Heavy Is the Crown for China's Land Kings

NOVEMBER 25, 2011   THE WALL STREET JOURNAL

By TOM ORLIK

In the boom years, it seemed the only constraint on growth for China's property developers was how much land they could acquire. Rapacious hoarding earned some the title of land kings. With the correction in China's property market now pushing land prices down, the crown is starting to feel heavy.

Nicole Wong, property analyst at CLSA, says developers China Overseas Land & Investment Ltd. and Longfor Group have already cut the prices of homes by 20% to 25% at projects in Shanghai. A fall in the real-estate market reduces the incentive for developers to invest in new projects, denting demand for land.

In October and November, land auctions at several major cities failed, with no bidders at some and only low prices offered at others. Prices nationwide for residential land were down 8% year-to-year in October while transaction volumes were down 37%, according to data from property agency Soufun.

That is bad news for developers, many of whom are sitting on large inventories of land purchased near the peak in September 2009. Land prices are volatile, but average prices for October are down 40% since then. Anyone who bought at the top could be looking at significant write-downs.

Something similar happened in 2008, when CC Land wrote down the value of its land bank by 12%, and China Vanke by 3.9%, according to calculations by Jinsong Du, a property analyst at Credit Suisse. It was only the boost from the government's stimulus policy—kick-starting the real-estate engine—that saved developers from recognizing bigger losses.

Those sitting on large land reserves are in the toughest spot. Zhejiang-based Greentown China Holdings, for instance, says only a tiny fraction of its stock of land gives cause for concern. But a land inventory nine times as big as sales for 2010, according to Credit Suisse data, still looks vulnerable if prices continue to fall. Reserves for China Overseas Land are smaller, though the company made substantial purchases in the second half of 2009 and first half of 2010 when prices were high.

Policy remains a wild card. If investment falls sharply and growth slows, the government could relax controls on the sector, buoying sales, encouraging developers to break ground on new projects, and pushing land prices back up. Barring such a shift, falling sales and land values mean some of China's former land kings could be in a royal mess.

Write to Tom Orlik at Thomas.orlik@wsj.com