The Zhitong Finance App learned that Shen Wan Hongyuan released a research report saying that the dual-track system of urban village renovation+housing will be the key to breaking the real estate industry. Under the dual track system, guaranteed housing and commercial housing will coexist and prosper. Among them, it is expected that guaranteed housing will be supplied according to demand, and phased inventory acquisitions will help commercial housing be removed from inventory, while commercial housing is expected to create a new track for high-quality housing growth, and it is expected that high-quality housing enterprises can benefit from pattern optimization and quality improvement. Recently, regulation policies in core cities have been relaxed, and mortgage interest rates have been drastically lowered. It is expected that some core cities will experience a bottom in demand, and sales are expected to improve first.

Shen Wan Hongyuan's views are as follows:

Recent analysis: Short-term demand bottoming is expected, based on the following three points:

1) Second-hand housing transaction recovery after the Spring Festival this year: On the transaction side, second-hand housing transactions in 17 cities showed a recovery since the Spring Festival in '24, with outstanding performance; on the housing price side, the average cumulative decline in second-hand housing prices in North Guangshen and Shenzhen during this cycle has reached 25%. The decline exceeds the previous cycle and has shown a deep adjustment. Recently, first-tier cities have shown a narrowing trend of decline.

2) The mortgage burden ratio in core cities has improved markedly: Due to the deep adjustment of housing prices and continued interest rate cuts, the mortgage burden ratio in core cities has improved significantly, supporting the bottom of demand; the average mortgage burden ratio of households in first-tier cities (top 40% income group) fell from 90% in 18Q3 to 57% in 23Q4, close to a historical low; the average mortgage burden ratio in the core 10 second-tier cities (top 40% income group) fell from 47% in 18Q3 to 27% in 23Q4, reaching a historic low.

3) Baicheng's rental yield narrows on treasury bonds: Due to the increase in rental returns and the continued decline in treasury bond yields, the cost performance ratio of current real estate allocations has improved, further supporting the bottom of demand; the spread between Baicheng rent yield and treasury bond yield continued to narrow, 2.20% in February '24, narrowing to -0.14% from 10-year treasury bonds, reaching a new high in recent years. Among them, rental returns and treasury bond spreads in first-tier cities are close to historic lows.

Medium-term support: Mid-term demand is still supported.

In this cycle, real estate sales and construction commencement have all been deeply adjusted. According to data from the Bureau of Statistics, in 2023, the country's residential sales area was 950 million square meters and the new construction area was 690 million square meters, with cumulative declines of 39% and 59%, respectively, from high points. Moreover, the current residential sales area (rolling over 12 months) has dropped to 910 million square meters, which has returned to the level of 2010; the new residential construction area (rolling over 12 months) has dropped to 660 million square meters, which has returned to the level of 2007. However, in the medium term, although the fundamentals of real estate are being adjusted deeply in this round and market expectations are still quite pessimistic, the bank believes that China's housing demand center still has strong support, mainly based on demand estimates in two dimensions: 1) deduction estimates from indicators such as urbanization rate, per capita housing area, and old housing renewal rate. China's housing demand center is estimated to be about 1.16 billion square meters in the period of saturation; 2) drawing on estimates from the housing construction situation in Japan and South Korea during the saturation stage, the center of new housing construction (or sales) in China is estimated to be 1.05 billion square meters. Given that in 2023/2024E, China's residential sales have dropped to 95/90 million square meters, and new construction has dropped to 69/630 million square meters, all of which have continuously fallen below the center of housing demand in China. As a result, the bank believes that the current fundamentals of the industry have already fallen by far, and it is expected that the support for sales from the center of subsequent demand will gradually strengthen.

Policy optimization: Further support for policy optimization and upgrading.

Since this year, central and local policy statements have continued to be upgraded. On the demand side, policy relaxation continues to increase in first-tier cities, from easing housing and loan approvals to easing purchase restrictions, the 5-year LPR was drastically lowered by 25BP to 3.95%, there is still room for decline in mortgage interest rates, and the recent National Standing Committee to stimulate potential demand. On the supply side, the Ministry of Housing and Construction's financing white list and operating property loans for housing enterprises are progressing in an orderly manner. The white list has now approved loans of 200 billion yuan, and property loans for housing enterprises such as Vanke, Jindi Group, and Longhu Group have been implemented one after another. In the medium term, it is expected that the two-track housing system will be the key to breaking the game. It is expected that China's housing monorail supply system will shift to a two-track supply system. A “guaranteed housing+commercial housing” supply system will gradually be formed, and rigid demand and improved demand will be classified and satisfied.

Among them, in terms of guaranteed housing, it is expected that the construction of guaranteed housing will help commercial housing sales based on demand and supply; in terms of commercial housing, the overall policy orientation shows a shift from “living and living comfortably” to “living comfortably,” which indicates that high-quality housing will become an encouraging direction. Looking ahead, the bank believes that the real estate industry policy will be further optimized: on the demand side, it is expected that restrictive policies (purchase restrictions and price limits) in Tier 1 and 2 cities will be further relaxed, and there is still room for further decline or optimization in mortgage interest rates and down payment ratios. Furthermore, the promotion of urban village renovation and guaranteed housing purchases of existing commercial housing is also worth looking forward to; on the supply side, various financing instruments such as financing whitelists and operating property loans will also help the real estate industry to gradually recover financing.

Investment Opinion: Maintain an “optimistic” rating.

The bank believes that the two-track system of urban village renovation+housing will be the key to breaking the real estate industry. Under the dual track system, guaranteed housing and commercial housing will coexist and prosper. Among them, it is expected that guaranteed housing will be supplied according to demand, and phased inventory acquisitions will help commercial housing be removed from inventory, while commercial housing is expected to create a new track for high-quality housing growth, and it is expected that high-quality housing enterprises can benefit from pattern optimization and quality improvement. Recently, regulation policies in core cities have been relaxed, and mortgage interest rates have been drastically lowered. It is expected that some core cities will experience a bottom in demand, and sales are expected to improve first.

Maintain the “optimistic” rating of real estate, 1) recommend high-quality real estate companies: A shares: Binjiang Group (002244.SZ), Huafa Shares (600325.SH), China Merchants Shekou (001979.SZ), etc.; 2) Focus on housing enterprises benefiting from urban reform: Yuexiu Real Estate (00123), urban construction development (600266.SH), Chinese enterprises (600675.SH), etc.; 3) Construction agencies that benefit from guaranteed housing construction: Greentown Management (09979). In addition, it maintains a “optimistic” rating for property management. Recommended: China Resources Vientiane (01209), Poly Property (06049), CNOOC Properties (02669), etc.

Risk warning: Sales and financing funds are tightening, and urban reform is falling short of expectations.