In this report, we have done a hypothetical analysis on what the property sector would look like if all new supply of development sites is required to be sold upon completion, as an extension to our previous report on Zhongshan&rsquo s implementation of sell-upon-completion policy for new residential sites. Our conclusions regarding potential near-term impacts are as follows: (1) sell-upon-completion is unlikely to be applicable to existing land banks but only to new sites supplied (2) the prices of new land offered have to be lower than those with presales allowed in order to attract developers&rsquo interests as IRR will remain stable only if land cost is 20% lower than those allowed for presales in a typical project. So far, 3 of the 6 land parcels launched for auction were sold to small developers with the remainder bought-in after receiving no bids during the tender.

Based on press reports, it is the Ministry of Land and Resources at Central Government level that is trying to push through the sell-upon-completion requirement. It will take at least five years for the initiative to take full impact on developers as (1) it would still take another 3-4 years to digest the existing land that are supplied but yet to be built (2) the initiative is only tested in Zhongshan at the moment and will take time for other cities to follow suit (3) developers will prioritise projects that are allowed for presales from the M& A market over new land auctions.

Although at the project level, IRR can be compensated by lower land cost, assuming an unchanged development loan quota, the total number of projects that a developer can run during a certain time period will be significantly reduced under the sell-upon-completion scenario, as capital will be taken up by the same project over a longer period. Our analysis shows that if sales time horizon is lengthened from 6-18 months to 24 months, the same amount of development loan can only support 2/3 or 1/2 of the saleable resources, which translates to a potential 1/3 or 1/2 decline in revenue. Developers currently pursuing a high asset turnover business model will be more impacted.

The adoption of a high asset turnover business model has been commended by the sector and investors over recent years on its ability to generate stronger IRR and achieve higher operational leverage to attain quicker scale expansion and enhance absolute returns. Yet, as shown in our analysis, a sell-upon-completion environment will limit developers&rsquo ability to maintain such a business model. We therefore believe this will redirect developers&rsquo future investment focus back to profitability when making land acquisition decisions. Furthermore, given possibly less project participation, developers&rsquo earnings may become more volatile in accordance with their booking schedules.