Huachuang Securities: How to grasp the ideas of this round of real estate adjustment and transformation?

The Zhitong Finance App learned that Huachuang Securities released a research report saying that in 2024, marked by the September Politburo meeting, the focus of real estate is “to stop the decline and stabilize the real estate market, strictly control the increase, optimize inventory, and improve the quality of commercial housing construction.” Due to changes in population, real estate supply and demand patterns, and maintenance of the results of early structural adjustments, how should we understand the differences and differences in the basic characteristics of real estate regulation over the coming period compared to the previous two? If the previous two rounds of shifting were “quantitative pricing,” then the more prominent feature this time is “volume control and price stability,” and the capital market needs to deeply understand the impact of this new characteristic on investment.

The main views of Huachuang Securities are as follows:

1. How to grasp the ideas of this round of real estate adjustment and transformation?

If PPI is negative year over year, it is called a macro-low price environment. Around 1998, around 2015, and around 2024 are the three periods where PPI was negative for a long time (all over 2 years). All three stages have ushered in major changes in real estate regulation.

1) Around 1998, with the “Notice of the State Council on Further Deepening the Reform of the Urban Housing System and Accelerating Housing Construction”, the physical distribution of housing began to be stopped, “speeding up housing construction and making the housing industry a new economic growth point.”

2) In November 2015, marked by the 11th meeting of the Central Financial and Economic Leadership Group, it began to be clarified that the focus of real estate is “to resolve real estate inventories and promote the sustainable development of the real estate industry”.

3) In 2024, marked by the September Politburo meeting, the focus of real estate is “to stop the decline and stabilize the real estate market, strictly control the increase, optimize the stock, and improve the quality of commercial housing construction.” (According to a Xinhua News Agency report, He Lifeng's research in Taiyuan, Shanxi, and Xi'an, Shaanxi, from October 10 to 12 pointed out, “The real estate market is a current macroeconomic weather vane. Doing a good job in real estate is essential to promote the continuous recovery of the economy and safeguard the vital interests of the masses. We must effectively raise our political standing and make every effort to secure housing deliveries and stabilize the housing market.”)

Due to changes in population, real estate supply and demand patterns, and maintenance of the results of early structural adjustments, how should we understand the differences and differences in the basic characteristics of real estate regulation over the coming period compared to the previous two? If the previous two rounds of shifting were “quantitative pricing,” then the more prominent feature this time is “volume control and price stability,” and the capital market needs to deeply understand the impact of this new characteristic on investment.

Therefore, the policy title of the October 17 press conference was “optimizing stocks.” Optimization involves three aspects, namely digestion of existing commercial housing, housing delivery guarantee, and revitalization of vacant land.

II. Optimizing Inventory 1: Digesting Stock of Commercial Housing

(1) Introduction of incremental policies: renovation of old houses, monetary resettlement

According to the original statement at the press conference, “One million new urban village renovation units and dilapidated housing renovation will be implemented through monetized resettlement and other methods.” Answer four small questions.

1) How much inventory and sales is affected? Assuming that the renovation of 1 million units brings in demand for the purchase of 1 million new housing units (which may actually be partially converted to second-hand housing demand), based on 90 square meters per unit, it can bring in sales demand of 90 million square meters. Affected by this, the inventory sales ratio is expected to fall from 5.6 months at the end of August to 3.9 months, slightly higher than the average since 2012 (3.07 months). In terms of sales, in January-August, the cumulative residential sales area was -20.4% year-on-year. Based on this growth rate, the residential sales area may be 750 million square meters in 2024. Assuming that the impact of the renovation of 1 million units is all reflected in 2025, the residential sales area growth rate is expected to rise 11.9% due to this impact, and the full-caliber commercial housing sales area growth rate is expected to rise 9.8%.

2) Will there be more in the future? The presentation at the press conference was open and emphasized two points. One was “focusing on supporting cities above prefectural level, there are 297 prefecture-level cities in the country”, and the other is “Statistics have been done on key cities. 35 major cities have demand for 1.7 million units, and there are 297 prefecture-level cities across the country. As you can imagine, this demand is real, and there will be even greater demand.”

3) How are funds secured? According to the press conference, “Developmental and policy financial institutions can grant special loans. Local authorities are allowed to issue special government bonds. Commercial banks can also issue commercial loans based on project evaluations.”

4) What difficulties might be encountered in implementation? Financial balance issues. According to the statement at the press conference, “What kind of projects can receive policy attention and support? ... The other is that the large capital balance plan can achieve the overall balance of the project and avoid the risk of additional local debt.”

(2) Implementation of inventory policies: four abolished, four reduced

In the future, the main focus will be on adjustments to tax policies relating to ordinary housing and non-ordinary housing.

3. Optimizing Inventory 2: Ensuring Housing Completion and Delivery

(1) Introduction of incremental policies: Significantly increasing the credit scale for “white list” projects

According to the press conference, “By the end of the year, the credit scale of the 'white list' project will be increased to 4 trillion dollars.” 3 details.

1) Credit investment in whitelist projects accelerated: According to disclosed data, an increase of 520 billion dollars was added in the first quarter. An additional 415 billion dollars was added from April 1 to May 16. From May 17 to September 24, 495 billion dollars were added. From September 25 to October 16, 800 billion dollars were added. From October 17 to December 31, the target will increase by 1.77 trillion yuan.

2) How to observe whitelist credit investment data? You can observe development loan balances and housing enterprise financing data.

3) What is the impact on investment in real estate development? Currently, real estate investment is hampered by two factors. First, the number of construction projects in stock is declining. In January-August, the cumulative growth rate of construction area was -12.0%. Second, the developer's funding sources are insufficient. If the investment scale reaches 4 trillion dollars by the end of the year, there will be almost no restrictions on the capital side. Real estate investment is expected to be mainly affected by construction projects.

(2) Implementation of inventory policies: playing a “combo punch” of various financing instruments for real estate

1) Support from the central bank: “16 financial rules”, operating property loans, mergers and acquisitions loans, housing rental loans, etc.

2) Financial support is mainly special debt, which can be used to collect stocks of commercial housing. However, the press conference continued to emphasize “according to market-based operations, on the basis of ensuring the balance of project financing benefits, local authorities can arrange for special bonds to purchase existing commercial housing for use as affordable housing.”

3) Possible subsequent financing support, or from the Securities Regulatory Commission. Referring to the experience of 2015 (the scale of issuance of corporate bonds by housing enterprises has increased dramatically), it may be possible to further relax or innovate tools at the level of housing companies' listing and financing.

4. Optimizing Stock 3: Revitalizing Existing Vacant Land

(1) Introduction of incremental policies: Studying the establishment of special loans to acquire existing land

The original text of the press conference said, “We will also work with relevant departments to study the establishment of special loans for the acquisition of existing land. As a supplement to special bonds, the People's Bank of China will provide special reloan support.”

(2) Implementation of inventory policies: Special debt and other instruments are supported for land reserves

Includes three:

1) Special debt is used for land reserves. According to the original text of the press conference, “In terms of specific operations, with regard to the use of special bonds for land reserves, the main purpose is to support all regions to reasonably determine the purchase price with owners and enterprises that have stock of land, and properly handle debt-debt relationships involving the recycling of existing land.”

2) Encourage enterprise development and promote market circulation.

3) Loan support. According to the original press conference, “Our study allows policy banks and commercial banks to issue a certain percentage of loans for the acquisition of these vacant land stocks. The main purpose is to promote more efficient use of vacant land while improving and releasing cash flow in the real estate industry.”

Risk warning:

Housing prices have fallen, and there are blockages in the policy implementation process.