages in this parcel. On the one hand, the land is located in a desirable neighborhood, one within easy reach of downtown Shanghai. On the other hand, its relatively small size - roughly 6,885 square meters in total - means that the developer can keep its future expenses somewhat low as it builds high-end luxury apartments on this land, which is apparently its intention.

Near this plot, secondhand homes sell for about 40,000 to 50,000 yuan per square meter. Newly built homes could sell for twice as much. Based on these figures, the buyer clearly sees potential for future residential market growth.

Still, this land sale should be seen as an individual case, not one that necessarily represents broader market trends. Just because one developer is willing to pay a record price per square meter for a particular plot, there is no guarantee that housing prices will continue to rise in the future. In fact, most large mainland property developers, including Vanke and Poly, are cautious about adding to their land inventories these days.

In some instances, the crowning of a new land king will bolster investor confidence in surrounding properties. But this all depends on conditions in the market. If the demand is sluggish, the prospect of higher home prices will only scare away potential buyers.

Over the past several years, we've seen several land kings in Shanghai and Beijing, but final home sales results on these plots have been somewhat disappointing. Rather than chasing ever-higher prices, developers should sit tight and buy land when the market cools.

Shaun Brodie, head of China Strategy Research at DTZ

Due to the scarcity of new land available for development in Huangpu district, this plot is expected to be developed into a high-end residential community.

Current high-end residential prices in Shanghai's central downtown area can reach as high as 160,000 yuan per square meter. When taking this into account, the plot still has room to grow in terms of generating a respectable profit.

This sale - and once the project is completed - is expected to influence housing prices in nearby communities by helping move them in an upward direction.

Moreover, the plot is in a good location and if the developer delivers the right product to the market, then profitability is expected to be realized.

Yang Hongxu, vice president of Shanghai-based E-house China R&D Institute

This recent decision by a Hong Kong developer to pay such a high price for a parcel of land in Shanghai's Huangpu district has been viewed with skepticisms by several of its local peers.

Despite the prime location, the developer who purchased this land might not be able to achieve the high profits it is aiming for over the coming two years. With the right promotion toward high-end buyers, perhaps it will be possible to make some profit over the next few years when the market recovers from its current funk.

Generally speaking, giant developers that invest mainly in high-value land parcels in first-tier cities usually are not rewarded very well for their labors. Right now, China's real estate market is under a cloud. And after factoring in the less lucrative affordable housing units that the Hong Kong builder will have to construct as it develops this land, the profit potential of this project does not look incredibly promising. Certainly it will be much harder to handle than projects simply aimed at satisfying the "rigid demand" of ordinary buyers.

Except for periods when the general housing market is booming, an unexpectedly high price for a specific parcel will not stimulate property sales or raise prices in nearby areas. I don't expect the general landscape of the mainland housing market to change much over the next five years or so.