The Ministry of Housing and Urban-Rural Development and other five ministries interpret the real estate "combination of punches", with the "monetization resettlement" attracting a lot of attention.

On October 17, the Ministry of Housing and Urban-Rural Development stated that it will implement the addition of 1 million sets of urban villages and old housing renovations through monetary resettlement housing methods. Five policy supports for monetary resettlement housing include: first, key support for cities at or above the prefectural level; second, special loans provided by developmental and policy-oriented financial institutions; third, allowing local governments to issue special bonds; fourth, providing tax incentives; fifth, commercial banks granting loans based on evaluations.

Looking back at the shantytown renovation in previous years, if classified according to the forms of resettlement, China's shantytown renovation process can be roughly divided into two phases starting around 2015, with physical resettlement and monetization resettlement as the main methods. Monetization resettlement refers to the government compensating demolished shantytown residents directly in monetary form, and then residents purchasing houses in the commodity housing market.

In a report by Swhy Securities in March 2022, it concluded that the main source of funds for monetization resettlement after 2015 was the collateral supplementary loans provided by the central bank, with the PSL loan balance reaching around 3.6 trillion at its peak in November 2019.

Regarding the new round of urban renewal funds, swhy Securities stated in its report from November last year that in terms of fund composition, the central policy-oriented banks' special funds are relatively high in energy and are expected to remain the most important component. In the previous round of shantytown renovation special loans accounted for 72%, this round's proportion will slightly decrease, and local special bonds may become one of the important components; different from shantytown renovation, social capital and commercial banks have significantly higher enthusiasm for urban renewal, mainly due to this round of urban renewal being concentrated in high-energy level first- and second-tier cities, with higher certainty in land transfers, and some property operational cash flows being more substantial; moreover, urban renewal fund sources will also include central subsidies, local self-owned funds, and other aspects.

Given the new round of policies, what the market is currently most concerned about is how much funding can the "monetization resettlement" leverage again? What are the major positive implications? How long will it take for the improvements to trickle down to the fundamentals?

Swhy: The cumulative new issuance of PSL from 2014 to 2018 was 3.38 trillion yuan.

Although the start of shantytown renovation was relatively long ago, it only entered a full-blown outbreak stage in 2014. The reason why shantytown renovation can "accelerate and expand" is the direct driving role played by monetized resettlement. In 2014, the national monetized resettlement ratio for shantytown renovation was 9%, rapidly increasing to 29.9% in 2015, and further rising to 48.5% in 2016.

So how much is the total resettlement funds? And where do they come from?

Swhy wrote in its November 2023 report that PSL constitutes the main source of funds for shantytown renovation special loans, by lending through PSL to policy banks to support shantytown renovation projects, and in the future, policy banks will repay the maturing debts of PSL after receiving debt repayment from local governments:

The cumulative new issuance of PSL from 2014 to 2018 was 3.38 trillion yuan, while the two major policy banks issued a total of 4.96 trillion yuan during the same period, accounting for as high as 68%. The proportions for 2014 to 2018 were 90%, 90%, 82%, 50%, and 54% respectively, with an average of 68%. This shows the importance of PSL to shantytown renovation.

According to data from the Ministry of Housing and Urban-Rural Development, from 2015 to 2018, the Ministry planned to start a total of 23.6 million sets, actually starting 24.42 million sets, with an estimated total investment of 6.26 trillion yuan, including:

Resettlement special loans: The resettlement special loans provided by China Development Bank and Agricultural Development Bank are the main source of funds. The cumulative scale of resettlement special loans from 2015 to 2018 reached 4.53 trillion yuan, accounting for 72% of the total investment, with proportions of 65%, 80%, 70%, and 74% for the years 2015 to 2018 and an average of 72%.

2) Central subsidies/local own funds: The estimated cumulative central subsidies/local own funds from 2015 to 2018 amounted to 0.63 trillion yuan (calculated based on the estimated funds for the renovation of shantytowns in the national public financial housing security expenditure), accounting for 11%, 12%, 9%, 10% of the annual investment in 2015-2018 respectively, with an average of 10%.

3) Other types of resource resources: Other types of resource sources (including commercial bank loans, special bonds for shantytown renovation) totaled 1.09 trillion yuan, accounting for 18% of the total investment.

As for the resettlement area, official data claims that in 2016, the monetary aid for shantytown renovation helped local areas absorb 0.25 billion square meters of real estate inventory. Although since 2017, the housing construction department no longer publishes the national shantytown renovation monetary resettlement ratio. However, according to industry estimates, in 2017 this ratio was around 60%, helping to absorb real estate inventory of 0.25 billion to 0.3 billion square meters.

The positive significance of the monetary resettlement of shantytown renovation

Regarding the positive significance of the monetary resettlement of shantytown renovation for the real estate itself and the macro economy, swhy has summarized three points:

1) The monetary resettlement of shantytown renovation is conducive to reducing real estate inventory, leading to an average national proportion of 15% of commodity housing sales area.

After the transformation of cash settlement in the relocation of shantytowns, the government essentially directs the housing demand of shantytown residents to the distribution of commercial housing, effectively magnifying the demand, which greatly assists in destocking the commercial housing system. In terms of driving sales, in the previous round of shantytown transformation, we estimated that from 2015 to 2018, the cash settlement of shantytown transformation nationwide resulted in destocking of 0.15 billion sqm, 0.25 billion sqm, 0.31 billion sqm, and 250 million sqm respectively, accounting for 14%, 18%, 22%, and 17% of the national residential sales area from 2015 to 2018, with an average of 18%; accounting for 12%, 16%, 18%, and 14% of the national commercial housing sales area from 2015 to 2018, with an average of 15%.

2) The cash settlement of shantytown transformation is beneficial for boosting local investment and consumption, thereby driving the macro GDP recovery:

After the shantytown transformation, the investment driving effect of the real estate industry chain is more pronounced, and in addition, the income and consumption of shantytown residents in original third- and fourth-tier cities were low. After experiencing the cash settlement of shantytown transformation, residents not only generated housing demand, but the government also recognized the original real estate value of shantytowns, activated the original real estate assets, thereby significantly increasing the residents' wealth and stimulating their consumption demand at the same time.

3) The cash settlement of shantytown transformation is conducive to promoting people's livelihood projects:

After the cash settlement of shantytown transformation, the government revitalized the real estate assets of shantytown residents, significantly increasing their family wealth, thereby improving their various living standards, which is very acceptable to shantytown residents.

Regarding the capital effect, Shenwan Hongyuan stated that the transmission of PSL issuance to fundamental improvement lags by about 3 quarters.

We found that after the surge in PSL in 2015Q2, the sales area of third- and fourth-tier cities saw a significant increase in 2016Q1, with a year-on-year growth rate of 31% in the sales area of third- and fourth-tier cities in 2016Q1. From the quarterly issuance of PSL, there was a peak in 2016Q1-Q3, with quarterly issuances reaching 313.6, 280.7, and 252.6 billion yuan. The next peak in commodity residential sales occurred in 2016Q4, 2017Q1, and 2017Q2, with year-on-year sales area growth rates of 18%, 28%, and 19% respectively.

We believe that under the monetary settlement method of shantytown transformation, the lag time for the transmission of PSL issuance from the central bank to the sales improvement in third- and fourth-tier cities is about 3 quarters. It is worth noting that as third- and fourth-tier cities show signs of recovery in sales, the corresponding improvement in GDP also occurs during the same period. Therefore, it can be considered that the lag time for the transmission of PSL issuance from the central bank to the improvement in GDP is also about 3 quarters.

Editor/ping