It has been nearly 3.5 years since the real estate industry entered a downward cycle. Many real estate companies have begun to adapt to the new development model in accordance with market rules. The previous “high turnover, high leverage, and high debt” operating model has come to an end. The reason is that high turnover corresponds to the high sales rate of commercial housing, but the current market cannot sustain it.
According to data from China Index Academy, from 2014 to 2023, the planned construction area of land sold reached 21.3 billion square meters, but the area of commercial housing sold was only 14.7 billion square meters, and there is still 6.6 billion square meters of potential inventory space. In 2021, the sales area of new commercial housing was 1.8 billion square meters, while it is estimated that it was only 1 billion square meters in 2024.
As of the end of the third quarter of 2024, the balance of real estate loans was CNY53 trillion or USD7.2 trillion (including CNY37.5 trillion of personal housing loans and CNY13.8 trillion of real estate development loans), accounting for 21% of all credit balances, while this proportion was 22.1% at the end of 2023. After three and a half years of adjustment, the average debt-to-asset ratio of A-share real estate developers has dropped from 64.7% in the third quarter of 2020 to 60.9% in the third quarter of 2024, and this trend will continue in the future.
In September 2024, the Central Political Bureau meeting proposed to promote the real estate market to stop falling and stabilize. The essence of “stop falling and stabilize” refers to “increase in volume and stable prices”, which has played a very positive role in improving market expectations. Since the end of September, after the further relaxation of real estate policies, y-o-y sales growth rate in November turned positive for the first time, reaching 3.2%
In addition, the Ministry of Finance clearly pointed out that local government special bonds can be used to purchase existing commercial housing and can also be used for land reserves. This is an innovation that is conducive to the destocking of commercial housing, and can also effectively alleviate the tight cash flow of real estate companies and promote the real estate market to stop falling and stabilize.
From a structural perspective, the destocking situation of commercial and office buildings is more severe than that of residential buildings. The destocking cycle of commercial and office buildings in Shanghai even exceeds 160 months, and it has developed from oversupply in the past to the double pressure of severe oversupply and falling demand today.
Sheng Songcheng, a Former Counselor of the People’s Bank of China, said that in the next one or two years, even if the real estate market continues to decline, the downward range will continue to shrink. Major cities can basically achieve a stop falling and stabilize, and third- and fourth-tier cities will need a little longer.
Real estate brokerage industry
In China, the era of housing shortage has basically ended. Developers are facing the challenge of increasing difficulty in selling houses, so they rely more on channels to promote real estate sales, and the real estate brokerage industry has grown accordingly. In recent years, developers have been facing high inventory pressure and strong demand for cash recovery.
At present, there are more than 1 million real estate brokerage-related companies in China. Brokerage leading companies such as Beike and Lianjia have changed consumers’ home buying experience by integrating house information, providing convenient house buying services and innovative marketing methods.
In 2023, the scale of Chinese real estate brokerage market was about CNY365.4 billion, up 4.4% y-o-y. In the long run, the supply of new houses in the middle and late stages of urbanization may continue to be low, and the price drop of second-hand houses will be more significant than that of new houses, making second-hand houses more cost-effective and making them an important growth pole for the real estate brokerage business.
In recent years, Chinese second-hand housing market has developed rapidly. Among the 20 core cities, the transaction volume of second-hand houses accounted for 40% in 2019, and the proportion rose to 62% in August 2024. The transaction volume of second-hand houses has exceeded that of new houses and is close to the level of the capital region of Japan. So, key Chinese cities have entered the stage of stock market dominated by second-hand housing transactions.
In the future, as the popularity of house hunting changes, the real estate brokerage industry will pay more attention to allocating resources in cities or regions with high house hunting popularity. For example, it may increase market investment in first-tier cities and new first-tier cities, while optimizing existing resources in second-tier cities and third- and fourth-tier cities to reduce unnecessary expansion.
Written by Mainbayar
