Zhixin Securities App learned that China Securities released a research report stating that the adjustment of the land value-added tax is the first time to reduce the tax burden on real estate enterprises from the enterprise side, which can effectively alleviate the cash flow pressure of real estate enterprises. By adjusting down the deed tax and value-added tax for housing transactions, it effectively reduces transaction costs, stimulates demand for improved housing, and increases the activity of the real estate market, especially in first-tier cities. Since the political bureau meeting on September 26 proposed to promote the stabilization of the real estate market, a series of policies have been continuously introduced, including the relaxation of purchase restrictions in first-tier cities, the collection of existing commercial housing, the storage of special bonds for idle land, the introduction of monetization of shantytowns, and adjustments to tax policies, providing continuous support for the improvement of the real estate sector, reaffirming a bullish view on the property sector.

Event: On November 13, the Ministry of Finance, the State Administration of Taxation, and the Ministry of Housing and Urban-Rural Development issued an announcement, adjusting the policies on deed tax and value-added tax related to land value-added tax after the cancellation of standard ordinary and non-ordinary residential properties in relevant cities.

Main viewpoints of Zhongxin Jiandao are as follows:

The relevant tax policies supporting the real estate sector have made adjustments to deed tax, value-added tax, and land appreciation tax, without making adjustments to personal income tax.

Finance Minister Lan Foan clearly stated at a press conference on the 8th that the relevant tax policies supporting the healthy development of the real estate market have been approved according to procedures and will be launched soon. This adjustment in tax policies is a tangible manifestation of this wording. According to the documents, adjustments have been made to deed tax, value-added tax, and land appreciation tax in the process of real estate sales transactions, without adjustments to other taxes such as personal income tax.

The reduction in deed tax effectively reduces transaction costs and releases demand for improved housing.

Previously, in first-tier cities, the deed tax for first-time home purchases of 90 square meters or less was levied at 1%, and for those larger than 90 square meters it was levied at 1.5%. For second homes, a unified rate of 3% was applied. In non-first-tier cities, the deed tax for first-time and second home purchases of 90 square meters or less was unified at 1%, while those larger than 90 square meters were subject to 1.5% and 2% respectively. After this policy adjustment, all cities nationwide will levy a unified 1% deed tax for first-time and second home purchases of 140 square meters or less, and 1.5% and 2% respectively for those larger than 140 square meters. The reduction in deed tax will effectively reduce the burden on homebuyers, helping to release demand for upgraded properties, especially benefiting those purchasing 90-140 square meter residences in first-tier cities.

After first-tier cities cancel the standard for ordinary and non-ordinary homes, the VAT will be aligned with the national standard, significantly increasing the activity in the real estate market in first-tier cities.

Previously, in first-tier cities, those selling homes bought within 2 years were subject to a full 5% additional VAT, while those selling homes bought 2 years or more ago were exempt from VAT for ordinary homes and subject to 5% on the difference for non-ordinary homes. After this policy adjustment, all sales of properties purchased 2 years or more ago in first-tier cities that have canceled the standards for ordinary and non-ordinary homes will be fully exempt from VAT. This policy adjustment will help alleviate the tax burden on sellers of upgraded homes in first-tier cities, further unlocking the chain of property exchange and boosting market activity.

The adjustment of the land value-added tax policy is the first time to reduce the tax burden on real estate companies from the perspective of the real estate side, effectively alleviating the cash flow pressure on real estate companies.

The policy stipulates that real estate companies building standard residential homes for sale, with incremental value not exceeding 20% of the project cost, will continue to be exempt from the land value-added tax. Local governments set their own standards for land value-added tax, but the minimum pre-tax rate for land value-added tax across different regions is uniformly reduced by 0.5 percentage points, namely the eastern, central, northeastern, and western regions are reduced to 1.5%, 1%, and 0.5% respectively. This adjustment of land value-added tax will effectively alleviate the cash flow pressure on real estate companies, allowing them to concentrate funds on construction or debt repayment.

The continuous introduction of a combination of policies is helping to stabilize the market and prevent further decline.

After the Politburo meeting on September 26, a series of policies were introduced including relaxation of home purchase restrictions in first-tier cities, leading to a significant increase in real estate market activity in October. According to our statistics, in October, key 40 cities saw new home transactions of 11.58 million square meters, up 40.5% from the previous month and 5.0% year-on-year, while transactions of second-hand homes in 13 key cities reached 7.24 million square meters, up 26.2% month-on-month and 23.8% year-on-year, with superior performance in high-energy-level cities. This tax policy adjustment will further boost demand in the real estate market, especially in first-tier cities, helping to stabilize the housing market.

Reiterating a bullish view on the real estate sector performance.

A-shares: Hangzhou Binjiang Real Estate Group (002244.SZ), Beijing Urban Construction Investment & Development (600266.SH), China Merchants Shekou Industrial Zone Holdings (001979.SZ), Zhuhai Huafa Properties (600325.SH), Xiamen C&D Inc. (600153.SH), China Merchants Property Operation & Service (001914.SZ), Shanghai Wanye Enterprises (600641.SH), Shanghai Zhangjiang Hi-Tech Park Development (600895.SH),

H-shares: China Resources Land (01109), China Resources Mixc (01209), China Overseas (00688), China Overseas Property (02669), Longfor Group (00960), Yuexiu Property (00123), C&D Intl Group (01908), Greentown China (03900), Greentown Ser (02869), Wanwu Cloud (02602), KE Holdings-W (02423).

It is also recommended to pay attention to some local urban investment and development related real estate companies, which are expected to benefit from this round of fiscal counter-cyclical adjustment, mainly including Shanghai Chengtou Holding (600649.SH), Chong Qing Yukaifa (000514.SZ), Cinda Real Estate (600657.SH), Yunnan Metropolitan Real Estate Development (600239.SH), Everbright Jiabao (600622.SH) among others.

Risk Warning: The risks in the real estate industry mainly lie in sales not meeting expectations, underperforming project completions, and exceeding expected write-downs:

1. Sales falling short of expectations: The real estate market sales are still at a bottoming phase, with risks of further decline or recovery falling short of expectations;

2. Project completions falling short of expectations: Weak sales lead to poor sales receipts for real estate companies, causing financial constraints, which may impact project construction progress or lead to project completions falling short of expectations, affecting the real estate companies’ revenue and profit performance;

3. Real estate write-downs exceeding expectations: Intensified market sales pressure, disparities between land prices at the time of project acquisition and current prices, causing significant pressure on real estate inventory values, resulting in risks of real estate companies' performance falling short of expectations.