Hangzhou authorities recently announced that they will invest in purchasing a batch of commercial housing for public rental housing. This move confirms the previous speculation that the Chinese Communist authorities have been ordering local authorities to buy property to help reduce inventory.
The Housing and Urban-Rural Development Bureau of Lin’an District in Hangzhou released a notice on May 14th regarding the specific implementation plan for acquiring commercial housing for public rental purposes within the district.
According to the notice, a batch of commercial housing will be purchased in Lin’an District for public rental purposes. The requirements for the properties to be acquired include the basic purchase unit being a whole building, with individual units not exceeding 70 square meters in floor area. The purchased properties must also come with a certain ratio of parking spaces, with the number of parking spaces meeting specified conditions. The maximum purchase price will be based on the evaluation price of surrounding properties and parking spaces. The principle for setting the maximum purchase price of acquired properties will be based on not exceeding the surrounding property prices.
The announcement also stated that the total area of the acquired properties shall not exceed 10,000 square meters, and the target will be existing properties or properties that will be ready for delivery within a year. Furthermore, after registration, suppliers are not allowed to resell the properties they provide.
However, local property developers in Hangzhou find it challenging to meet the requirement that “each unit in a whole building should not exceed 70 square meters.”
A representative from a property development company mentioned to “Daily Economic News” that it is difficult to find projects in Hangzhou that meet the acquisition threshold, with very few projects having units below 70 square meters. Even the units under 70 square meters are usually a combination of middle and corner units, rarely with an entire building designed to be 70 square meters.
Data from Fang.com shows that currently, there are 17 commercial housing projects available in Lin’an, with only 5 projects offering unit types below 70 square meters.
Yan Yuejin, research director at E-house Research Institute, commented to Caixin Media, “This policy in Lin’an, Hangzhou, is the first of its kind in the country. This means that the national team has officially stepped in to address de-stocking and reducing existing housing inventory.”
Several analysts believe that Hangzhou’s move can be considered not only a “replace old with new” policy but also a significant policy innovation. It is expected that more cities may follow suit in the future.
Prior to this, reports revealed to Bloomberg that the State Council of China had instructed local authorities across the country to purchase millions of apartments to reduce the surplus housing inventory. State-owned enterprises were required to use loans provided by state-owned banks to buy unsold properties from struggling developers at significant discounts. Subsequently, many of these properties would be converted into affordable housing.
The continuous rollout of housing market stimulus policies by the Chinese Communist authorities, and even the involvement of the “national team” to reduce inventory, can be attributed to the persistent decline in housing sales and the continuous rise in inventory levels on the mainland.
In the first four months of this year, housing sales in China dropped by about 47%, while the unsold housing inventory remained at its highest level in 8 years.
According to data from E-house Research Institute, as of March 2024, the inventory for new commercial residential properties in the top 100 cities in China was approximately 49.916 million square meters, with a vacancy rate of around 15%.
In terms of de-stocking cycles, data from E-house Research Institute shows that in March, the de-stocking cycle for new commercial residential properties in first, second, and third-fourth tier cities was 19.2 months, 21.6 months, and 33.1 months, respectively. As for the de-stock cycle in these cities in December 2019, it was 12.2 months, 8.9 months, and 10.2 months, respectively. The industry norm for de-stocking in the housing market is generally considered to be 18 months.
Despite the Chinese Communist Party continually rolling out stimulus measures for the housing market to boost de-stocking, some analysts believe that the main contradiction lies not in the fact that property developers have supplied a large number of properties, but rather in the low capacity for clearing inventory.
Yan Yuejin stated, “One of the main problems with the de-stocking of inventory currently lies in the sales side. Although sales data have shown improvement, and the absolute volume of inventory has decreased, the low sales volume continues to weaken the ability to clear inventory.”
Tianfeng Securities believes that government acquisition of existing housing stock can theoretically reduce inventory levels and alleviate downward pressure on the real estate market. However, to have a market-supporting effect, the residential de-stocking cycle needs to be reduced to less than 18 months. To shorten the de-stocking period to under 18 months, around 7.4 months of inventory needs to be cleared, which corresponds to approximately 770 million square meters of sales, accounting for about 29% of the broad housing inventory.
Cao Jingjing, the general manager of the Index Research Department at China Securities Index Co., believes that during this round of clearing out existing housing stock, more financial support from the authorities will be needed.
Regarding financial issues, Jin Jing, a real estate industry analyst at Guosen Securities, also believes that most of the funds needed for de-stocking inventory will still have to be resolved at the central level, as solely relying on local finances will be difficult to progress.
Political commentator Wang Jian stated in his self-media program on May 15th that although the initiation funds might not be a problem for Hangzhou in acquiring housing, ensuring long-term funding is impossible as the Chinese authorities are financially strained, with local governments burdened with debts amounting to hundreds of billions. Raising funds through bonds is also not feasible. If properties cannot be sold, leading to developers being unable to repay bank loans, a surge in non-performing loans could potentially lead to bank failures.
Following the release of this news, over 800 netizens engaged in discussions on Tencent’s website.
One netizen sarcastically commented, “Finally understand why the construction of affordable housing, talked about for so many years, hasn’t materialized. It turns out it was to enter the market and rescue the property bubble when it’s severe. How clever! What ordinary people thought was market economy—turns out it’s a mantis stalks the cicada, unaware of the oriole behind!”
Another netizen raised concerns, “It wouldn’t be easy to meet these requirements unless developers directly build such properties. It’s hard to get every unit in a whole building to be below 70 square meters and have all residents agree to sell.”
And another remarked, “They’re definitely using one or two projects to support the market. The effects are to be observed because even landowners have run out of resources.”
Lastly, a netizen voiced apprehension, “Just afraid that some government departments will take the houses first and delay the payments. It’s big news even outside. Companies still bear a heavy burden.”