After a series of real estate stabilization policies were implemented, the sales of the real estate industry improved significantly, expected to gradually reverse the pessimism, while sector investment sentiment also returned from frenzy to rational.

Since September, a series of real estate policy measures have been introduced aimed at promoting the stabilization of the real estate market, strictly controlling the increase, optimizing the existing stock, improving quality, and supporting with loose monetary and fiscal policies. For example, the central bank has lowered the benchmark interest rate, guided commercial banks to lower mortgage rates, including for existing homes, in order to reduce the burden on borrowers. In October, meetings were held on the 8th, 12th, and 17th, where the NDRC, Ministry of Finance, and Ministry of Housing and Urban-Rural Development all actively participated, mainly pushing forward the stabilization of the real estate market through policy implementation.

The policy effects are immediately visible in first-tier cities. Taking Shenzhen as an example, according to the Shenzhen Real Estate Intermediary Association, in the 41st week of 2024, Shenzhen's second-hand housing (including self-service) recorded 2,316 sets, a 649.5% increase compared to the previous week. The positive policy effects in the Shenzhen property market are significant. Similarly, in Peking, as of the first half of October, the volume of second-hand housing transactions in Peking has exceeded 0.017 million sets, reaching a new high for the same period in recent years. However, non-first-tier cities are not optimistic, with both inquiries and transaction volumes continuing to be low.

The real estate industry can drive over 50 industries upstream and downstream, making it an important part of the real economy. Real estate stabilization is crucial to achieving macroeconomic growth targets. After experiencing collapses in many real estate companies, industry reshuffling has entered the final stage, and the worst period is over. With policy support and valuation bottoming out, opportunities on the right side of the sector may have arrived.

Multiple forces from monetary and fiscal policies are supporting the stabilization and rebound of real estate enterprises.

The worst times for the real estate industry are over, why do we say that?

Chinatop Finance app learned that on October 18, the statistics bureau released data for the first three quarters showing that the national sales area and sales amount of new commercial real estate were 702.84 million square meters and 6.89 trillion yuan respectively, decreasing by 17.1% and 22.7% year-on-year. Due to the impact of policies and industry price reductions, sales in September were slightly better compared to the first 8 months, but not optimistic, still in a double-digit decline trend.

This year can be said to be the worst year in the history of the real estate industry, with national sales area and sales amount maintaining a double-digit downward trend on a monthly basis since the industry entered a recession in 2017, setting a record of 9 consecutive months of decline. With the turning point, a series of policy measures have been frequently introduced in October, especially in the market demand, notably improving in first-tier cities, it is expected that the rate of decline will slow down, and the industry will enter a slow decline trend in Q4.

In fact, real estate demand is influenced by multiple factors, including a sharp decrease in demand for first-time homes due to declining marriage rates, pessimistic macroeconomic conditions leading to lower job and wage expectations, and a vicious cycle triggered by price reductions. In order to stimulate demand recovery, promote a stable rebound in the real estate sector, prevent further deterioration of the industry, the government made a resolute statement of 'maintaining stability' in September, and subsequently introduced a series of incremental policies after October, including a 'combining punch' of four cancellations, four reductions, and two increases in policies.

"Four cancellations" to boost demand include canceling purchase restrictions, sales restrictions, price limitations, and standard specifications for ordinary and non-ordinary residential properties; while the "four reductions" stimulate on the financial side, including reducing housing provident fund loan rates, reducing housing loan down payment ratios, lowering existing loan rates, and reducing the tax burden on buying new homes through 'selling old and buying new'. In addition, the 'two increases' target real estate developers, one of which is to increase the credit scale for 'white-listed' projects to 4 trillion yuan to meet the financial needs of healthy real estate companies.

Furthermore, policies involve local special bonds acquiring existing commercial properties for use as indemnificatory apartments, meeting the demand for first-time homes of the middle- and low-income groups, and clearing the inventory. As monitored by China Index Research Institute, as of the end of August 2024, about 30 cities have issued announcements soliciting commercial properties for use as indemnificatory residences. This policy indeed effectively clears the stock, yet due to debt transfers, while rescuing real estate companies, it also raises the level of local debt.

The gradual effects of policies are becoming evident, since October, many places have intensified support for the real estate sector, with Beijing and Shenzhen representing first-tier cities experiencing a full rebound in the real estate market, while lower-tier cities still need time to digest the policies, showing an overall positive and benign development. Under the dual track system of indemnificatory and commercial residences, on one hand, it deepens the implementation of 'non-disturbance to homeowners', and on the other hand, it helps real estate companies to clear the inventory and recirculate funds. With a variety of policies landing intensively, the real estate industry as a whole is expected to stabilize and rebound.

It is noteworthy that over the past few years, the financial issues of real estate companies triggered by Evergrande have gradually been resolved, and financially troubled companies have been phased out, with the expansion of bank financing to 'white-listed' projects accelerating the elimination of lagging companies. The industry reshuffle has entered its final stage this year, with clear signals of industry turning points and valuation turning points appearing.

Valuation regression has certainty, and high-quality real estate enterprises have a high rate of investment value.

After reaching a low point, the real estate industry is accelerating its comprehensive transformation, shifting its development model from 'scale is king' to 'fine workmanship'. Land acquisition tends to be cautious, with financial health as the main focus, adhering to a global strategy of both leasing and selling, developing comprehensive real estate groups. Taking Vanke (02202) as an example, its property management income proportion continues to increase, reaching 11.74% in the first half of 2024, an increase of 4.75 percentage points year-on-year.

However, the transformation and development differentiation of participants are very serious. High-quality real estate enterprises not only maintain stable finances, but also achieve performance growth and profitability. For example,$CHINA RES LAND (01109.HK)$In the first half of 2024, the revenue increased against the trend by 8.44%, achieving a net income of 10.253 billion yuan. In addition,$CHINA OVERSEAS (00688.HK)$And.$LONGFOR GROUP (00960.HK)$During this period, it also achieved 10.314 billion yuan and 5.866 billion yuan respectively.

In the first nine months of this year, leading in terms of sales area and sales volume are Vanke, China Overseas Development, China Resources, Longfor, and$GREENTOWN CHINA (03900.HK)$Only Vanke incurred losses (with a loss of 9.853 billion yuan in the first half of the year). The fundamental reason for Vanke's losses is that the gross margin has declined significantly, facing unprecedented challenges in price reduction and quality control. In the first half of the year, the gross margin was only 6.76%, while the gross margins of China overseas, China Resources Land, and Longfor Group all exceeded 20%. However, Vanke is not unique, as the performance of small and medium-sized real estate companies ranked lower is also uneven, with the majority in a state of loss.

Before the industry turning point arrives, the first test is the financial strength of real estate enterprises. The 'white list' plays a supportive role, favoring the strong and providing more financing resources and development opportunities. High-quality real estate enterprises represented by China Overseas Development, China Resources, and Longfor have sound profits, sufficient cash flow, and manageable debt pressures. In contrast, Vanke faces challenges - in addition to losses, it also encounters significant financial problems.

As of June 2024, Vanke's total short-term and long-term interest-bearing debt amounted to 267.468 billion yuan, an increase of 26.131 billion yuan from the end of 2023, predominantly short-term debt. If the losses are not reversed and without cash flow replenishment, Vanke may enter a vicious cycle of debt restructuring by debt. Apart from Vanke, the well-established real estate enterprise Sunac is also facing similar dilemmas, burdened by huge losses and debts – Sunac appears even more strained, with only 5.389 billion yuan in cash on hand and a net debt (interest-bearing bank debt - cash) of 272.04 billion yuan, surpassing Vanke by a significant 94.558 billion yuan.

Under the dual influence of the strong getting stronger and industry reshuffling, the valuation of individual stocks in the real estate sector also shows differentiation. Following multiple policy stimuli since the end of September, the real estate sector has experienced a significant rebound from a surge to a sharp decline. Over 50% premium is still present in the Hong Kong real estate sector, indicating continued market confidence in the real estate industry. After stabilizing, the market gradually returns to rationality, and quality stocks in the sector are embarking on a long journey of valuation regression as the fundamental turning point unfolds.

Overall, driven by both monetary and fiscal policies, with a basket of incremental policies still in place, various ministries are coming together to stabilize the industry. The real estate industry is undergoing its largest and most impactful market rescue activities to-date, collaborating with the capital markets to remove obstacles faced by real estate enterprises in market and financing demands. Following the policy effects in October, the market's expectation of a steady recovery in the real estate industry is growing.

Based on the expectation of turning points, conservative investors choose high-quality real estate companies such as China Res Land and Longfor Group to bet on sector returns, while risk preference investors choose lower market cap risks such as Sunac and Vanke to pursue excess returns. However, in terms of asset valuation, the PB values of China Res Land, China Overseas Development and Longfor Group are 0.6 times, 0.4 times and 0.4 times respectively, while the deeply loss-making companies Sunac and Sunac respectively have a ratio of 0.3 and 0.4 times, indicating that high-quality real estate companies have a higher betting rate.

Editor/Rocky