MIPIM 2012: Panel tips new source for rural land sales in China

To date, most land sales in China have come from local governments. However, at the annual MIPIM conference in Cannes, delegates heard that a new and potentially sizeable land source is poised to materialise.

Foreign investors with a strategy for China should pay attention to a new and potentially sizeable land supply source, delegates at this year’s MIPIM conference heard today. That source is China’s farmers.

Yue Tang, partner at Beijing–based law firm Jun He Law Offices, capped off an hour-long panel on China investment by tipping rural land as the next big source of real estate development land. She told an audience of property professionals, including fund managers and institutional investors: “Pay attention to big changes in the land supply market. It’s currently monopolised by the Chinese government, but there have been some policy changes at the start of this year.”

In a move designed to enable China’s farmers to benefit from the country’s exponentially growing urbanisation rate, Shangahi and Beijing have been running pilot schemes since January that allow farmers to lease their land for development and to collect rent.  “This is the first time that rural land could come to the market.”

After the panel, Tang told PERE that China’s land supply market would get more players as a result, which is an important trend for foreign investors to follow. While the pilot schemes are at an early stage – there are no public projections in terms of how much land could become available and, crucially, foreign investors have not yet been invited to buy this land – she predicted that investors could expect to be able to buy the land within the next four to five years. “It’s currently only for farmers to lease, but in the near future I think they will be able to sell to foreign investors,” she said.

While clearly a nascent initiative, the news should be welcomed by private equity real estate firms, which already are taking advantage of discounted land auctions across China as local authorities face pressure to generate the same high level of capital receipts as they did just a couple of years ago.

Indeed, according to Frank Khoo, global head for Asia at AXA Real Estate Investment Managers, another member of today’s panel, land prices in certain local jurisdictions have dropped by 50 percent in one year and a further 15 percent decline is possible. “Last year, about 900 land auctions were aborted because [local governments] couldn’t reach their reserve prices,” he noted to illustrate the point.

Choy-Soon Chua, managing director at German fund manager SEB Investment, added that Chinese developers, the main buyers of land from the country’s local authorities, generally are “cash-strapped,” which meant that private equity was finding a way to partner with them as they buy the discounted land. “You can provide mezzanine loans to this group with interest rates between 20 percent and 50 percent,” he said. “However, if the interest rate is 50 percent, you probably don’t want to as they are going bust,” he joked.