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Recovering real estate on way to future balance

By Qin Hong | China Daily | Updated: 2023-04-03 09:30
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A sales person introduces a housing complex to potential customers in Beijing on Feb 5, 2023. [Photo/VCG]

From the 20th National Congress of the Communist Party of China last year to the recent two sessions, real estate is one of the sectors highlighted in many high-level documents, such as the Government Work Report. Based on the sections concerning property, we see three major focuses in its future development — preventing risks, helping those with inelastic housing demand and stimulating demand for better homes.

Three major focuses

Regarding risk prevention, given the current stage of real estate development in China, there are two main risks that we think should be put under close watch. The first is debt risk, as the number of collapses by Chinese real estate developers last year had more than doubled compared to 2021. The second is secondary risks following debt risks, the most important of which is that it may lead to the addition of incomplete projects.

Another major focus is to further support homebuyers with inelastic housing demand. Currently, homebuyers in some Chinese cities, especially major urban areas, are still confronted with high property prices when buying a house for living in instead of speculation. Ensuring support for both housing and rental markets is key to addressing the basic living needs of a large urban population.

China has been setting up and improving its housing guarantee system in accordance with actual housing needs in cities nationwide, which is a significant move to this end. There has been a clear view of how the nation established such a system, which not only integrates public rental housing and guarantees rental and co-ownership housing, but also vigorously promotes the rental market to further shore up residential property demand.

However, compared to housing markets in developed economies such as Japan and Germany, houses for urban rental services in China make up much less of total existing housing units, with the figure for 2020 being 21.1 percent, lower than the typical 35 percent or higher figures recorded in more mature markets. More importantly, the quality of rental services and homes needs to be further improved. This is also part of the reason why the government encourages large-scale and professional rental service providers to develop high-quality rental housing under centralized and unified management.

Luckily, more improvements are likely to be seen in the years to come. It is underlined in the nation's 14th Five-Year Plan (2021-25) that a total of 6.5 million units of guaranteed rental apartments will be built in 40 key cities nationwide to solve the housing difficulties of nearly 20 million people seeking residential property.

Another focus is to stimulate demand for better homes, which we believe will be an important measure to stabilize China's real estate market over a certain period, as the relevant market space is quite large.

Based on related figures revealed by the seventh national population census, we have analyzed the market-oriented housing demand in domestic cities and towns over the past 10 years. Market-oriented housing demand in cities and towns over the past decade stood at about 121 million households, of which 25 million have demand for new houses due to shantytown renovation or demolition, some 31 million households seek better homes, and 65 million households are planning to move to big cities amid the ongoing urbanization drive.

It should be made clear that unleashing and meeting demand for better homes cannot be achieved merely by increasing the number of larger residential properties. There should be a corresponding improvement in housing quality. It's not all about building better homes. Better housing projects should provide homebuyers with better living experiences and related amenities. Homebuyers with demand for upgrades do not always prefer the latest generation of real estate projects. Optimized and upgraded existing projects are also key to tapping homebuyer demand for better living spaces. Therefore, whether China can see an effective and efficient unleashing of such a demand, which has great potential, depends on how much product innovation can be achieved and whether homebuyers can improve their urban living environments through new housing purchases.

How has the new permanent population in cities and towns contributed to real estate growth in recent years? According to our research, since 1995, more than 20 million new permanent residents have been added to China's cities and towns annually, and such a trend continued until 2019. However, from 2020 to 2022, there were some big reversals. In 2022, the new permanent population of cities and towns was only 6.46 million. Thus, in the future, the government should focus on unleashing demand for better homes, make it a key pillar to stabilize the real estate market and strive to reverse downtrends as quickly as possible.

Measures in place

In order to ensure the smooth operation and recovery of real estate, the government has introduced many supportive policies, especially financial policies, such as 350 billion yuan ($50.94 billion) in support to ensure housing unit delivery. Taking a closer look at these moves, it can be found that their aims — more than 300 measures were put forward by local governments nationwide last year to ease restrictions on housing purchases, a historical low interest rate and financial support for developing guaranteed rental housing on a large scale — are very clear, with their benefits also clear. In fact, such efforts have already paid off.

According to January-February official data, commercial housing sales, sales area and growth in real estate development investment had all rebounded significantly, but we must continue to pay attention to the sustainability of the recovery, as some current market activity indicators still imply a less-than-solid foundation for a sustained market recovery, which calls for efforts of all parties in the market to boost confidence.

New development model

In February, the top leadership emphasized that while adhering to the principle that houses are for living in, not for speculation, more concerted efforts should be made to study how measures should be conducted related to major trends and structural changes, such as the supply and demand relationship and the urbanization pattern, in order to come up with a long-term strategy that suits the long-term development of the real estate industry, eliminates drawbacks of the traditional development model's heavy reliance on high leverage, high debt and high turnover for many years, and promotes the smooth transition of the industry to a new development model.

Referring to the new development model of the industry, we see four aspects worthy of mentioning.

China should prioritize the transformation of its development model from the old "three highs" — high leverage, high debt and high turnover — to a development model integrating development, operations and services.

The profit model should be updated and diversified, instead of simply relying on developing new projects. As we see, more than 95 percent of the income of real estate developers comes from housing sales. Income sources should be further diversified in the future.

The high-debt financing model should be shifted to a diversified financing model using various equity and debt options. Eliminating debt from the financing mix is not realistic but in the future, equity financing should be given bigger play.

Developers need to add business stability, brand promotion and project and service quality to their business goal lists, instead of purely seeking high sales and rapid or even blind expansion.

All in all, with the general direction of future development clear and requirements for short-term policies and long-term development of real estate also clear, we believe that after market adjustments are implemented, the entire industry will return to a new balance. The market potential is there, and enterprises should actively innovate, build confidence and achieve better development to further tap the market.

The writer is a senior researcher at the National Academy of Development and Strategy, a think tank of the Renmin University of China. 

The views don't necessarily reflect those of China Daily.

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