Exorbitant land costs burden developers

A popular saying is echoing in Beijing as property tycoons enter a weak spell: "It is mostly an appalling death for real estate developers to be stuffed (with land), but not hungry."

Plots of land in Beijing and other major Chinese cities have been bought at record-high prices, but have become a burden for struggling developers.

On March 15, 2010, the final auctions of three plots of land in Beijing hit 11.08 billion yuan (about 1.75 billion U.S. dollars). Just about one month after the sky-high bidding commenced, China imposed a raft of measures aiming to cool property prices in April 2010.

The government has repeatedly stressed its efforts to contain the runaway property market, including tighter monetary policies, higher down payments, a ban on third-home purchases, price control targets and a trial property tax.

Under the government's strict tightening control policies, the development pattern of China's real estate industry is expected to be more reasonable and rational under the guidance of the government, insiders said.

Re-sold, but still untouched

Left untouched for nearly two years, the 104,537-square-meter Dongsheng township residential and commercial property, one of the three plots of land sold at record-high prices, was covered by weeds and light snow in early December this year.

The World Expo Hongye Real Estate Development Co., Ltd. won the plot with a bid of 1.76 billion yuan in 2010.

"We paid such a huge sum just hoping to create a high-end real estate project," Wang Dan, the development company's vice president, said after winning the bidding war on the massive urban plot.

The exorbitant winning bid means that the prices of apartments built on the plot will have to factor in about 30,000 yuan per square meter just to cover land costs, a reality that shocked many other property tycoons at the auction.

Fortunately for its initial buyer, Poly Real Estate Group, China's second-largest listed developer, said in a statement in August that it had "gained the Dongsheng plot project through 100-percent equity acquisition from the World Expo Hongye Real Estate Development Co., Ltd."

In the real estate industry, the piece of land always decides the fate of the developer, and land price can sometimes be the straw that breaks the camel's back, said Zhang Dawei, an analyst with Beijing-based Centaline Property.

Compared to most property projects, these plots of land sold at record-high numbers require more capital and are an even heavier burden for the developer, he said.