China’s real estate market has experienced a challenging 2021 amidst tighter regulation and frequent defaults. The growth rate of investment, sales, and land concessions has slowed sharply, particularly since the second half of the year, putting the real estate market in for an unprecedented cold winter. After the real estate regulatory policy changes at the end of 2021, the market is mainly concerned about two aspects: one is whether the whole market can achieve a “soft landing”, and the other is whether the risk of real estate enterprises can be properly dealt with. For the dual purpose of “steady growth” and “risk prevention”, both the government and the market hope that real estate can stabilize and enter a virtuous circle. According to ANBOUND researchers, even if the real estate market recovers steadily, the logic and characteristics of the marketplace will change, and real estate will face a new pattern.
It should be noted that, in the long run, the dynamics for real estate to enter a new round of cyclical growth would be insufficient due to the gradual slowing of overall economic growth, changes in demographic and urbanization patterns, as well as other long-term factors. This indicates that the real estate market will continue to face downward pressure in the medium to long-term cycle. Amid this long-term structural change, ANBOUND believes that the competitive pattern of China’s real estate industry will also undergo fundamental changes. In the future, state-owned real estate enterprises will replace private enterprises as the main players in the market.
Based on the situation in 2021, although a large number of private enterprises are experiencing liquidity difficulties and continue to “burst”, central and local state-owned enterprises with state-owned assets continue to expand due to capital and policy advantages.
In terms of land purchases, the land acquisition area and new construction area in 2021 dropped by 15.5% and 11.4% respectively compared to 2020, implying that the housing market will face a contraction in supply in the future. Meanwhile, as a result of various housing enterprises’ major and minor crises, as well as a general lack of confidence in the real estate market, various developers’ desire for land acquisition has declined since the second half of 2021. The land auction market has altogether been cold, with more and more land being sold at abortive and low prices, and the land auction has gradually become a one-man show for central enterprises or local state-owned enterprises. Thus, from the supply side, state-owned real estate enterprises are constantly expanding their future market.
According to institutional statistics, central enterprises and local state-owned platforms represented by urban investment accounted for nearly 70% of land acquisition in 22 popular cities with centralized land supply. Only private enterprises such as Longfor and Greenland continue to remain active. It is worth noting that there is an obvious phenomenon in the second and third batches of land auctions, where local state-owned platform-type companies frequently participate in local land auctions, and land acquisitions are mostly conducted by way of reserve price transactions. This is primarily due to a lack of willingness on the part of land auction and real estate companies to participate in the auction since the fourth quarter, and many cities have been “left out in the cold.” To complete the annual land supply task, the participation of local state-owned enterprises in the auction can play a role in supporting the land market. In the first and second-tier cities, and regarding the depressed third and fourth-tier markets, the willingness of private enterprises to participate will decline further in the future. They will be squeezed out of the vast market of small and medium-sized cities by local urban investment with a government financial background.
On the other hand, under the policy of encouraging market-oriented mergers and acquisitions of real estate companies, those companies with state-owned assets are still the ones that have shown a strong willingness to merge. For regional risk prevention, local governments also hope that state-owned enterprises will take over the projects of private enterprises that are facing challenges. In the case of Evergrande, not only has Cinda, as one of the four largest state-owned asset management companies, been involved in debt disposal, but Evergrande’s projects in various locations are mostly acquired by local state-owned enterprises. The projects sold by World Trade Group in Shanghai, Shenzhen and Guangzhou are also basically taken over by local urban investment and state-owned real estate enterprises. Recently, the state-owned background of China Merchants Shekou Industrial Zone Holdings is also actively raising funds to participate in the acquisition of real estate projects. This means that in the process of clearing the real estate market, state-owned enterprises are actively or passively expanding their market share in the sector.
However, with the change of high leverage and high turnover in the market, and the gradual divestment of real estate financial attributes, the public attributes of real estate are increasing. With the decrease in profits and the slowdown in overall demand, the government hopes that state-owned assets will be used as a medium for policy implementation to promote the construction and development of public housing with public service attributes. Then, in the long run, state-owned real estate enterprises will be the dominant force in the market as it transitions to a new stage. Furthermore, private-sector housing enterprises will be reduced to supporting roles in construction, escrow, and consignment.
The new market pattern of state-owned real estate enterprises taking the lead is naturally beneficial to the market’s stability, but it will also introduce new problems and contradictions. On the one hand, it will lead to the weakening of market vitality. If the government continues to monopolize the real estate market, new challenges may arise, making it difficult for it to adjust in time to maintain the dynamic balance between supply and demand. When local urban investment begins to dominate the local market, it may result in regional fragmentation of the real estate market, making it more difficult for private enterprises to enter the county market.
On the other hand, if a large number of local urban investment enterprises enter the local real estate market, it may bring more debt risk. Although the entry into the real estate sector will provide new development space and profit potential for urban investment, the slowdown in demand for real estate in these areas may lead to a downturn in the housing market. This in turn will exacerbate the debt burden of urban investment as a “backstop” role and increase financial pressure on local government. Local governments are also facing a dilemma: it wishes to protect local land concession revenue, but it does not wish for capital and population spillover from high housing prices to have an adverse effect on regional development.
In the view of ANBOUND, after entering the “post-land economy” era, it may be difficult for China to avoid the situation where state-owned assets play the leading role. If the country wishes to reduce its economic reliance on real estate, it must first reduces its reliance on land finance, create a stable long-term financial system for local communities, and promote the market-oriented transformation of urban investment enterprises. This will allow the real estate market to return to normal and truly realize the virtuous cycle.
Final analysis conclusion:
With the relaxation of regulatory policies, China’s real estate market may achieve a “soft landing”. However, in the long run, the development logic and market structure will be undergoing fundamental changes, and state-owned real estate enterprises will become the protagonists in this sector. What changes will this bring to the era of “post-land economy”? The market will wait and see.
ANBOUND
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