Real Estate - "Comments on MOHURD's Rmb900bn Low-income Housing Program

yangruoxin

Events:
China’s Ministry of Housing and Urban-Rural Development (MOHURD) has drawn up an Rmb900bn 3-year low-income housing program, according to Mr. QI Ji, Vice Minister of MOHURD, who stated that the government aims to solve the housing problem for 7.47mn low-income urban households by providing low-rent housing for 2.87mn families and subsidizing rentals for the remaining 4.60mn households. Furthermore, the government plans to build 4mn affordable flats over the next three years, and renovate dangerous or old housing for SOE employees in the forestry, coal mining and agricultural development industries, thereby solving the housing problems of 2.2mn families. According to Mr. QI, the central government will make transfer payments to fund the program, but the main financing sources should be local governments, households with housing problems, as well as their employers.
Our Comments:
Alongside the State Council’s Rmb4trn plan to boost the Chinese economy, MOHURD’s program should help stimulate domestic demand, improve the property supply structure, and support long-term stable growth of the commercial housing market. However, we believe the plan will have a negative short-term impact on this market, protracting the down-cycle of the real estate industry.
1. The low-income housing program should help ensure social equity, reduce housing prices, and support long-term stable growth of the real estate industry
The low-income housing policy should have been introduced ten years ago, during the 1998 housing reform. It is largely consistent with existing (2007+) real estate industry policies. According to existing policies, low-rent housing should account for 10% of total housing development, while affordable flats and mid/small commercially developed homes should represent 20% and 30%, respectively. The low-rent housing component of the new program exceeds this level, but the new affordable housing target remains flat with the previous target.
•           Investment in low-rent housing exceeds expectations: Most of the Rmb900bn is to be spent on low-rent housing for 7.47mn low-income families and housing renovation for 2.2mn families living in slum housing. Subsidies are to account for 60% of the total support, so the program should help boost demand in the home rental market. Actual low-rent housing provision accounts for 40% of the program, so the government has to develop or purchase 2.87mn flats for use as low-rent housing.
•           Affordable housing program consistent with expectations: The new program aims to build 4mn affordable flats in three years, or less than 25% of annual sales of commercial housing (about 6mn flats in 2007) on a per year basis. This is largely consistent with previous plans and market expectations (Table 1).
2. Short-term impacts on commercial housing market are negative but limited
Market participants believe the Rmb900bn program may erode demand for commercially developed homes, further reducing expectations for home prices. As such expectations are critical in an industry down-cycle, we believe the policy will have a negative impact on the real estate market in the short-term. However, we think that impact on the commercially developed home market should be limited. As we have stated before, low-income/affordable housing and commercially-developed homes target different market segments. From a mid/long-term perspective, improvement in the market structure should help reduce bubbles and support healthy growth of the commercially developed home market.
3. Policy implementation is key
According to the MOHURD, the new housing program is mainly to be funded by local governments, although the central government plans to make some transfer payments to local governments. Just like many other policy initiatives, however, effectiveness of the new housing program depends on the financial strength of local governments. As local governments rely on revenue from land use right sales, but have limited land in hand available for sale, implementation of this policy initiative may face problems: we think implementation of the policy will be the greatest challenge.
4. Ratings maintained on property stocks
We do not believe the new policy will change the down-cycle of the real estate industry. The worst period has yet to come, and real estate stocks are unlikely to turn around. Industry leaders recommended by us face a relatively less severe impact from the downturn, and may actually benefit from the industry consolidation. A-share investors are advised to buy stocks of industry leaders on dips. H-share investors should take profit, as valuations are already expensive. Stocks with P/B below 0.5x are worth our attention.
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2008-11-14 12:45