Citic Securities Sees Sharp Drop in Land Sales This Year

The chill that began to afflict China’s property market at the start of the winter shows no signs of thawing this year as confidence falters across the wider economy, China’s largest investment bank said in a new report.

Land transfer fees reached a record 6.5 trillion yuan ($986 billion) last year, largely due to increased activity in China’s smaller and less developed third- and fourth-tier cities, according to Citic Securities. Transfer fees are earned by local governments when they sell land-use rights, typically to real estate developers, and therefore is a good indicator of demand across the real estate market.

The extra funding in local government coffers is unlikely to continue this year, Citic warned. It predicted that land transfer fees will fall by 18.6% this year to 5.3 trillion yuan, reflecting a lack of confidence in the property market nationwide.

Economists have warned for several years that China’s overheated property market was in danger of a correction, as speculators looked to make easy returns by betting on seemingly ever-rising house prices. When large first-tier cities such as Beijing and Shanghai increased regulation to curb price growth, speculation migrated to second-tier then third- and fourth-tier cities where there was still opportunity for speculators to make a profit.

Last year’s growth in land transfer sales was a reflection of growing demand in these smaller cities, Citic Securities said. First-tier cities generated transfer fees of 546.9 billion yuan in 2018, down 14% year-on-year, while second-tier cities collected 1.6 trillion yuan in fees, down 5%. On the other hand, fees in third-tier cities rose 17% to 1.17 trillion yuan, while those in fourth-tier cities jumped 30% to 320 million yuan.

Yet most of the fee growth in smaller cities occurred before the property market entered a downward spiral in the third quarter of last year after the government began to crack down on easy financing for development and as the effects of the trade war with the United States started to hit growth.

Builders rely heavily on buyers who pay cash, down payments from prospective buyers that are often made before developments are completed, and transfers from mortgage providers. But the government's campaign and the slower economy have made it more difficult for buyers to hand over down payments and get mortgages as well as for developers to sell houses in their inventories.

The Lunar New Year holiday is traditionally a popular time for property sales as buyers have more time to shop around. But during this year’s holiday from January 28 to February 10, the supply of new housing in 44 major cities fell 29% year-on-year, while sales volume was down 14% year-on-year, according to research by CRIC Research.

Consumers are becoming more cautious because of the changing environment, said Huang Wei, the general manager at Centaline Property Agency Ltd., one of China’s largest real estate agencies. China’s slowing economy has led to a sharp drop in confidence both among developers and buyers. Even developers in third- and fourth-tier cities are losing their optimism, he said.

Contact reporter David Kirton (davidkirton@caixin.com)