By Hu Yuanyuan (China Daily)
Updated: 2007-10-22 10:58

Autumn is usually the best time of year in Beijing, but for the city's property developers, the season may already feel like a chilly winter.

After raising the down payment and mortgage rates for second home buyers on September 27, the government has now further tightened the screws on property developers by requiring them to pay land-use fees in a lump sum rather than in installments.

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A notice known as Circular 39 released by the Ministry of Land and Resource on October 9 will squeeze the cash flow of developers and deter those now known as "land kings", experts say.

"The move is also an effective measure to prevent potential financial risks brought by the sizzling property market," says Peter Pan, CEO of Care Property Holdings.

Before the circular was issued, property developers typically divided land into several blocks. After paying off land-use fees for one block, they then acquired the development certificate for the entire site, Pan explains.

Now they are required to pay land-use fees upfront for all property to be developed.

"Developers before could get loans from banks once they acquired the first certificate. Sales from the first block were then used to finance the development of the remainder, which meant they could embark on several projects with limited capital," says Pan.

Insiders say it was a common practice for developers to postpone paying the government for rights acquired at high prices. Some even privately negotiated about the payment process.

"In that case, most of the risks are transferred to financial institutions," says Pan. "Once one of the links goes wrong, banks may foot the bill."

Sunco is an example. The developer acquired large reserves of land around the country, but most of it was in arrears on land-use payments to the government. As a result of restraining measures on real estate development beginning in 2005, the market dropped temporarily. Sunco's cash flow finally evaporated and the company was taken over by the Hong Kong infrastructure company Road King.

But the new requirements may further fuel already high property prices rather than bring them down, some industry experts say.

With the new policy, only developers with a large capital pool can acquire land rights, further strengthening their monopoly status, which gives them a bigger say in pricing, according to Yi Xiaodi, president of Sunshine 100 Real Estate Group.

"In such a situation, raising money from the capital markets turns out to be a must for developers," Yi adds.

In September and October, three mainland property developers, Sino-Ocean Land, SOHO China and China Aoyuan Property Group, made their debut on the Hong Kong stock exchange.

Sunshine 100 is also mulling a listing plan, Yi says. "Without strong capital backup, you can hardly keep pace in the fierce bidding campaigns for land."

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