Credit: Visual China

BEIJING, October 20 (TMTPost) -- It was reported on Tuesday that at the end of September, the Ministry of Natural Resources issued a document to the natural resources authorities of various provinces and cities, which included recommendations to eliminate price restrictions on land auctions and to remove the 1.0 floor area ratio limit in suburban areas.

Oversupply in the land market, with dim enthusiasm for land auctions

The introduction of land price limits occurred in 2016 when the land market was heated, with a total of over 340 'land kings,' both in terms of unit price and total price, emerging nationwide. Beijing, Shanghai, Hangzhou, Suzhou, Changsha, and other hot cities were among the first to implement maximum price restrictions for land auctions.

In 2021, under the leadership of the Ministry of Natural Resources, 22 major cities in China adopted a centralized listing and supply model for residential land. In August of the same year, the ministry made four requirements for cities using this model, including a restriction that the premium rate for a single land parcel should not exceed 15%, while previously, most of the highly sought-after land plots had premium rates of over 30%. In 2021, nearly all hot cities announced the implementation of maximum land prices.

Against the background of the hot land market, this policy was introduced to cool down the real estate market, control land prices, and reduce premium rates.

The supply and demand in the land market have fundamentally changed. Due to the downturn in the real estate market, the land market is now in a low-demand phase.

According to data from the Ministry of Finance, land sales revenue was 8.7 trillion yuan in 2021, and it dropped to 6.6 trillion yuan in 2022, a year-on-year decrease of 23.2%. In the first half of 2023, land sales revenue was only 1.87 trillion yuan, a decrease of 20.9% compared to the previous year. It is expected to reach a new low in 2023.

Data from CRIC Research shows that in the first three quarters of 2023, out of 59 sample cities and counties, the total area of land parcels earmarked for pre-sale was 62.07 million square meters, with actual supply at 43.27 million square meters, resulting in an average pre-supply completion rate of 68%.

Data from the China Index Academy indicates that in the first three quarters of 2023, the supply and demand scale for residential land in 300 cities across China all experienced a year-on-year decrease of over 30%. In the third quarter, the sentiment in the land market remained weak, with a withdrawal and cancellation rate reaching 28%, an 8.1% increase from the second quarter."

In addition, the confidence of real estate companies in land investment remains

low. Despite new real estate policies introduced by the central government and local authorities since the third quarter, cash flow for real estate companies has not significantly improved, and the real estate market remains weak in its sales, collections, and financing. Real estate companies continue to be cautious in their investments, and even in first and second-tier cities, only land parcels in core

areas with real purchasing power and demand are attracting active participation from real estate companies.

In this context, adjusting land auction rules is in line with market changes.

Removal of land price ceilings in many cities

Several cities, including Jinan, Nanjing, Hefei, Ningbo, Suzhou, Chengdu and Xi'an, have already moved to eliminate the upper limit on land prices, and most cities are expected to remove price restrictions in their following land auction documents. Core cities like Beijing and Shanghai are still considering how to adjust bidding rules.

On September 26, Chengdu relaxed property purchase restrictions and specified that land for residential properties in the central urban area would be auctioned based on land price, with pricing for newly auctioned land determined by companies based on market conditions, including bidding land price without a price limit.

On October 9, the Natural Resources and Planning Bureau of Jinan issued a supplementary notice adjusting the land auction rules for two land auctions scheduled for the middle and late October. The highest price limit was removed, and the principle of "the highest bidder wins" was reinstated.

On October 11, the Hefei Land Market website released the list of the third batch of planned residential land for sale in Hefei this year, with six parcels set to be auctioned on November 2. The auction information only specified the starting price without an upper limit on land prices. These parcels will be auctioned by bidders raising their offers, and the highest bidder above the reserve price will win.

Previously, Hefei's land auction rules for residential land used a bidding method based on the combination of "the highest bidder wins" , a high-quality residential development proposals, as well as a lottery.

On Tuesday, the Natural Resources and Planning Bureau of Xiamen announced that one residential land parcel would be publicly auctioned on November 7. This parcel will be auctioned without setting a reserve price, and the highest bidder wins. Restrictions on the average price of residential housing will also be removed.

Previously, Xiamen's residential land auctions were conducted with the approach of "specified quality, price limits for both housing and land and lottery".

So far, four cities have announced the removal of land price restrictions. With the Ministry of Natural Resources explicitly eliminating the upper limit on land prices, it is expected that other cities, especially first and second-tier cities, will soon implement the rule of "the highest bidder wins". Additionally, various previous land auction policies that restricted market activity, such as competition-based development, self-retention, and competition based on quality, may be phased out of the market.

Industry experts believe that such measures mean that real estate companies will rely more on their financial strength and capabilities than luck when acquiring land. This change may lead to further differentiation in the real estate industry, with stronger companies dominating the market. Competition on core land parcels is expected to intensify, and land prices may reach new highs. However, this may also lead to increased land acquisition costs, which could be reflected on property prices. Additionally, allowing land to realize its true value and increasing support for local government revenue could help reduce the possibility of inverted pricing between new and existing homes.

Therefore, the removal of the maximum land price is expected to have a positive impact on both the land market sentiment and the real estate market, potentially rekindling the real estate market with a hot land market.

The removal of the "1.0 floor area ratio" limit and the "villa construction ban"

The "1.0 floor area ratio" limit originated from the "Catalog of Restricted Land Use Projects (2012 Edition)" jointly issued by the Ministry of Land and Resources and the National Development and Reform Commission in 2012. It required residential land to have a floor area ratio greater than 1.0. Additionally, the

"Catalog of Prohibited Land Use Projects (2012 Edition)" explicitly prohibited villa development projects. Land with a floor area ratio of ≤1.0 is generally considered for residential and villa use. Starting in 2003, the Chinese government gradually restricted the sale of such land, and by 2012, it was completely prohibited, which is commonly referred to as the "villa construction ban."

The removal of the "1.0 floor area ratio" limit suggests that more land parcels with a floor area ratio below 1.0 may become available in suburban areas. This could lead to more low-density, high-quality real estate projects in suburban areas, such as detached and townhouses, complementing the primarily high-rise and mid-rise products in central urban areas. This would provide more options for those looking to upgrade their homes.

Currently, there has been a significant shift in the supply and demand of the real estate market. Relying solely on ordinary residential properties may not be sufficient, so more low-density, high-quality real estate projects can stimulate demand from the affluent population. It provides them with options for their ultimate residences, and offers them a way to diversify their asset portfolio.

(This article was originally published on the TMTPost. Reporting by Wang Jian)

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