Despite the ongoing challenges in China’s property market, construction activity continues in areas like northwest Beijing, where private developer Longfor remains one of the few non-state players still active. This development reflects the broader transformation of China’s real estate sector, where state-owned enterprises (SOEs) are increasingly dominating. For over three decades, private developers were key drivers of economic growth, but the landscape has shifted significantly. A salesperson near the Longfor construction site noted that the majority of land acquisitions are now handled by state-owned firms, as they have the financial capacity to continue building where private companies have faltered.
Data from recent years shows that state-backed developers have steadily outpaced private competitors in land acquisitions, particularly since the onset of the real estate crisis triggered by the 2021 default of China Evergrande. Since then, private developers have struggled with liquidity issues, while SOEs have stepped in to stabilize the market. Analysts estimate that more than 80% of land sales in 2023 were driven by state entities, highlighting a structural change in the market dynamic. This shift has been particularly evident after the economic impact of the COVID-19 pandemic, with the government tightening its grip on the sector to prevent broader financial instability.
Land auctions, once a significant source of revenue for local governments, have seen their proceeds nearly halved since 2021. This decline reflects the broader downturn in China’s property market, with construction slowing down and overall floor space development shrinking for the first time since 1997. As private developers struggle under mounting debt and tighter regulations, state-owned developers have become the main players in land purchases and new housing construction. This has been particularly evident in Beijing, where private developers were more active as recently as 2020, but their presence has since sharply declined.
In wealthier cities such as Beijing, Shanghai, Shenzhen, and Guangzhou, state-owned enterprises have seized the opportunity to expand their dominance. These cities remain somewhat resilient, with housing prices still elevated compared to international standards, providing an incentive for state-backed firms to continue developing high-end projects. For instance, in Beijing’s Fragrant Hills area, luxury developments backed by state-owned enterprises like Beijing Urban Construction Group and Yuexiu reflect this trend. The state-driven developments cater to high-income buyers, with some apartments selling at prices comparable to those in global hotspots like Manhattan.
The government’s interventions are aimed at restoring confidence in the housing market while mitigating the damage caused by years of debt-fueled expansion. Policies such as mortgage rate cuts and land repurchases for social housing are designed to stabilize the sector, but they also highlight the extent of the damage caused by the property bubble. Analysts at Capital Economics suggest that while state-led housing markets may be less prone to risky debt practices, they could be more susceptible to inefficiencies and misallocated investments.
Private developers, once responsible for two-thirds of new home sales, have seen their market share decline to around 30% by the end of 2024, as many struggle with financial pressures and defaults. Analysts point out that the state is stepping in to fill the void left by these companies, providing a level of financial stability that the private sector can no longer guarantee. Homebuyers, wary of incomplete projects from failing private firms, increasingly prefer to purchase properties from state-owned enterprises, which are seen as more reliable.
While Beijing and other wealthy cities continue to see development, smaller cities are faring much worse. Local government financing vehicles (LGFVs) have become significant players in land acquisitions in these areas, not necessarily to spur new housing projects but to stabilize the struggling land market. In many poorer regions, land sales have declined sharply, further squeezing local government revenues. Analysts warn that the oversupply of housing in these areas poses a long-term challenge that could hinder future construction activity.
The government’s broader strategy appears to be shifting toward greater control of the property market, reflecting a return to a more planned economic model. Urbanization has slowed significantly, and the government seems less reliant on private developers to fuel growth. This transformation is particularly evident as state-owned enterprises take on a larger role in completing stalled projects from struggling private developers. In cases like Shenzhen-based Vanke, new management from state-owned firms has been brought in to help stabilize operations and prevent further defaults.
Despite measures to stimulate demand, such as mortgage cuts and government-backed land purchases, consumer confidence remains weak. In Beijing, even state-backed developments are experiencing slower sales compared to previous years. Analysts suggest that while the worst of the crisis may be over in some areas, the broader property market is still weighed down by excess supply and falling demand. Construction, a major contributor to China’s GDP, is expected to decline further as fewer new projects replace completed ones.
The shift toward a state-dominated property sector marks a significant change in China’s economic strategy, signaling a retreat from the liberalization policies that fueled rapid urbanization and growth in the past. For private developers like Longfor, opportunities are shrinking as the government increasingly relies on state-backed entities to drive housing development. This trend reflects not only economic concerns but also a broader shift toward centralized control over one of the most critical sectors of China’s economy.
Source: Financial Times
