China Land Fans Bubble Fears (go back »)

Land prices are on the rise again in China, as easy credit helps reverse last year's correction but also raises concerns that another bubble could be in the making.

When a property boom in China came crashing to a halt last year,chi hair straighteners, purchases of land by developers for new projects began drying up. But this year, the area of land purchased has risen every month from the previous one. And in recent weeks, as a recovery in housing sales continues to strengthen, property developers are again paying top dollar for empty lots in China's biggest cities.

Last month,hair straighteners, Gemdale Corp., a Chinese residential developer based in the southern city of Shenzhen, surprised the market by paying 3.05 billion yuan ($446.5 million) for a 210,ghd hair straighteners,000-square-meter plot in Shanghai's Qingpu suburb, more than tripling the opening bid.

A few weeks earlier,chi hair straighteners, Franshion Property (China) Ltd. paid 4.06 billion yuan at a public auction for a 156,000-square-meter site in Beijing's main business district. The price of 14,500 yuan per square meter, when calculated using the total area that can be developed, was a record on that basis.

Analysts attribute the turnaround in land prices to the flood of credit that has entered China's economy in recent months.

'Land sales have been going crazy in big cities,ghd hair straighteners, particularly in Beijing, and regulators suspect a lot of that money came from banks,' said Karen Tang, a partner for law firm White & Case LLP in Shanghai who specializes in banking and real estate.

'The bubble is getting bigger and bigger,' said Alan Chiang, head of mainland Chinese residential property in Shenzhen for the property broker DTZ. He said the trend is encouraged by local governments, who earn revenue from land sales and hope an upturn will refill their coffers.

Concerns about real estate focus on a flood of cash sloshing around China that has driven up stock prices as well. The Shanghai stock market's main index is up 91% this year,ghd hair straighteners, and two initial public offerings in recent days soared in their debuts.

The speed with which developers are paying peak-level prices for land has fanned concerns among policy makers and analysts about a bubble. Bei Fu, Standard & Poor's Ratings Services' main credit analyst for the Chinese property sector, warns that many developers 'continue to have a potentially risky appetite for expansion and land acquisitions, largely supported by an aggressive equity culture.' Ms. Fu warns that should the trend continue, a 'policy backlash,' combined with a broader downturn, could cripple developers' balance sheets.

Still, developers' hunger for more land reflects bullishness on the long-term prospects of China's cities. 'Land prices could be even higher in 2010,' said David Ng,ghd hair straighteners, a Hong Kong property analyst for Royal Bank of Scotland Group. 'It's a game of planning ahead.'

Throughout the summer, land purchases by developers and state-owned enterprises have continued at a rapid clip. Ten of China's most prominent developers spent about 10.7 billion yuan on land purchases in June, a 74% jump from the month before, according to data from property broker Centaline Group. Others, including Hong Kong-listed CC Land Holdings Ltd., are raising equity to fund more land purchases.

After falling 1.3% in the first quarter of 2009 from the previous three months, the nationwide land-transaction price index rebounded 2.3% in the second quarter, according to the latest official figures.

The rush to buy land echoes what happened in 2007, when a number of developers focused on expanding land banks to lock up future revenue. A number of big property developers overextended themselves and approached the brink of collapse.

Some of those same developers are now back in the market.

'It's remarkable; in a lot of other economies these companies would have gone to the wall and crashed,' said Ashley Howlett,chi hair straighteners, a property lawyer with Jones Day in Beijing. He said 'prices are about the same or even higher than they were in 2007.'

Regulators are in a delicate position. They are loath to stifle a recovery in a sector that can spur growth in other industries such as construction and building products, and which has underpinned a rise in the country's wealth. On the other hand, the last run-up in property prices pushed many home buyers out of the market and stretched developers' balance sheets to dangerous levels.

But while home prices have begun to rise, the upside could be constrained in the short term by a glut of inventory. If demand from home buyers doesn't rise quickly enough,chi hair straighteners, developers will see margins shrink from the 30% or 40% they enjoyed before markets collapsed last year.

China Vanke Co. Ltd., the country's largest developer by market capitalization, said Monday that high land costs in previous years squeezed its gross margins to 26% in the first half of 2009,hair straighteners, down from 30.6% in 2007.

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