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天风证券:如何构建房地产新发展模式?

Tianfeng Securities: How to build a new real estate development model?

Zhitong Finance ·  11/26/2023 14:03

The decline in total volume, high inventories, and structural differentiation are the three main problems in the current real estate market.

The Zhitong Finance app learned that Tianfeng Securities released a research report saying that the decline in total volume, high inventories, and structural differentiation are the three main problems in the current real estate market. Judging from the trend and structure of potential home purchase demand, the key to constructing a new real estate development model is to solve these three major problems. The bank's forecast: 1) Compared with rigid demand, improved demand focuses more on “living well”. In the short term, real estate demand-side policies are expected to continue to be relaxed. Restrictive policies, including purchase restrictions, sales restrictions, price limits, and loan restrictions, etc., may be further relaxed, thereby restoring free flow in the real estate market and helping groups with real improvement needs to better release demand. Looking at the medium to long term, the mechanism design for the transition from affordable housing to commercial housing may also be the focus of the new real estate development model.

Tianfeng Securities's views are as follows:

The July 24 Politburo meeting put forward an important judgment that “the relationship between supply and demand in China's real estate market has changed significantly”, which is the basic starting point for analyzing the current real estate market. Specifically, the decline in total volume, high inventories, and structural differentiation are the three main problems in the current real estate market.

The first problem is that negative population growth and slowing urbanization may cause potential demand for home purchases to fall back in an “L” shape.

How many new urban residents are added each year is an important factor in determining a country's real estate demand. Judging from international experience, a country's urbanization can be roughly divided into three stages — “accelerate urbanization - slow down urbanization - stop urbanization”, yet China's urbanization slope peaked in 2016. Currently, it is at the stage of slowing down urbanization, and the slope of urbanization is expected to slow down year by year. At the same time as the urbanization slope is peaking, China's natural population growth rate has also continued to decline since 2017. As a result, the new urban population has entered a channel of continuous decline since 2017, and potential demand for home purchases has declined year by year. According to the bank's estimates, it is estimated that by around 2035, China's potential housing purchase demand will fall back to around 800 million square meters.

The second problem is that the reversal of expectations has increased the pressure on second-hand housing inventories.

As land acquisition efforts by housing enterprises have clearly slowed in the past two years, new housing inventories have continued to decline. Currently, the broad inventory of new homes is basically the same as the level in 2011, and the pressure on new housing inventories is limited. However, unlike the previous real estate cycle, there has been a clear shift in market expectations in this round of real estate downturn. From the previous long-term optimism and housing price increase expectations, they have changed to current long-term pessimism and expectations of falling housing prices. Previously, expectations of price increases made real estate have value-preserving and value-added properties, and households with multiple vacant housing units were not in a hurry to sell their properties due to investment or speculative demand. However, current housing price expectations have been reversed, and real estate in some cities no longer has investment or speculative value, so redundant second-hand housing will become an effective supply and potential inventory in this round.

Therefore, it is currently necessary to combine potential second-hand housing inventories to analyze broad real estate inventories. According to data from the Seventh Population Census, by the end of 2020, China's urban housing stock area was about 29.5 billion square meters (after considering the area completed in 2021 and 2022, China's existing urban housing area is estimated to be about 31.3 billion square meters by the end of 2022); while Qiu Baoxing, the former vice-minister of the Ministry of Housing and Construction, also pointed out at the 2022 China Urban Quality Development Think Tank Forum that “at present, China's housing vacancy rate has reached 15%, and some provinces have reached 25% or even 30%, which is higher than the international standard of 5%.” Assuming that the housing vacancy rate is 15%, it is a rough estimate that the current vacant second-hand housing area in China is about 4.7 billion square meters.

Also, considering the current broad inventory of about 1.6 billion square meters of new housing, if price reduction expectations cannot be reversed, the potential removal pressure on the broad real estate inventory may be far greater than the 2.6 billion square meters in 2014. The supply of second-hand housing will have a crowding out effect on demand for new housing purchases, which in turn inhibits the willingness of housing enterprises to acquire land and invest.

The third problem is that there is structural differentiation in the real estate market with different needs and in different cities.

The first is the differentiation between immediate needs and improvement needs. Compared to improved demand, immediate demand is more affected by changes in urban population. With the long-term decline in the population of new cities, immediate demand may continue to decline in the future. On the one hand, the demand for improvement depends on the size of the urban population in stock, and on the other hand, on the slope of the increase in the per capita housing area. Although the new urban population is declining year by year, it has maintained positive growth, and the urban population stock is still increasing, which will hedge against the impact of the slowdown in the slope of per capita housing area growth. According to the bank's estimates, as of 2022, the relationship between immediate demand and improvement demand in China's new home purchase demand is roughly 0.9:1. It is expected that by 2030, it will fall back to 0.6:1, and around 2035, it will fall back to 0.4:1. Improvement demand may become the dominant factor in future housing demand.

The second is the differentiation between high energy level cities and low energy level cities. In the past, during the period of accelerated urbanization, there was a net inflow of the population in most cities. Market expectations were generally optimistic, and there was a certain degree of speculation and demand for house speculation. The real estate market in different cities showed the same characteristics of rising and falling. However, as population growth is negative and the urbanization slope continues to slow, different cities have different endowments and capabilities to attract industries and population, and differences between cities may become more prominent. For example, some cities are still vigorously developing labor-intensive industries that can continue to attract population inflows, while others are adjusting their industrial structure, and the population may flow out as traditional industries migrate out. In the future, the population of high-energy cities is expected to continue to flow in, and demand for home purchases will be supported, while the population of low-energy cities is expected to face pressure from a continuous outflow of population and a continued decline in the pressure to buy a home.

Judging from the trend and structure of potential housing purchase demand, the key to constructing a new real estate development model is to solve the above three major problems. The bank expects that in the future, China will build a differentiated, multi-level housing supply market that combines rental and purchase, focusing on affordable housing solutions for “affordable housing,” and that the commercial housing market will adapt to “living well.”

The first forecast is that the construction of policy housing systems such as affordable housing will accelerate to address the rigid housing needs of low- and middle-income groups.

Although China's potential housing demand tends to decline over the long term, in the context of “new citizens” and “new youth” entering the city, the bank expects that until 2030, there will still be a rigid demand for housing purchases of about 3-4 billion square meters per year, especially in central cities such as first-tier and new-tier cities where the population continues to flow in.

Living well is not only an important livelihood issue, but also a prerequisite for improving fertility and boosting consumption. For some “new citizens and new youth” groups with low income levels but rigid housing needs, their purchasing power is relatively limited. Buying commercial housing directly will increase their cost of living, which in turn may have an inhibitory effect on their desire to have children and consumption. Therefore, in the context of economic transformation, increasing the protection of the housing needs of low- and middle-income groups through policy housing such as guaranteed housing and long-term rental housing is expected to be the focus of future real estate policy efforts.

On August 31, 2021, the Ministry of Housing and Construction made it clear at the “Strive for All People to Live Well” press conference that “during the 14th Five-Year Plan period, the Bank will focus on developing affordable rental housing, further improve the housing security system, increase the supply of affordable housing, and strive to achieve a decent home for all people.”

The Politburo meeting on July 24 this year called for “increasing the construction and supply of affordable housing,” while the National Standing Committee on August 25 deliberated and passed the “Guiding Opinions on Planning and Construction of Affordable Housing,” and the construction of a housing security system is progressing at an accelerated pace.

According to the Ministry of Housing and Construction's previous disclosure, during the “14th Five-Year Plan” period, the country plans to raise 8.7 million affordable rental housing units, of which 40 key cities plan to add 6.5 million affordable rental housing units (rooms), which is expected to solve the housing difficulties of 13 million people; at the same time, during the “14th Five-Year Plan” period, in large cities with many new citizens and young people, high housing prices or high upward pressure, the proportion of new affordable rental housing in the total supply of new housing should reach more than 30%.

Considering the current high level of real estate inventories, the acquisition of some redundant inventory such as vacant housing and vacant office buildings for affordable housing or long-term rental housing is also expected to be one of the policy options. It can not only relieve inventory pressure to a certain extent, but also effectively address the rigid housing needs of low- and middle-income groups.

The second forecast is that the commercial housing market will coexist with affordable housing, and that the housing needs of middle- and high-income groups will be solved through market-based mechanisms.

China's per capita GDP is expected to continue to rise, so residents are still pursuing a more comfortable and beautiful living environment. The bank expects that there will still be an average of about 500 million square meters of new improvement demand per year until 2023.

Compared to rigid demand, demand for improvement focuses more on “living well.” As residents' income levels continue to grow, residents will pay more attention to the quality and sense of experience of housing, and have higher requirements for area, location, facilities, new and old, design, etc. In terms of providing high-quality housing, professional market-based housing enterprises have more advantages and experience. Therefore, after completing the restructuring and clearance of the real estate market, the bank expects that there is still room for development in the commercial housing market, focusing on improving demand.

In the short term, the real estate demand side policy is expected to continue to relax. “The relationship between supply and demand in China's real estate market has changed profoundly. In the past, there is room for marginal optimization of policies introduced one after another during the long-term overheating phase of the market.” The bank believes that restrictive policies, including purchase restrictions, sales restrictions, price limits, and loan restrictions, etc., may be further relaxed, thereby restoring free flow in the real estate market and helping groups with real improvement needs to better release demand.

Looking at the medium to long term, the mechanism design for the transition from affordable housing to commercial housing may also be the focus of the new real estate development model. Housing needs will change as residents' incomes change, and residents living in affordable housing will also gradually need improvements. It is expected that while promoting affordable housing, the policy will also open up flows between different markets and achieve the effect of being backed by the government and improved by the market.

The third forecast is that the relationship between real estate and local finance will be adjusted and optimized.

Currently, land concession revenue is still an important source of local finance. Although land concession revenue was reduced by about 1.8 trillion yuan in 2022, it still accounts for 24% of the overall financial resources of local governments. Therefore, the commercial housing sales situation directly affects local revenue, and the local government may have an “impulse” to stimulate the real estate market.

Constructing a new real estate development model also includes achieving a virtuous cycle between real estate and finance. First, it is necessary to reduce the dependence of local finance on real estate. The bank expects that financial system reforms such as adjusting the financial rights relationship between local governments and central governments and expanding local tax sources will also steadily advance along with the construction of a new real estate development model to prevent local governments from excessively exploiting land concession revenue and excessively stimulating the real estate market in order to meet fiscal expenditure.

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more
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