Government, commercial housing, destocking
On April 20, the Political Bureau of the Central Committee of the Communist Party of China proposed to "study the policy measures to digest the stock of real estate and optimize the incremental housing as a whole". This article discusses the potential acquisition scale and possible scenarios for the acquisition, storage, and destocking of commercial housing.
Assuming that the 18-month residential de-conversion cycle mentioned in the Ministry of Natural Resources is used as the desired inventory level, the government's potential acquisition scale is the netting value between the saleable area of commercial residential buildings in each city and the desired inventory level at the end of April. Among the 90 cities for which data are available, the central and median ratio of potential acquisitions to saleable area of commercial residential buildings is 29.7%, and the median is 27.8%. Taken together, the potential commercial residential acquisition area in the above 90 cities is about 153 million square meters. According to the proportion of commercial residential sales in 90 cities in the country, the potential residential acquisition area in the country is about 566 million square meters.
As of the end of March 2024, the rental yield of residential buildings in mainland China was about 2.18%, while the yield to maturity of 10-year local government bonds in mainland China was about 2.53% during the same period. Assuming that the rent of public rental housing is 85% of the market rent, in order to ensure that the income of the main body of residential housing can cover the financing cost, the purchase price of commercial housing may not exceed 73.2% of the market price, and a total of 4.55 trillion yuan is required. The discounted acquisition process may involve debt restructuring or concessions by related entities.
If the capital is calculated at 25-30% of the total amount of funds, the actual capital capital requirement is about 1.14 to 1.36 trillion yuan, or it can be raised through special bonds and other means, and leveraged funds can come from commercial institutions or structural monetary policy instruments depending on the difference in the rate of return of the project.
Resolving the stock inventory through housing storage can help improve market supply and demand, but the inventory level and the price level are not simply inverse, and the stabilization and recovery of housing prices also needs to further stimulate terminal demand and improve market expectations.
On April 20, the Political Bureau of the Central Committee of the Communist Party of China proposed to "study the policy measures to digest the stock of real estate and optimize the incremental housing", and some cities have recently tried to explore the acquisition of commercial housing for public rental housing. This paper estimates the potential acquisition scale required for the government to acquire commercial housing on a national scale, and discusses possible acquisition options. 1. Estimation of the scale of potential acquisitions At the national level, according to the data of the National Bureau of Statistics, as of the end of March 2024, the area of commercial residential buildings for sale in mainland China was about 390 million square meters, divided by the rolling average of the sales area of commercial residential buildings in the past 12 months, showing that the inventory clearance cycle of existing houses has increased rapidly, which has exceeded the historical high, indicating that the pressure on real estate inventory has risen significantly in recent years. In order to stabilize the property market expectations and speed up the market clearance, the government may need to purchase commercial housing.
On April 29, the General Office of the Ministry of Natural Resources issued the "Notice on Doing a Good Job in the Supply of Residential Land in 2024", requiring cities with a de-conversion period of more than 36 months to suspend the transfer of new commercial residential land, and cities with a de-conversion period of 18 months (exclusive) to 36 months should transfer residential land in accordance with the principle of "how much to revitalize and how much to supply". It can be seen that 18 months and 36 months are important nodes for the health of residential inventory. At the prefectural and municipal levels, the China Index database counts the saleable area of urban commercial housing, that is, the area of commercial housing that has obtained the "Commercial Housing Pre-sale Permit" and can be pre-sold and sold[1]. As of April 2024, among the 83 cities with data in the country, a total of 68 cities have a clearance cycle of more than 18 months, of which 26 cities have a clearance cycle of more than 36 months, and only 15 cities have a commodity inventory within 18 months. Among them, the average clearance period was 33.1 months, and the median was 28.2 months.
Assuming that the inventory of commercial housing is reduced to the desired level through government acquisition, that is, the period of commercial housing decommissioning is reduced to 18 months, the approximate scale of government acquisition can be estimated. If the average area of commercial residential sales in each city in the past 12 months (May 2023 to April 2024) is multiplied by 18 months to obtain a relatively healthy residential inventory level in the city, the potential acquisition scale of the government is the saleable area of commercial residential properties at the end of April minus the desirable level calculated above. Among the 90 cities for which data are available, the central part of the ratio of potential acquisitions to the saleable area of commercial residential buildings at the end of April was 29.7%, and the median was 27.8%. In the 90 cities for which the aggregate data is available, the potential commercial residential acquisition area is about 153 million square meters. It is important to note that this level is only the sum of the 90 cities for which data are available. From January to March, the proportion of residential sales in the above 90 cities to the cumulative residential sales area in the country was 27.0%, and according to this ratio, the total area of commercial housing that needs to be purchased in the country is about 5.65 trillion square meters.
2. Discount of the acquisition If the government acquires commercial housing and transforms it into public rental housing, the future cash flow will mainly be public rental housing rent. As of the end of March 2024, the rental yield of residential buildings in 100 cities in mainland China was about 2.18%, while the yield to maturity of 10-year local government bonds in mainland China was about 2.53% during the same period[2]. If the acquisition is made at the market price, the rental yield is lower than the cost of financing. Considering the social nature of public rental housing, its rent may be lower than the market price. At present, rental rental housing is usually priced at no higher than 80%-90% of comparable properties in the surrounding area, and at 85%, the rental yield may fall further to 1.85%. In order to ensure that the income of residential collection and storage entities can cover financing costs and reduce the increase in local government debt, it is necessary to purchase from the market at a discount. If 2.53% of the cost of capital can be covered, the purchase price of the commercial housing needs to be discounted to no more than 73.2% of the market price. In practice, if you want to acquire commercial housing at a discount, you may need to restructure your debts or make profits from relevant entities. 3. Estimate of the amount of funds actually needed Multiplying the potential acquisition area by the sales price of commercial housing as of the end of April[3] (of which 90 cities use the sales price of the city where the acquired area is located, and the rest of the acquired area uses the national average sales price of commercial housing), about 6.21 trillion yuan of funds will be needed, close to 60.3% of the annual sales of commercial housing in 2023. If the acquisition is carried out at a discount of 73.2% of the market price, about 4.55 trillion yuan will be required. Since the acquirer is either a real estate development enterprise or an urban investment company, it can be leveraged through the financial market for financing. If the government needs to invest 25-30% of the total capital, the actual capital demand is about 1.14 to 1.36 trillion yuan, and it can consider raising capital through special bonds and other means. In terms of leveraged funds, depending on the rate of return of different projects, leveraged funds can come from both financial institutions and structural monetary policy instruments. However, it is worth noting that historically, real estate inventory and prices are not simply inverse, and destocking helps stabilize housing prices and expectations, but reducing inventory levels is not a panacea to ensure that housing prices rise. The stabilization and recovery of house prices is still dependent on end demand and the expected improvement.
Note: [1] "Description of Common Indicators for CREIS Middle Finger Data". [2] March average. [3] If the price at the end of April is not available, the price at the end of March will be used.
★
★
Disclaimer
CIB Research Co.,Ltd. Chinese The information provided in this report is obtained in accordance with international and industry standards and through legal channels, but does not guarantee the accuracy and completeness of the information stated in the report, and readers of the report should not rely on the accuracy and completeness of the information.
The information provided in this report reflects the judgment of this report at the time of the initial public release, and we reserve the right to supplement, correct and revise the relevant information at any time, but do not guarantee that it will be released in a timely manner. The content of this report is for the reference of the report reader only, and all business decisions will be made by the report reader after synthesizing the information of all parties, and our company does not assume any responsibility for any direct or indirect consequences caused by the information provided in this report.
The judgments in this report are based on the researcher's own knowledge and inclination, and should be regarded as the researcher's personal opinion and do not represent the institution. Our company may issue other reports that are inconsistent with the information provided in this report or express different views based on objective circumstances or different data sources or analysis. The researcher himself believes that he adheres to an objective and neutral position, but does not make any guarantee that the relevant information expressed in the report is directly or indirectly related to the business interests of our company, and the relevant risks must be independently assessed by the reader of the report, and our company and the researcher do not assume any legal responsibility that may arise therefrom.
The information and opinions expressed in this report do not constitute any offer or investment advice and should not be relied upon as the basis for any investment research decision, and no action is taken to ensure that the information contained in this report is appropriate for individual investors or any individual, and we do not recommend any action based on this report.
Nor should the reader of the report interpret any statements in the report from a strictly economic perspective and without any ethical, political or other biases, and neither we nor the researchers themselves accept any responsibility for the consequences of any interpretation based on these biases, and reserve all rights to take action to protect their rights.
The copyright of this report is only owned by our company, and no institution or individual may reproduce, reproduce and publish it in any form without written permission. Unless it has been officially published in a public publication, it should be regarded as a non-public act of discussion and analysis. If it is quoted or published, the source must be indicated as "Industrial Economic Research & Consulting Co., Ltd.", and this report shall not be quoted, abridged or modified contrary to the original intention.
Our company has the right to modify and interpret the terms of this disclaimer.