Goldman Sachs estimates that China's new property rules will lead to a substantial decrease in land sales revenue, projecting a 30% hit from the approximately $800 billion annual average seen between 2020 and 2022. This comes as the Chinese government implements new regulations aimed at reducing developers' reliance on presales to fund projects, pushing towards completed-home sales instead. The new policies mandate that banks withhold buyer mortgages until a property is fully completed and that developers cannot begin preselling until a building's main structure is topped out. This shift creates a significant funding gap for developers, as presales can begin within 6-12 months but project completion typically takes 2-3 years.
The stricter financing environment is expected to curb leveraged expansion and force developers to tie up more capital per project. For instance, a hypothetical project that previously required about $700 million in peak funding under the old presales system could now need over $1.2 billion, potentially reducing the internal rate of return by 3-5 percentage points. This will make land purchases more selective and increase the stakes for developers, as wrong decisions will be harder to reverse. The impact was already visible at a recent Beijing land auction, where one parcel saw intense bidding while another was suspended due to a lack of bidders.
The new regulations will particularly strain developers' cash flow, as presales and mortgages historically accounted for about 40% of development capital. With this funding source restricted, developers will likely turn to loan and bond financing. However, this shift disproportionately favors state-owned developers, who can secure loans at 2-3% interest rates, compared to 5-6% for private developers. Analysts anticipate a decline in land purchases, property investment, and new project starts in the near future, further accelerating consolidation within the property sector, as only top-tier developers with strong financing capabilities are expected to thrive.
