(Yicai) Sept. 27 -- Shenzhen has stopped setting a 15 percent limit on land auction premiums, which the government of this first-tier Chinese city introduced four years ago, in a move that is expected to boost land prices and lift market expectations for higher property prices.

The city auctioned a residential plot of land in Bao'an district yesterday. Poly Developments & Holdings Group beat out eight other developers with a winning bid of CNY2.82 billion (USD402 million), an almost 36 percent premium on the CNY2.08 billion starting price.

Shenzhen capped premiums in 2020 to prevent a real estate market bubble and keep housing affordable. The restoration of the highest bidder wins principle signifies a shift to a more market-driven approach, with the local government likely trying to raise expectations for property prices in the city, which should spur fresh interest from buyers.

"Shenzhen's decision to scrap price caps on land auctions likely aims to encourage competition, boost land transfer prices, and ultimately raise property price expectations in the market," an source at one of the builders that took part in yesterday’s auction told Yicai.

A neighboring plot of land sold for CNY42,000 (USD6,000) per square meter in August last year, while the parcel in the latest auction cost CNY52,000 per sqm, the person noted. “For this location, CNY52,000 is quite expensive, but the winner should still have some profit margin and will likely suffer no losses.”

Shenzhen regulators have also removed the price cap on the sale of commercial housing developed on auctioned plots, allowing their developers to raise unit sales prices and boost their bottom line, the insider pointed out.

However, the neighboring project whose land was bought for CNY42,000 per sqm is selling homes with the price ceiling still in place, as the policy was still active when the land changed hands last year, the source noted. Poly Developments will likely have to reference that pricing when setting its own, with unrestricted pricing unrealistic, the insider added.

Shenzhen's supply of residential land has continued to shrink, with the city bagging only CNY8 billion from related sales so far this year, compared with CNY31.2 billion for the whole of last year.

Growing housing inventory is the main reason why the local government has hesitated to put more land on the market. The city's new housing stock hit 5.1 million sqm last month, according to Centaline Property Research Center. Based on average sales over the past year, it would take around 21.8 months to clear that, up about 0.3 months from July.

Editors: Tang Shihua, Martin Kadiev