(Yicai) Jan. 17 -- After China Overseas Land and Investment secured Shenzhen’s first residential land auction of this year at a 70 percent premium, experts expressed concerns about the project’s profitability.

The project may turn unprofitable in the later stage because China Overseas purchased it at too high of a premium, according to investment and development employees at several real estate companies. “Our premium rate ceiling is 35 percent, so buying lands at 70 percent premiums will likely result in losses,” one of them said.

Shenzhen’s first residential land auction of this year was a 21,000-square-meter plot in a relatively convenient area of Longgang district, with a construction area of 104,000 sqm and a starting price of CNY1.8 billion (USD245.6 million).

After 246 rounds of budding from eight property developers, including Greentown Management Holding, China Overseas secured the land yesterday for nearly CNY3.1 billion, or CNY29,611 (USD4,040) per sqm. In comparison, pre-owned homes in the area were sold at between CNY45,000 and CNY55,000 per sqm last month.

The average construction costs in Shenzhen are around CNY6,000 to CNY7,000 (USD820 to USD955) per sqm, an employee at a real estate company familiar with the land plot acquired yesterday by China Overseas told Yicai. However, due to the high probability of the land being on top of karst or caves, the costs may reach CNY8,500 per sqm, making it harder for the project to achieve profitability, the person added.

The supply of residential land in Shenzhen plunged last year, with only five residential land auctions taking place in the 12 months ended Dec. 31, which were all won by leading state-owned real estate developers, said Sun Hongmei, a senior analyst at the local branch of the China Index Academy.

The overall willingness of private enterprises to acquire land remains weak, Sun noted, adding that the intense bidding for the first residential land parcel of this year is expected to further drive the market’s recovery expectations.

Editor: Futura Costaglione