The latest document issued by the central government has once again set the tone for real estate

In August this year, the State Council deliberated and passed the "Guiding Opinions on Planning and Construction of Affordable Housing" (Guo Fa [2023] No. 14), which has recently been conveyed to the people's governments of cities and institutions directly under various ministries and commissions. The market generally believes that Circular 14 will further implement the principle of housing not speculation, which is also a response to the "great changes in the relationship between supply and demand in the real estate market".

From the perspective of investors, how will this change be promoted, and what kind of people will benefit? What is the impact on the traditional commercial housing market? Will the sales, investment, and price systems of the real estate industry change dramatically in the future? What will be the new changes on the supply side of real estate in the future?

Today, we will give you a detailed interpretation of the diversified supply system of affordable housing, the impact of affordable housing on the sales of commercial housing, the trend of real estate investment, and a detailed analysis of the interaction between affordable housing and the transformation of urban villages and guaranteed delivery of buildings.

Q&A

(1)丨What is the positioning of affordable housing? What is the whole system like?

- A housing system that forms a "rent-property" system with rental housing

Compere: 

In August, the State Council issued document No. 14, which detailed the planning and supporting policies for affordable housing, which many financial media believe is an important change in the industry. In your opinion, what is the difference in positioning between affordable housing and the previous affordable rental housing, co-ownership housing, and commercial housing?

On the whole, the affordable housing mentioned in Document No. 14 is actually a link in the entire national affordable housing system, which does not mean to subvert the original real estate industry, but to better achieve the goal of "home ownership" through affordable housing as a supplement to commercial housing during the period when the market capacity of the real estate industry itself is shrinking and the industry is in a downturn.

Before Circular 14 promoted affordable housing, in fact, for a long time, the model of low-rent housing + affordable housing in China constituted the entire affordable housing system. In the first decade of the millennium, investment in affordable housing contributed more to overall real estate investment, with affordable housing investment accounting for nearly 6% of real estate investment at its peak. However, with the subsequent development of real estate commercial housing, the model of affordable housing gradually faded out, until the period of 2012-2013, more and more provinces gradually withdrew from affordable housing. See the figure below for details.

Chart: Proportion of Affordable Housing Investment in Real Estate Investment, 2002-2011

Source: Wind, Songshan City

Chart: Comparison of the cumulative year-on-year growth rate of affordable housing investment with the growth rate of real estate investment

Source: Wind, Songshan City

At present, the newly launched affordable housing, the target of protection is mainly for the "working class and talents needed by the city", according to the model of "guaranteeing the basics" to determine the area standard, according to the principle of "guaranteeing capital and small profits" fair and just allocation, and in strict accordance with the principle of closure, to prevent the flow of affordable housing into the commercial housing market.

In the future, affordable housing and affordable rental housing will form our diversified housing supply system together with commercial housing from the actual property right housing and rental mode. The introduction of Circular 14 has indeed reconstructed the mainland's diversified and multi-level affordable housing system, as detailed in the table below.

Table: Affordable Housing System in Mainland China

Data source: Songshan on the city

Some friends may have also discovered that the affordable housing system in mainland China is somewhat similar to Singapore's "low-rent housing-HDB flat-private housing" supply system. The affordable housing promoted by Circular 14 is similar to the positioning of HDB flats in Singapore.

HDB flats in Singapore are relatively inexpensive, with a three-bedroom unit being three times the annual income of an individual and a four-bedroom unit being about twice the annual income of two people. In general, young people can afford to buy a house by working for a few years and saving up, and the proportion of Singaporeans' income on housing is less than 25% all year round. The government has played a leading role in housing supply, meeting the needs of residents through the planning and development of a large number of public housing. For details of Singapore's supply system, please refer to the table below.

Table: Housing Supply System in Singapore

Data source: Songshan on the city

Referring to the Singapore model, China's future housing supply system will be composed of public rental housing, affordable rental housing, co-ownership housing, affordable housing and commercial housing, with leasing + property rights going hand in hand, and forming a mutually closed price system.

(2)丨What is the impact of affordable housing on commercial housing?

- Affordable housing is closed and strictly oriented to groups, which will not have an impact on the sales of commercial housing

Compere: 

According to you, affordable housing and commercial housing are segregated from each other. However, there are still many investors in the market who are worried that the promotion of affordable housing will have an impact on the sales of commercial housing, especially the sales of commercial housing under 90 square meters, and the demand for affordable rental housing to replace commercial housing will further shrink the capacity of the commercial housing market that is already in decline, or trigger a further decline in the price of commercial housing in rigid demand. What do you think about this?

I don't think there's a need to worry about that, because as I said earlier, the systems of commercial housing and affordable housing are closed to each other.

First of all, from the perspective of demand, there are strict eligibility restrictions for the beneficiary groups of affordable housing. As mentioned in Circular 14, affordable housing is aimed at the working class with low incomes and the talent groups that cities need to bring in. However, the group that can only purchase one set of affordable housing as a family unit and has already enjoyed other preferential policy housing needs to vacate the original policy housing.

From the perspective of supply, the promotion of affordable housing is not to be achieved overnight. According to the planning of Document No. 14, the supply of affordable housing needs to first determine the affordable land, and more importantly, the original idle and inefficient industrial, commercial and office land will be changed to land use, and then the land supply can be completed through the allocation mode on the premise of not paying the land premium. It is worth noting here that the original text of Circular No. 14 clearly mentions that the commercial housing of bankrupt real estate enterprises can be converted into affordable housing, which can hint at the direction of the liquidation of the real estate industry in the future.

Many investors are worried that the promotion of affordable housing will affect the price of commercial housing that is just in demand. This is reassuring, because affordable housing is a "placement", not a market-oriented sale, and Circular 14 requires strict closure management of affordable housing. It is forbidden to change affordable housing into commercial housing and flow into the market in any way and in violation of laws and regulations. Affordable housing purchased by wage earners must not be idle for a long time. If it has been idle for a long time, it is really necessary to transfer, or it is necessary to leave the government organs, institutions or enterprises due to resignation and other reasons, the city people's government shall repurchase it in accordance with regulations.

Therefore, there are restrictions on the beneficiary groups of affordable housing, and the sales method is targeted allocation rather than market-based supply and demand matching, and the affordable housing itself is closed management. The supply of affordable housing will not be achieved overnight, and more long-term rental apartments similar to the "same rights for rent and sale" promoted in 2017 will not release the supply at one time, and it is difficult to have an actual impact on commercial housing.

(3)丨Does affordable housing pull real estate investment?

- Affordable housing is mainly renovated in stock, which has little impact on real estate investment

Compere:

From a macroeconomic point of view, will affordable housing have a great impact on real estate investment? Can we expect to boost investment through affordable housing?

To a certain extent, affordable housing will not be achieved overnight, nor is it released at one time, and the applicable groups of affordable housing are strictly conditioned, so it is unrealistic for some financial media to say that "40% of China's real estate market in the future is affordable housing", nor can we mechanically apply the Singapore model and use the proportion of HDB flats to speculate on the scale of affordable housing.

If we look at the example of affordable housing in the past, the proportion of investment in affordable housing was only about 1% of the fixed asset investment at that time. In the short term, it is difficult to promote affordable housing on a large scale as it was at that time. See the figure below for details.

Chart: Ratio of investment in affordable housing to investment in fixed assets in previous years

Source: Wind, Songshan City

In addition, many sources of affordable housing revolve around the transformation of stock housing and the transformation of industrial land and commercial land, and the amount of investment brought by stock transformation is relatively limited compared with the land purchase + new housing of ordinary commercial housing.

During the "14th Five-Year Plan" period, 40 key cities across the country initially planned to add 6.5 million units of rental housing. In 2023, 72% of the task of raising and building 2.04 million units (rooms) of affordable rental housing across the country this year has been completed, and the progress of raising and building in various places is accelerating. From a national perspective, in the past two years, a total of 5.08 million units (rooms) of affordable rental housing have been built and raised, and more than 520 billion yuan has been invested. If according to 520 billion yuan/5.08 million units, almost the corresponding investment of each set is about 100,000 yuan, and if the investment of 2.04 million units of 100% of the rental housing plan is realized in 2023, 200 billion yuan of investment can basically be realized, accounting for about 1.5% of real estate investment, and compared with rental housing, the volume of affordable housing is smaller.

Therefore, compared with the investment in the entire commercial housing, whether it is affordable housing or rental housing, the proportion is about 1-2%, and the promotion of affordable housing planning still needs to be implemented in various places, and it will not be achieved overnight, so it cannot be simply inferred that affordable housing can achieve a significant pull on real estate investment.

(4)丨What is the relationship between affordable housing and the renovation of urban villages and the delivery of buildings?

- Affordable housing is tied to the transformation of urban villages, and it is also necessary to solve the problems of funding sources and subject incentives

Compere: 

At present, affordable housing, dual-use facilities for leveling and emergency services, and the transformation of urban villages are all important policies on the supply side of the real estate industry, and they are also the direction of the long-term mechanism transformation of the real estate industry in the future. According to your research on Circular 14, how is affordable housing related to key areas on the supply side, such as the renovation of urban villages and the delivery of buildings?

First of all, affordable housing is closely related to the transformation of urban villages, on the one hand, the megacities involved in the transformation of urban villages are also the cities with key layout and promotion of affordable housing. In the overall urban renewal work, the transformation of urban villages and the construction of affordable housing are integrated. Most of the projects that have been renovated and put into storage in urban villages need to be equipped with affordable housing in a certain proportion. Circular 14 itself also emphasizes that making full use of idle land will also promote the conversion of industrial land and commercial land into affordable housing land.

From the point of view of funds, the local finances will play a key role. If it is difficult to achieve profitability in a single project of urban village transformation, the local government can make a unified area plan, raise funds, and solve the funding problem. External special bonds for urban village renovation and CDB's special loans for urban village renovation can provide new sources of funding.

Affordable housing itself is also a meager profit, lacking the premium and financing of the land itself, so the promotion of affordable housing is destined to be tied to the transformation of urban villages, and the joint use of financial funds, CDB funds or special bond funds and other funds with strong public welfare attributes to complete the construction, and actively guide social capital to complete the financing and construction of benchmark projects.

In terms of the financial market, with the promotion of the debt plan, a large part of the transformation of urban investment platforms in various places is to promote the construction of affordable housing. At present, the Shanghai Stock Exchange has also begun to provide targeted window guidance, and will provide support for financing review if the funds from the issuance of corporate bonds will be used for affordable housing, rental housing, dual-use facilities for leveling and emergency purposes, and the transformation of urban villages.

Of course, whether it is the transformation of urban villages or affordable housing, financial support is not achieved overnight, which requires the patience of investors.

In addition, we need to pay attention to the progress of the delivery of the building. Circular No. 14 also specifically mentions that commercial residential buildings and idle land after the bankruptcy of real estate enterprises can be recovered by the government for the construction of affordable housing. It may be that in the future, the key disposal direction of the promotion of guaranteed delivery of buildings is the government's unified acquisition and transformation into affordable housing.

At present, the transformation of urban villages and the delivery of buildings have not been promoted on a large scale in the short term from the perspective of participating enterprises and funders, as well as local governments, and the situation that a single project and a single enterprise cannot be calculated is still the current pressure point. In this process, it is still necessary to find new sources of funds to realize the capital cycle of its own project construction. On this point, we have done in-depth research before, and we recommend that you read it.

Affordable housing is an important part of China's diversified and multi-level housing supply system in the future, an important supplement to the commercial housing market, and a key policy for the real estate industry to better realize "housing for living, not speculation" and "home ownership". We can't expect to boost real estate investment through affordable housing construction, and we don't need to worry about the impact on commercial housing sales. The next real estate industry will enter a new stage with the transformation of urban villages, the construction of guaranteed delivery of buildings and affordable housing.

Source: Songshan Nonshi, this article has been authorized, thank you to the original author!