China’s real estate consulting and information service company Kerui recently revealed that urban construction investment companies (city investment) have started construction and development on very few of the lands they have acquired, with nearly 330 million square meters of land remaining undeveloped, and optimistically, only 15% is estimated to start development in the future.
According to a report from First Financial on July 27th, Kerui’s research report stated: “Over the past three years, influenced by various factors, city investment has acquired nearly half of the land in core cities, but very few have started construction and development, with few opportunities to find agents for development.” Kerui stated that the undeveloped land acquired by city investment companies amounts to nearly 330 million square meters, and optimistically, only 15% is estimated to start development in the future. The reason for this is that their operational expertise falls short of large-scale state-owned enterprises and central enterprises, as well as highly turnover-oriented private enterprises. Kerui believes that while city investment companies provide a substantial amount of land support in the market, their low “development capability” is a major weakness.
Due to the ongoing weakness in China’s real estate industry, the enthusiasm of private enterprises for land acquisition has significantly declined. Data shows that before 2021, private enterprises accounted for over 60% of the top 100 new land acquisitions by investment amount (total caliber) exceeding 2 trillion yuan. However, in 2022 and 2023, private enterprises experienced a sharp decline in land acquisition, with the proportion of investment amount dropping by nearly 40 percentage points compared to the previous years, and the land acquisition amount dropping by nearly 90% from the peak in 2020.
Kerui believes that the reasons for the shrinking investment of private enterprises are twofold: the weak sales in the real estate market leading to difficulties in receiving sales returns, and the continuous pursuit of leveraging under the “three red lines” causing operational and cash flow crises to intensify.
As the enthusiasm of private enterprises for land acquisition wanes, state-owned enterprises have significantly increased their land acquisitions. Among the top 100 new land acquisitions in the past three years, the investment amount of central and state-owned enterprises accounted for over 60% in 2022 and 2023, which increased by nearly 28 percentage points compared to 2020.
At the same time, city investment companies in various regions have also become one of the main forces in the land market. Kerui stated that from 2021 to May 2024, 46% of residential land transactions in 30 key first- and second-tier cities were won by city investment companies (including cooperation in land acquisition), with the land acquisition amount accounting for 33%. From the perspective of the number of land acquisitions or the amount invested, city investment companies have the highest proportion.
However, the development pace of city investment platforms is extremely slow. According to Kerui’s statistics, from 2021 to the present day, only 20% of the land acquired by city investment has been developed, and when including partially developed lands, the overall development rate is 22%. Even in the earlier years of 2021 and 2022, the land development rates for city investment were only 30% and 27% respectively, while during the same period, central enterprises had an average development rate of over 75%, local state-owned enterprises at 85%, and private enterprises at nearly 50%.
Yan Yuejin, research director of E-House Research Institute, analyzed to First Financial, “In the past two years, the land auction market has always been supported by city investment, to a certain extent, it is also a strategy of local governments to stabilize the land market, so there may be a situation where only the initial land transactions are considered while the subsequent development lags behind. Many city investment companies have been active in the initial transactions, but now the development has stagnated, which is actually a potential risk.”
With the decline in local government fiscal revenues, since 2024, the momentum of land acquisition by city investment has slowed down, leading to a decrease in the “capacity to support” by city investment. Huatai Securities stated that from January to May 2024, the national land transfer revenue with standardized caliber was 751.3 billion yuan, a 37% decrease year-on-year, with city investment land acquisition amounting to 178.4 billion yuan, a 16% decrease year-on-year. The slowdown in land acquisition may primarily be due to increased cash flow pressure on the platforms, contributing to the decline in their ability to provide support.
Huatai Securities believes that most of the principal of city investment debts are rolled over through “recruiting new debts to repay old debts,” but the interest on the debts must be repaid. In 2023, the total interest expenditure of city investments nationwide was 3.43 trillion yuan, while the total government fund revenue in 2023 was 6.62 trillion yuan. Since the city investment support accounts for part of the government fund revenue, and expenses such as land requisition, demolition, and compensation still need to be deducted, it is expected that there will be a repayment gap.
City investment companies, short for urban construction investment companies, originated in 1991. They serve as investment and financing platforms for major cities in China, shouldering corresponding government functions, and are special market entities. Most city investment companies are not profitable and belong to either public institutions or wholly state-owned companies, achieving profitability through government subsidies.