Over-supply Of Luxury Properties In Tier-one CitiesRecord-breaking land sales have been seen throughout the year of 2015 in Tier-one and some of the major Tier-two cities. Developers are shifting their focus from Tier-three and four cities and even some of the Tier-two cities where there is high de-stocking pressure, to Tier one cities where demand is more stable. Yet, with such high land prices, the risk of investing in the Tier-one-city property market is still extremely high. Will the market be able to absorb the wave of supply of luxury properties when the cost for land is so high?

On 25th November, a land lot priced at RMB 4 billion, situating in the Xin Jiang Wan Cheng area of Shanghai, was sold to Cinda at the price of RMB 7.299 billion. Including the costs of building indemnificatory housing units, the price for each sqm of saleable floor area amounts to over RMB 60,000, while private housing in the immediate area is priced at around RMB 50,000 per sqm. It is expected that, just to cover all costs, Cinda may have to sell future units at RMB 90,000 per sqm, meaning that home prices would have to rise over 80% to catch up.

Those who were able to afford to buy land at such high prices are often state-owned. Although the costs of capital have been falling in general, state-owned corporates, with their high credit ratings, have a relatively low cost for capital. Mid- to small-sized developers are therefore out of the picture when bidding for land in the Tier-one cities.

It is still uncertain whether costs can be recovered by the sale of luxury properties built on lands with record-breaking prices despite low capital costs. According to the National Bureau of Statistics’ October statistics, all Tier-one cities, except for Shanghai where growth in price went up 0.2 percentage points, had shown a drop in growth in housing prices. Among which, Beijing’s price increase had fallen 0.3 percentage point. The fall in price growth shows that the buying power of the cities are slowly falling and if prices fail to rise to the expected level, developers may have to postpone the launch of their projects and face even higher costs. As a matter of fact, the inventory turnover period for luxury property in the second half of 2015 have been prolonging. Take Beijing as an example, around 4,000 units of luxury housings with prices over RMB 10,000 per sqm will be completed in the next one or two years. Using this year’s inventory turnover rate, experts predict that it would take more than 20 years for the market to absorb all these supply.