The Zhitong Finance App learned that the China Index Research Institute published an article stating that the inventory removal cycle is dynamic and is affected not only by the size of inventory, but also by the speed of market sales. With land supply shrinking drastically, the market is entering a stage of spontaneous inventory removal, but currently real estate sales are still under pressure to adjust. Relying on market power alone to remove inventory is slow, and support policies still need to be strengthened. Currently, there is room for improvement in policies such as storage and land revitalization for state-owned enterprises. If the policy side can be adjusted quickly, it will help eliminate inventory. At the same time, it will also have a positive impact on improving the cash flow of housing enterprises and residents' expectations.

Along with the rapid decline in new construction area, “inventory already under construction and unsold” dropped significantly. At the end of July, the country's residential “inventory already started and not sold” was about 2.5 billion square meters, down 5.2% from the end of last year. Supply contraction is the main reason for the current decline in inventory, but judging from the removal cycle, the “already started and unsold inventory” removal cycle was about 3.4 years, which was 0.6 years longer than the end of last year.

In response to “completed and unsold inventory,” the 5.17 New Deal proposed a “state-owned enterprise storage” plan. Currently, collection announcements have been issued in many places, but the policy is still being explored, and policy optimization is still needed to increase the enthusiasm of all parties. In response to “land that has already been sold and has not started construction,” Yuexiu Guangzhou recently successfully withdrew and was compensated with notes. The withdrawal funds will continue to be used to purchase land in Guangzhou. This method provides a reference for other cities. In the future, more cities may refer to this method to improve inventory structures and ease the pressure on companies' inventories.

The “inventory” of new homes across the country has started construction and is about 2.5 billion square meters. The scale of inventory has declined due to shrinking supply, but it is still facing some pressure to eliminate

Figure: Inventory size of homes of different calibers across the country

Note: Inventory that has started and not sold = cumulative newly started area of commercial housing - cumulative sales area of commercial housing, cumulative inventory clearance cycle since 1998 = inventory already started and unsold inventory/commercial residential sales area in the current year. The sales area of commercial housing in 2024 is estimated on a year-on-year basis

Figure: Comparison of new residential construction and sales area across the country

According to estimates by the China Index Research Institute, as of July 2024, the national residential “inventory that has started construction and not sold” was 2.52 billion square meters, of which “completed and unsold inventory” was 0.38 billion square meters. Judging from the clearance cycle, the current clearance cycle for “started and unsold inventory” is about 3.4 years, and the removal pressure is high.

Judging from the trend of inventory changes in the past ten years, it can be roughly divided into three stages:

Phase 1 (2015-2017) - Monetization of shed reform drives demand release and inventory decline: After experiencing a boom in the real estate market in previous years, some cities experienced inventory backlogs. In 2015, “inventory already started and unsold” of new homes reached 2.95 billion square meters. In order to ease the inventory problem in the market, the government adopted a “shed conversion and monetized resettlement” policy to release new housing demand by demolishing old houses. Market inventories declined somewhat in 2016-2017, but due to a marked increase in market popularity, housing companies' enthusiasm to acquire land quickly recovered, and market inventories did not drop much.

Phase 2 (2018-2021) - The “three highs” model drives inventory growth: The real estate market has entered a period of steady development in recent years, and compared with 2016-2017, the market popularity has declined. During this period, local governments continued to increase land supply, and under the impetus of the “three highs” model for housing enterprises, the scale of market inventories gradually increased.

Phase 3 (after 2022) - Inventory decline due to supply contraction: Since 2022, the property market has cooled down significantly, and “inventory” of new homes across the country has declined, but unlike 2016-2017, the current market sales scale has not recovered significantly. The decline in inventory is mainly due to a marked contraction in land transactions and new construction starts (the scale of land transactions and new construction starts in 2023 fell by about 60% compared to 2020, and the scale continued to decline in 2024). This difference is also reflected in the trend of the two-stage removal cycle. In 2016-2017, as market sales increased, inventory levels declined, and the removal cycle was shortened, market inventory pressure eased; currently, although market inventory levels declined, sales continued to be sluggish, and the decontamination cycle was still lengthening, and market inventory pressure increased.

Furthermore, in contrast to the decline in the scale of “inventory already under construction and unsold”, the scale of “completed and unsold inventory” has continued to grow since 2020, which is also a sign of continued weakness in market sales. As of July 2024, the “completed and unsold inventory” of residences nationwide was about 0.38 billion square meters, an increase of 70.9% over 2020.

State-owned enterprise collection and storage is a direct means of removing inventory, but the pace of implementation still needs to be accelerated, and there is room for improvement in storage policies

Local state-owned enterprises should have had the most direct effect, but due to factors such as acquisition prices, capital costs, and housing mismatches, the pace of implementation is still slow. After the 5.17 New Deal proposed a 300 billion yuan reloan for guaranteed housing, various regions began to promote the collection and savings of state-owned enterprises. According to monitoring by the China Research Institute, by the end of August 2024, about 30 cities had issued announcements to solicit commercial housing for use as guaranteed housing. According to data disclosed by the central bank, as of the end of June 2024, the balance of 300 billion yuan affordable housing reloan was 12.1 billion yuan.

Table: Some cities issued a solicitation notice for “State-owned Enterprises Collect and Save Unsold New Homes”

Source: Comprehensive compilation by the China Index Research Institute

Judging from the current policy for state-owned enterprises to collect and save, its promotion may face many challenges:

(1) It is difficult to match the collection price: Judging from the collection announcement issued so far, the storage price usually uses the replacement price of guaranteed housing in the same location as the reference upper limit (land transfer costs, construction and security costs and profit of not more than 5%), and it may be difficult for this price to reach the level that developers are willing to accept.

(2) The problem of mismatch between supply and demand: Judging from the distribution of cities, in cities where housing enterprises have high inventory pressure and are more willing to sell, the demand for guaranteed housing is relatively limited, and it is more difficult to achieve income balance; in core cities where demand for guaranteed housing is relatively strong, market inventory pressure may be less, and housing companies' willingness to sell commercial housing at a discount is also relatively low. In terms of unit size, affordable housing should be dominated by small units. Under strict restrictions on the area of apartments, there are few commercial housing projects in stock that meet the requirements. Although the area of purchased apartments in some cities has been reduced to less than 120 square meters, it may be necessary to carry out a second renovation in the future to meet guaranteed housing requirements. Judging from the building requirements, most cities currently require priority to select building projects where the entire building or unit is not sold and can be managed in closed management, but the eligible projects on the market may be limited.

(3) High capital costs: Although the central bank currently has 300 billion yuan reloan support for guaranteed housing, the maximum period of use is no more than 5 years, and the annual interest rate for reloans is 1.75%. If the increase in commercial bank loan interest rates is considered, the capital cost for state-owned enterprises to collect and store is about 3%. If costs such as transformation and operation are taken into account, the actual cost may be higher. Therefore, in the process of collecting stored houses and converting them to guaranteed rental housing, cooperation such as financial interest rates is required to achieve a balance of benefits. However, local governments are currently facing a great deal of financial pressure, and financial support for collection and savings may be limited.

Table: Recent progress in the collection and storage of state-owned enterprises in some cities

Source: Comprehensive compilation by the China Index Research Institute

In terms of urban storage progress, on August 17, the first Wuhan project was officially launched, which can provide the city with more than 500 affordable rental housing units. On August 26, the signing ceremony for the second batch of commercial housing already built in Chongqing to be used as affordable housing projects was held. The seven projects were renovated to provide more than 2,600 affordable housing units. Since the second half of 2021, Zhengzhou Chengfa Anju Group has been negotiating acquisitions for some stock projects. As of June 2024, Zhengzhou Chengfa Anju Group has acquired more than 0.111 million units. Fuzhou is also one of the eight pilot cities for the rental housing loan support program. As of July 2024, Fuzhou Anzhu Development Co., Ltd. has acquired a total of about 5,000 existing housing units, and the first batch of 149 renovated insured housing units will be allocated for rent in September this year.

In addition, Zhuhai state-owned assets have also begun the acquisition of stock housing. On July 31, 2024, Huafa Co., Ltd. issued an announcement to transfer all existing properties under its subsidiary Huaben Company to Zhuhai Anju Group at a price of 0.266 billion yuan; on August 8, Huafa Group, Zhuhai Anju, and CCB Guangdong Branch signed a strategic cooperation agreement in Zhuhai. According to the agreement, CCB Guangdong Branch will provide comprehensive bank credit support with a total amount of no more than 20 billion yuan to Anju in Zhuhai, and the three parties will carry out in-depth cooperation in Anju projects and other areas. On August 9, Huafa Co., Ltd. announced once again that it plans to trade stock commercial housing and supporting parking spaces with Zhuhai Huafa Group Co., Ltd., the controlling shareholder of the company, or its subsidiary, with a total transaction amount of no more than 12 billion yuan.

In order to speed up the pace of collection and storage of state-owned enterprises, relevant policies still need to be further optimized. Possible directions include:

(1) Expand the scope of use of purchased stock housing. After collection and storage, priority can be given to demolition and resettlement housing. As a proposal for rental housing, it is possible to solve the capital balance problem, that is, keep the nature of the purchased stock commercial housing unchanged. In the stage of deep adjustment of the real estate market, it can be used as rental housing after renovation. After the real estate market stabilizes and is approved by the local city government, it can be sold again as commercial housing.

(2) Expand the scope of acquisition targets. On the one hand, the current target of collection and storage of state-owned enterprises is focused on completed and unsold inventory, and there is no targeted policy for unfinished inventory under construction. In the future, the scope of state-owned enterprise collection and storage policies may be further expanded to include eligible unfinished inventory (collection and storage funds are strictly supervised to ensure normal project completion). On the other hand, it is possible to consider combining the acquisition of commercial housing with resolving the operating difficulties of construction companies and decoration companies, and including the acquisition of existing commercial housing within the scope of the acquisition of existing commercial housing already built to ease the plight of enterprises in the upstream and downstream industrial chains.

(3) Further increase financial support, such as extending the maximum period of use of affordable housing reloans to meet the operating capital requirements for affordable rental housing renovation. Furthermore, if the collection and savings of state-owned enterprises can be included in the field of investment of local government special debt funds, it will also help ease the financial pressure on local governments and speed up the pace of stock housing collection and storage.

Recently, Yuexiu left the land in Guangzhou and received 12 billion “land stamps” compensation. The obtained land stamps will be used for subsequent land purchases in Guangzhou. This model provides new ideas for solving the land inventory problem

In addition to the “inventory that has been started and not sold” and “completed and unsold inventory” mentioned above, the general real estate inventory also includes land that has already been sold and not started. This part is also quite large. In recent years, due to market downturn and debt repayment pressure, housing enterprises are less willing to start construction on the land in hand. Regarding land inventories, the Ministry of Natural Resources previously proposed policy ideas and measures to support enterprises to optimize development, promote market circulation and transfer, and support local authorities to take back land at reasonable prices.

Recently, some housing enterprises have improved the soil storage structure through land withdrawal. In July 2024, the government of Hongshan Town, Gulou District, Fuzhou claimed that China Resources had submitted a land withdrawal application for the Fuzhou Douchi Road plot. In August 2024, the Yuhua Branch of the Changsha Municipal Bureau of Natural Resources and Planning said that due to developer funding issues, the government is going through land reclamation procedures for the Zhongxin Chutian Lanting project and plans to relist it after it has been taken back.

Furthermore, controlling land supply is also an important means of regulating market inventories. On April 30 of this year, after the Politburo meeting of the Central Committee proposed “integrated research on policies and measures to absorb existing properties and optimize incremental housing,” the Ministry of Natural Resources issued a document on the same day requiring cities with large inventories to suspend sales of new residential land, and clarified that the future supply of new land is highly correlated with revitalizing the scale of existing land.

Summary & outlook

Currently, China's real estate sales are still under pressure to adjust, and the market is still bottoming out. If the “inventory removal” policy is implemented at an accelerated pace in the next few months, it will have a positive impact on improving the cash flow of housing enterprises and residents' expectations. On the housing side, state-owned enterprise collection and storage is the most direct way to remove inventory, but the details of the policy still need to be optimized, and the pace of implementation needs to be accelerated. On the land side, revitalizing existing land and optimizing land supply are the main policy directions. Among them, land degradation and replacement may be an effective way to improve the land inventory structure. Overall, with the sharp contraction on the supply side, the market has entered the stage of spontaneous inventory removal. It is expected that market inventory will continue to improve in the future as policy support and sales stabilize.